The insurance industry quietly rules our lives. It determines where and what we build. It’s also a linchpin of the housing market. Without it, homeowners can’t get mortgages. And without mortgages, most people can’t buy homes, and the whole housing market starts to collapse.
So what happens when the insurance market breaks down? When a whole state essentially becomes too risky for many private insurers?
A lot of people think the insurance market in Florida is so broken that one really big storm could ruin the state.
In this episode, we dig into what’s broken, how we got here, and what’s at stake if we don’t fix it. We start by looking back at Hurricane Andrew, the 1992 storm that changed the insurance industry. And we look at the tumultuous Florida insurance market of today.
Season two of "How We Survive" follows the money to the end of the world. In this case, South Florida. New episodes are out every Wednesday. Be sure to follow us on your favorite podcast app and tell a friend if you’re enjoying the show.
How We Survive Season 2 Episode 5 Transcript
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Amy Scott: So for someone who can’t see this picture, tell me what’s there, what are you looking at?
Nimmond Lockhart: I don’t know if I can. It’s pretty hard.
Amy Scott: Do you mind if I describe it?
Nimmond Lockhart: Sure.
Amy Scott: It’s a black and white photo showing a small white house. The windows are blown out. The roof looks shredded. There’s a TV and furniture strewn about the yard. And a woman in a tank top and sandals perched on the arm of a chair, leaning forward.
Nimmond Lockhart: It’s a sad day in her life, you could tell just the way she’s sitting.
Amy Scott: This is Nimmond Lockhart. He’s 66 years old. And the woman in that picture taken 30 years ago is his mother. Louisa.
Nimmond Lockhart: That house is still there. They rebuilt it. She’s not, but the house is. That was tragedy, so I can’t say much about it.
Amy Scott: The tragedy was Hurricane Andrew, a Category Five storm that tore through Homestead, Florida in August of 1992. While Nimmond and his mom were sorting through the wreckage, a woman in Boston was staring at a computer screen, trying to put a price tag on the devastation. All the flattened homes and businesses ripped apart, all the lives upended.
Amy Scott: Do you remember what you were feeling as you’re watching this and realizing how catastrophic it was going to be?
Karen Clark: Very scared.
Amy Scott: Karen Clark is an economist, you may remember her from the season prologue. Back in 1992, she was running the first ever catastrophe modeling company. It was called Applied Insurance Research. Karen’s company had just invented a new computer model that pulled together data about weather, along with property values and building codes, to predict the probability of disasters and how much they could cost.
Karen Clark: The purpose of catastrophe models is to prepare companies for future events that could happen because you don’t want an insurance company to go insolvent after an event, to not be prepared, because then homeowners and commercial policyholders don’t get paid.
Amy Scott: Karen’s brand new model had never really been tested before. And Andrew was the first big test. Once she knew the track of the hurricane, Karen could more accurately estimate how much the damage would cost. And what the model was telling her was shocking.
Karen Clark: We were quite surprised when we started getting some very large numbers.
Amy Scott: Billions more in losses than any other storm had cost to date.
Karen Clark: You know, much larger than insurers even thought they could experience.
Amy Scott: She was like, Whoa, can this be right?
Karen Clark: I mean, this is a model, how accurate is the model, it’s never really been tested this thoroughly before.
Amy Scott: Karen ran the numbers again. And again.
Karen Clark: We ourselves had uncertainty.
Amy Scott: All she could do was wait to see how accurate her estimate would turn out to be. How many homes like Nimmond’s mothers would be destroyed. How many insurance companies would go belly up trying to cover all the claims. No one knew it at the time. But Hurricane Andrew and Karen Clark’s models would change the insurance industry forever.
I’m Amy Scott. This is How We Survive, where we’re following the money to the end of the world. In this case, South Florida. This is Episode Five, Risky Business. The insurance industry quietly rules our lives. It determines where and what we build. It’s also a linchpin of the housing market. Without it, homeowners couldn’t get mortgages. And without mortgages, most people can’t buy homes, and the whole housing market starts to collapse. So what happens when the insurance market breaks down, when a whole state essentially becomes too risky for many private insurers? A lot of people think the insurance market in Florida is so broken that one really big storm could ruin the state. This episode we’re going to dig into what’s broken, how we got here, and what’s at stake if we don’t fix it. We start with Hurricane Andrew, the storm that changed the insurance industry. When Andrew roared ashore as a category five hurricane, it brought wind gusts of up to 175 miles per hour, and storm surge that tossed cars and boats around like toys.
