Praising Florida's insurance market while criticizing California's misses the point

The country needs new ideas and new institutions. Insurers could help by remembering nobler moments in their history.

A recent editorial in The Wall Street Journal asserting that Gov. Ron DeSantis had "headed off an insurance disaster" in Florida while "California's insurance price regulations" were "blowing up in a big way" touched an online nerve, triggering more than a thousand comments—many from incredulous Florida homeowners wondering where the Journal got its facts. The reality is that both states are struggling, trying to maintain a functioning private home insurance market against very difficult climate change-driven odds.

The rest of the country is not far behind. We need insurance companies to play a new institutional role when it comes to climate risk, starting now.

Florida is the furthest ahead in this end-stage narrative. The state has frequently applauded the entry of 11 new insurers into the Florida market, but these are smaller, lightly regulated, geographically concentrated entities whose coverage may be narrower and whose solvency is more dubious. At the same time, Florida state reforms are making it more difficult for homeowners to fight back if their claims are wrongly denied.* The governor’s claim that coverage rates have gone down applies to a small minority of homeowners—rather than the 80+ percent who have been seeing higher premiums—while avoiding commonsense questions about the breadth and reliability of that coverage.

California still has major players in its market, and is trying to keep them there by allowing home insurers to use forward-looking climate models and reinsurance costs in asking for rate increases. More will exit when they can, leaving smaller, less solvent players behind—which will make California's market more like Florida's.

State Farm announced nearly two years ago it wasn't going to issue new policies in California, and this week said the state's denial of an "emergency" rate increase was making the company "seriously consider its options within the California insurance market going forward." Allstate and several other large companies have already left or have sharply cut back their California offerings.

Both states are relying on teetering state insurers of last resort, but, again, Florida is ahead in this dangerous game. Its dependence on Citizen's exceeds that of California's on its FAIR Plan. Based on premiums, the five largest homeowners insurance companies in Florida as of 2023 were Citizens Property Insurance Corp. (the last resort), with an 18.57% market share; Universal Insurance Holdings Group, 8.47%; State Farm Group, 6.88%; Florida Peninsula Group, 4.88%; and Tower Hill Group, 4.35%, according to BestLink. Progressive, Farmers, and AAA are among the insurers who have left or cut coverage in Florida.

In California, for the same year, the state residual insurer, the FAIR Plan, didn't make the top five.

Who's doing a better job? Who knows. The effects of a rapidly warming planet will be increasingly felt in both places. And the same story is playing out nationwide: the federal flood insurance program is similarly suffering right now. Following this months’ $2 billion bailout to pay claims related to Hurricanes Helene and Milton, the program is $22.5 billion in the red.

Only when insurers figure out how to help governments actually lower physical climate-driven risks to their citizens, by changing where and how we live, will insurable markets flourish.

More than a hundred years ago, insurers banded together to set safety standards for electricity. During the sixties, insurers played a role in setting auto safety standards. Why can't they step up now by helping local governments and residents assess and plan for climate risks? They surely have the models and the data—and, as Bell Labs did for the information age, could play an important part in helping government land use and building code rules move the country into its ever-changing climate future.

That kind of leadership, vision, and investment in the future may not be what Wall Street wants to see from insurance companies. Here's Morningstar's Brett Horn, a well-regarded expert in insurance, writing just after last month's fires in Los Angeles:

A number of insurers started to exit the California homeowners market in recent years, based on their view that the state regulator wasn’t allowing adequate pricing increases to match increased risk. More recently, regulators have appeared to bend somewhat on this front. However, if insurers ask for large pricing increases after this event [the fires] and the California regulator balks, we could see insurers move away from the state. In our view, this is the best course for insurers to take if pricing is inadequate, and we have generally been encouraged by the discipline the industry has shown in this respect in recent years.

Horn is praising exit, in other words.

If "pricing is inadequate," if the actuarial risks are too high, insurers are certainly free to leave. That's a market signal that is worthy of respect, as I've written in the past. That's what has already happened in Florida to major insurers, and what is happening right now in California.

But the short-term thinking of distant investors is not the only source of wisdom, and exit is not the only choice. The country's future could be brighter, and the number of insurable places could be greater, if insurers created a public-minded Bell Labs of their own.

Coming back to the WSJ editorial: The real comparison between California and Florida is a temporal one. Florida is farther down the path toward ultimate fragility and uninsurability. California is also struggling. The story will continue along this course as more hurricanes hit Florida and more wildfires rip through the Golden State. There are signs that the country as a whole is struggling to maintain adequate home insurance markets in the face of rapidly intensifying climate effects. The solution is not to move the deck chairs around on the Titanic, but to change course.

---

*About half of claims in Florida filed related to Hurricanes Milton and Helene were paid. Many claims may have been for damages that didn't meet deductibles; many may have been denied because they were for flood damage not covered by insurance. Still, that's a lot of denials.