Archival: This morning in South Florida. Power is out over a widespread area. Trees are down. Buildings have been damaged… Three hours ago it was calm. It fooled a lot of people here. A lot of people decided not to leave but right now it’s extremely dangerous… We have lost our signal on WTVJ, we are going to stick with you as long as we possibly can, we’re still…
Amy Scott: Andrew devastated the city of homestead, about 40 miles south of Miami. It was home to an Air Force Base and about 29,000 residents. The morning of the hurricane, Karen powered up the fax machine – remember this was 1992 – and started sending out her company’s predictions. And Karen basically said to her clients, Brace yourselves.
Karen Clark: There is uncertainty, but Andrew could cost the industry more than $13 billion. Now that was a shock.
Amy Scott: $13 billion was $9 billion more than any previous storm had cost.
Karen Clark: I mean, the largest loss to date had been under 4 billion and that was from Hurricane Hugo, in 1989.
Amy Scott: Immediately after Karen sent out those numbers, her phone started ringing.
Karen Clark: And there was just disbelief on the part of our clients.
Amy Scott: She remembers these calls like they were yesterday. One guy from London was like:
Karen Clark: I’ll bet you five quid it won’t be more than 6 billion.
Amy Scott: Another client basically scoffed.
Karen Clark: A few mobile homes and an Air Force Base. How much can it be?
Amy Scott: Other estimates were coming in way lower. The official insurance industry estimate came out well after the storm, at $7 billion. But Karen stuck to her guns and her $13 billion estimate. It took months to tally up all the damage. The final price tag was even higher than Karen predicted.
Karen Clark: It was probably about nine or ten months after the event that the losses did develop to actually over 15 billion.
Amy Scott: That’s about 30 billion in today’s dollars.
Karen Clark: And then the industry realized that yes, this was a major loss, more than they had expected, and the hurricane model was pretty accurate. The eyes were open, not just of the industry, actually, but of homeowners in Florida, of regulators, of everyone, that these types of large losses were possible.
Amy Scott: And I imagine your business took off after this.
Karen Clark: Oh skyrocketed.
Amy Scott: How do you even get your mind around $15 billion in damage?
Caitlin Esch: Check check check, we are entering the museum.
Amy Scott: This summer we met up with a few survivors. Nimmond Lockhart, Adelaide Gonzalez, and Jeff Blakely.
Amy Scott: Nice to meet you. How should we set up? Just around the table?
Amy Scott: We met at the historic Homestead Town Hall Museum. It had been 30 years since Hurricane Andrew, but for many folks, the memories are still painful to revisit.
Adelaide Gonzalez: Well, here are some of the photos that were taken right after the hurricane.
Amy Scott: Just inside the entrance, a wall of photos documents the devastation. Trees torn out of the ground. Trailer parks flattened. A palm tree impaled by a piece of plywood. 26 people died in the storm. More than 25,000 homes were destroyed. And another 100,000 damaged.
Nimmond Lockhart: Throughout the city, you will find remnants still, from all of the disruption.
Amy Scott: Nimmond grew up in that little white house from the photo of his mom in Florida city, just south of Homestead. He wasn’t with her the day of the hurricane. He rode out the storm in the condo he rented not far away. When he emerged from his complex after the storm, he didn’t recognize his own neighborhood.
Nimmond Lockhard: We started walking around trying to see if there was anybody around or anybody underneath anything. And I got lost. I got lost. I didn’t even know where I was living no more, because everything was so saturated and all look the same.
Amy Scott: Jeff Blakely’s house fared okay in nearby Leisure City.
Jeff Blakely: I was extremely fortunate because I lived in a concrete house. So I don’t have the experience that other people had.
Amy Scott: But his community suffered for a long time.
Jeff Blakely: You had no power here.
Adelaide Gonzalez: Nine weeks. I was without power for nine weeks.
Jeff Blakely: There was not a single working traffic light in all of Dade County after the storm.
Amy Scott: Jeff said, a lot of people loaded up what was left of their belongings and fled.
Jeff Blakely: I’ll never forget. For days after the storm, I would just see a solid line of cars hitting north. Kids hanging out the windows, stuffed bears hanging out the windows, mattresses tied on top of the cars. They had all of their worldly possessions packed in their cars, and they were heading north. This went on for days after the storm.
Amy Scott: Just a stream of people leaving. And a lot of them never came back?
Jeff Blakely: Oh, yeah. So when Andrew came, you had these huge insurance payoffs. People took the money and they left. They ran. And they left a big hole in population. And it took a long time for that hole to be filled. It was at least 10 years before some semblance of normality return.
Amy Scott: Insurance helped others like Adelaide Gonzalez stay and rebuild.
Adelaide Gonzalez: Those of us that had insurance, because a lot of people did not have insurance. But now the insurance was very good, for me, personally.
Jeff Blakely: They’ve handed out money like for free after the storm. It was good while the going was good.
Amy Scott: But the money quickly ran out. And in the aftermath of Hurricane Andrew, about a dozen insurance companies went bankrupt.
Jeff Blakely: Because of the storm. And so the insurance industry as a whole said, Woah, wait a minute. We gotta, we gotta redraw the lines.
Amy Scott: Many companies that survived took a look at the markets and at these new catastrophe models, and were like, No thanks. Too much risk.
Key Coleman: There’s always a love hate relationship between insurance companies and the Florida market.
Amy Scott: Key Coleman is a financial analyst and consultant to the insurance industry. He says insurers love Florida because of all the wealth there – lotta insurable assets. And they hate it because of all the risk. Key happened to be in Miami when Andrew hit.
Key Coleman: I was huddled in a hallway in South Miami with my wife, my aunt and her dogs.
Amy Scott: At the time, Key was working for a private insurer, a company called Vesta, in the underwriting department. His job was basically to look at new policies and decide if they were worth the risk. That company survived the storm. But afterwards, Key says, it tried to reduce exposure in Florida, by not taking on new customers.
Key Coleman: The company did not write new business at least for a long time.
Amy Scott: Key says a lot of companies did this. Insurers protected themselves from the risky Florida market in other ways too. Big household name companies, like State Farm and Allstate created something called pups. A pup is a subsidiary owned by a larger company. If a big enough storm hits?
Chuck Nyce: You can always cut a subsidiary loose and let them fail. And that’s one way these larger organizations have kind of insulated themselves from the large part of capital that they have that is supporting their operations in the 49 other states.
Amy Scott: Chuck Nyce is a professor at Florida State University. He says before Hurricane Andrew:
Chuck Nyce: The Florida market looked like every other state in the United States. There were a couple of very large companies that controlled most of the market share. They insured a lot of houses in the state of Florida.
Amy Scott: But after Andrew?
Karen Clark: Many of those companies have pulled out.
Amy Scott: Karen Clark again.
Karen Clark: Because the risk was higher than, at least in the short term, the ability to price for it.
Amy Scott: This is important. Insurance only works if you bring in enough money from premiums to cover potential losses. And after Andrew, there was this collective Oh Shit moment where everyone realized the insurance industry just wasn’t charging enough.
Karen Clark: What Andrew showed is that the premiums had to be much higher to really cover the risk, and that personal and commercial property owners would have to pay a lot more.
Amy Scott: The companies that did stay in Florida raised rates. As big national insurers pulled out, the state created financial incentives for smaller companies to fill the gap. Today, smaller insurers and pups make up two thirds of the Florida market.
Chuck Nyce: So these smaller companies are the major players in the state.
Amy Scott: Chuck Nyce again.
Chuck Nyce: It’s very difficult to get coverage from a large national insurer that you know about. You can get coverage from the smaller companies that are not as highly rated with regard to their capital position.
Amy Scott: And that can be dangerous because some of these smaller companies are taking risks that they may not be able to afford.
Karen Clark: Now, the Florida market is characterized by much smaller companies, much more thinly capitalized companies that really could not sustain a loss greater than their one in a hundred.
Amy Scott: A one in a hundred is insurance speak for a really big storm, technically a storm that has a 1% chance of occurring in any given year, which may sound small…
Karen Clark: But it could happen this year. It could easily happen that, you know, a Cat Five hits Miami, we’re gonna have a $300 billion loss. So what happens is any insurance companies that are overly exposed in the Miami Dade area, they’re going to go out of business.
Amy Scott: And when that happens, a company goes insolvent, the state becomes responsible for paying out claims. More often, pass those costs on by charging all policyholders in the state a fee. That happened this year with several companies and could happen again.
Mark Friedlander: We’re extremely worried about the vulnerability of Florida’s property insurance market, the most volatile market in the US. It’s hanging on a shoestring right now. In fact, I saw a recent report where one executive said, it’s being held together by a piece of chewing gum.
Amy Scott: Mark Friedlander is with the Insurance Information Institute, a research group funded by the insurance industry. There are about 60 home insurance companies operating in Florida, and almost half of them are on the state regulators’ watch list.
Mark Friedlander: Why are they on the list? Because of concerns about their financial health. That’s a really scary proposition. Because potentially, it could take just one major storm event that includes severe property losses throughout the state, could wipe out a half dozen or more of those companies easily.
Amy Scott: And what would be the ripple effects of that?
Mark Friedlander: The ripple effects would be crash of the real estate market. Very simple.
Amy Scott: Ah oh, we’ll get into that after the break.
Amy Scott: Okay, we’re gonna get into the worst-case scenario, how a collapse in the insurance market could take down the housing market. But first, I want to tell you about the other major change brought on by Hurricane Andrew, because it plays into the mess Florida’s in today. In the aftermath of Andrew, the Florida State Legislature created a state backed insurer of last resort, Citizens Property Insurance Corporation. Citizens sells property insurance to people who cannot buy private insurance or homeowners who have no other affordable options. And for a lot of homeowners in Florida, it’s the only coverage available for wind damage.
Mark Friedlander: Citizens was formed as a backstop insurer, when many insurers after Andrew decided they did no longer want to write home insurance in Florida because of the vulnerability.
Amy Scott: Citizens was supposed to stop the market from imploding after Andrew, and it did. But Mark Friedlander says the problem is that lately citizens has been growing really big, really fast. It now has more than a million policies, double what it had just two years ago.
Mark Friedlander: So we call it insurer of last resort. Well, here we are, today in 2022, and Citizens has become the insurer of only choice for so many homeowners now in Florida.
Amy Scott: That’s because just like after Andrew, private insurers are again pulling out of Florida. So far this year, six companies were declared insolvent by regulators and folded. Others are choosing to scale back their business in Florida. And this was before Hurricane Ian and Nicole.
Mark Friedlander: We’ve had more than a dozen other Florida insurers announced they are putting a moratorium on writing new business in the state because of its volatility.
Amy Scott: Now, this is not just about Florida’s climate risk. Another big factor driving insurance companies to the brink, Mark says, is fraud. This is a man-made problem with the connection to climate change.
Mark Friedlander: You unfortunately have a group of unscrupulous contractors that are taking advantage of homeowners by telling them they will improve your home and make it more resilient to storms when the home doesn’t need improvement. For example, they go to your door, they tell you there’s been a recent wind event in your area, hail storm, other type of weather event that has damaged your roof. And it’s not true.
Amy Scott: When contractors sell homeowners roofs they don’t necessarily need and then charge insurance companies for it, it’s considered fraudulent. And fraud leads to litigation. Lawsuits over disputed claims are rampant in Florida. The state accounts for less than 10% of all homeowner insurance claims in the country, according to regulators, but about 80% of lawsuits. And even if many homeowners’ claims are legitimate, the cost is staggering. The Florida Office of Insurance Regulation estimates insurers paid a whopping $3 billion in such lawsuits last year. Most of the money goes to attorneys fees and public adjusters. Very little to actual homeowners. So for insurers, the risk is high, and the losses are high. Overall, Florida property insurers haven’t turned a profit in the past six years. And when the worst happens and private insurers go under? Citizens often has to step in.
That happened to FSU Professor Chuck Nyce this summer when his wind insurer Weston went out of business.
Chuck Nyce: Within a week, I had a letter from my mortgage company, notifying me that Weston was no longer a rated company, I need to find coverage elsewhere.
Amy Scott: So he went to Citizens.
Chuck Nyce: This is the worst part, is my price actually went down a little bit when I went from Weston to citizens. It should go up.
Amy Scott: But because Citizens is a state-run company, its rates are heavily regulated. Annual increases are capped. Industry spokesman Mark Friedlander again.
Mark Friedlander: They are not allowed to charge market-level rates for risk. In fact, they have a cap of 11% whereas our data shows the average rate increase in Florida this year is 33%.
Amy Scott: Mark says Citizen’s premiums are too low to cover its risk. Essentially the state is selling insurance at a loss. At the same time its exposure is ballooning. He worries citizens is overexposed, and doesn’t have enough cash on hand to cover losses from a big storm.
Mark Friedlander: Citizens right now is in a very vulnerable state. In fact, they currently have $346 billion of exposure, with only 13.4 billion to pay claims.
Amy Scott: Since we talked, Citizens’ exposure has grown to over $400 billion. I should say, if a huge loss did happen, Mark says the state of Florida would not go bankrupt, because Citizens would dramatically raise rates for its policyholders. And then if that wasn’t enough, it could charge a fee to anyone who has almost any kind of insurance in the state of Florida. Still not a great outcome. Another wrinkle to all of this, Citizens also has a cap on coverage. It can’t write insurance for homes that are too valuable. In Miami Dade County, it won’t insure homes that cost a million dollars or more to rebuild. With the bonkers market, a lot more homes now fall into this category.
Mark Friedlander: Citizens won’t write you, and no private insurer will write you, so we are hearing from more and more homeowners across the state have no coverage. They cannot find coverage in any market right now.
Amy Scott: And yet the real estate market is booming in Florida. Is it just a matter of time before this starts to show up in the difficulty of selling houses or property values actually falling?
Mark Friedlander: Eventually this is going to have a negative impact on the value of real estate in Florida. We’ve been through a boom period here since the pandemic began. But as more homeowners find out, A, they either can’t afford home insurance, or B, can’t even find home insurance, because of the high value of homes here, the high replacement value, it is going to have a detrimental effect on our real estate market. And eventually the market will head in the other direction.
Amy Scott: Again, homeowners with mortgages are required to carry insurance. If large numbers of them can’t get it or it’s prohibitively expensive, the housing market could tank. And it’s not just homeowners who lose out. Local governments rely on a healthy housing market because they depend on property taxes to pay for all the stuff, like infrastructure, law enforcement, and basic government services. And real estate makes up about a quarter of the Florida economy. So if the insurance market falls apart, the ripple effects could be devastating. And right now a lot of homeowners are at the edge of what they can afford. Homeowners in Florida pay about three times as much for insurance as people in other states pay.
Down in Key West, I met up with Virginia Wark.
Amy Scott: Hello, I wasn’t expecting you to pull up in a motorcycle. I’m not sure why.
Amy Scott: She’s an artist and works at the local Maritime Museum. She shares her little blue and yellow house with two birds, a dog and a cat. She carries three insurance policies, regular homeowners, windstorm and flood.
Virginia Wark: I can remember when the insurance was easily less than 20% of my mortgage payment. And now I would say it is probably closer to at least 50%, if not more.
Amy Scott: Virginia bought her house in 1988 and has only filed two claims for flooding during Hurricane Wilma and wind damage caused by Hurricane Irma.
Virginia Wark: So I’ve only made those two claims in 35 years. And I don’t believe that they were extravagant claims. It was – I need the house to live in.
Amy Scott: Virginia understands that living in an increasingly risky place comes at a cost.
Virginia Wark: The demands on those insurance companies are so much more now because of the whole issue with what’s happening with climate change. I mean, you can’t pretend it’s not happening. There is massively, you know, strange weather going on, it’s only going to get worse.
Amy Scott: But she worries about how rising insurance costs are changing Key West.
Virginia Wark: The only people who can afford to live here are the rich people where it’s like, oh, you know, if it floods, it’s okay. We’ll just build another one. And that’s, that’s who’s in my neighborhood. That’s what’s happening here.
Amy Scott: Virginia says she has friends who’ve left the keys because it’s too expensive. We heard this from others in South Florida too.
Christopher Carita: I didn’t think you’d go up like it has.
Amy Scott: Christopher Carita is a police officer. He lives in Fort Lauderdale with his family. He bought his house in 2020, right before the pandemic. He knew what he was in for buying a home a few miles from the coast.
Christopher Carita: Fort Lauderdale is the Venice of America. There are canals everywhere.
Amy Scott: And he’s been through hurricanes before, as a first responder.
Christopher Carita: And I responded to hurricane Michael, up in the panhandle. You know, Panama City basically blew away in hurricane Michael. It was, it was devastating.
Amy Scott: But even he was shocked by how much his insurance has skyrocketed.
Christopher Carita: I think we’re paying, my last insurance policy now, I think we’re paying double what we originally paid when we bought the house.
Amy Scott: Double in just two years. At first, Chris had private insurance. He estimates he was paying 3500 a year. Then the company jacked up his premium, so they were able to switch to citizens. But even then, their costs went way up.
Christopher Carita: So right now it’s 6300.
Amy Scott: Citizens covers wind damage from storms, it does not cover flood damage. For that Chris added another policy after watching what happened with Hurricane Ian on the other side of the state.
Christopher Carita: We are not in a flood zone. But neither was most of Lee County. And so we’re, we’re gonna bite the bullet and pay the extra.
Amy Scott: And even with all the insurance Chris pays for, he worries he’s still under-insured. What with the rising costs of building materials, he expects rates to go up again next year. It’s making him rethink his investment in Florida.
Christopher Carita: We’re kind of moving away from the idea of investing more money into this house. And maybe, you know, maybe you spend that money and invest somewhere else. It does seem unsustainable.
Amy Scott: Chris says they’re even thinking about moving further north to the Blue Ridge Mountains, where insurance is cheaper and climate risk is lower. Remember how we started this episode with a warning that one big storm could ruin the state? A lot of people wondered if hurricane Ian was going to be that storm. It tore through southwest Florida in September. Karen Clark’s company estimates the total insured damage will be more than $60 billion, the costliest in Florida history. But as deadly and destructive as it was, Hurricane Ian was not the storm that will collapse the insurance market. A couple of factors helped lessen the blow. The area hardest hit by Ian around Fort Myers is less populated than say Miami or Tampa. And Mark Friedlander, the insurance industry spokesman, says unlike other parts of the state, Southwest Florida had a pretty robust private insurance market.
Mark Friedlander: Southwest Florida is not heavily populated with Citizens customers. So they will not have a major loss event, meaning their reserves will not be tapped out. Fortunately, that does not appear to be the case with Ian.
Amy Scott: Another factor protecting the insurance market: reinsurance, that is insurance for insurance companies. It’s looking like this hurricane season, most companies bought enough of it, thanks in part to catastrophe models, like Karen Clark’s, that estimate the probability of a major loss and help insurers plan for it. Karen told me her clients fared pretty well.
So Ian is not the storm that will bring the state of Florida to its knees. But the insurance industry is still hanging on by, well, a piece of chewing gum. And that brings us around to solutions. The state held a series of legislative hearings earlier this year in an effort to reform the troubled insurance market. And it’s expected to have another special session before the end of the year. There are other, shall we say, inventive solutions on the table, involving people who take bets on actual storms.
Jennifer Montero: If the wind doesn’t blow, then the investors made, you know, they made a few bucks off their investment and hopefully they’ll redeploy that capital right back into the market again.
Amy Scott: So if the wind does blow…
Amy Scott: They have the potential to lose all their money?
Jennifer Montero: That’s correct.
Amy Scott: All that and more, coming up on How We Survive. Oh, hey, if you like what you’re hearing, please rate and review this podcast and share it with a friend. How We Survive is hosted by me, Amy Scott. Senior Producer Caitlin Esch produced this episode. With help from our production team, Olivia Zhao, Hayley Hershman and Grace Rubin. Our editor is Jasmine Romero. Sound design by Chris Julin and audio engineering by Brian Allison. Our theme music is by Wonderly. Special thanks this week to Jon Gordon and Elisabeth Gawthrup. Donna Tam is the Director of On Demand. Francesca Levy is the Executive Director and Neil Scarborough is the General Manager of Marketplace.