Insurance Storms Whip The Sunshine State

“Unfortunately, I lost a couple of deals (recently) because of the insurance,” says Peter Bitzas, an originator for NEXA Mortgage based in the greater Tampa region. “Not only does it affect people’s budgets and what they want to spend, but it’s also affecting debt-to-income ratios for qualifying — not only on the primary purchase of their home, but also for investors looking to buy investment properties.”

Over the past year, Bitzas estimates that 10 to 20% of his loan applications have fallen through on account of insurance rate increases.

Rich Williams, principal broker for Florida Mortgage Pros in centrally located Lakeland, has seen a similar impact on origination on account of insurance costs. He calls the situation “unstable, quite unstable” for originators like himself who are seeing home shoppers priced out of the market as interest rates and skyrocketing premiums lay siege to debt-to-income ratios.

Parallel rising home prices, “with the interest rates going up and now with the insurance rates going up as well, it’s definitely affecting origination. … What they’re qualifying for, there’s limited to none or no homes available at those prices,” he says.

An Ailing Industry

With 8,436 miles of shoreline, Florida is the most catastrophe-prone region in the United States, yet its insurance market is dominated by local insurers too small to accumulate sufficient capital to balance future losses. The market depends heavily on reinsurance, or insurance for the primary insurer to help when claims spike. After back-to-back years (2020-21) of insurance companies experiencing net underwriting losses exceeding $1 billion, reinsurance rates have risen — and swamped — many of Florida’s smaller, private carriers.

The purpose of reinsurance is to disperse the risk of catastrophe outside of Florida’s borders through the global reinsurance market. In its January 2023 Property Insurance Stability Report, the Florida Office of Insurance Regulation (OIR) indicated that for 2022-2023, the amount of 2022 reinsurance coverage purchased by insurers increased an average of 17% from 2021. However, the cost of that reinsurance has increased by 52% from 2021 figures.

At present, primary insurers are putting 50% of policyholders’ premiums toward their reinsurance costs, up from 30% in 2018.

If the health of an industry can be gleaned from a statistic, since 2017, 14 property and casualty insurers have entered receivership with the Florida Department of Financial Services. Recently, other carriers like Farmers and AAA are opting to leave the state, drop policyholders, not renew policies, or severely tighten policy eligibility requirements, in addition to hiking rates substantially. 

The surge of insolvencies has contributed to massive growth in the number of policies that Citizens Property Insurance Corp. — the state-backed insurer of last resort — has had to absorb. As of September 2022, Citizens held more than one million policies — more than double the number from two years prior: a number predicted to swell to two million policies in 2023.

Meanwhile, the most current data shows 19 insurers are presently subject to enhanced monitoring by the OIR’s Insurer Stability Unit. Referrals to the unit can be triggered by myriad events, including (but not limited to) requesting a rate increase that exceeds 15%, filing a notice that the company intends to not renew more than 10,000 residential property insurance policies within a 12-month period, or filing financial statements which demonstrate the insurer is in an unsound condition, has exceeded its powers, is impaired, or is insolvent.

In 2022, homeowner’s insurance rates in Florida climbed 33% compared to the national rate increase of 9%. In Hillsborough County, which includes Tampa, rate increases have been particularly severe, and annual premiums for property insurance are estimated to jump from an average of $2,500 to $3,500 in 2023. In neighboring Pinellas County, which is largely surrounded by water and had the highest rates in the state in 2022, premiums are projected to surge from an average of $2,938 to well over $4,000, nearly triple the national rate of $1,428.

Philip La Rue, a homeowner’s insurance agent serving clients in Pinellas County, is optimistic that the state’s insurance reforms will help moderate premium hikes, providing relief to homeowners in the state.

A pair of insurance reform bills Gov. Rick DeSantis signed into law in May and December 2022 seek to stabilize the ailing industry by, among other measures, disincentivizing frivolous lawsuits that are crippling insurers. An Insurance Information Institute study released in June 2022 found that less than 10% of homeowners’ property claims nationwide are filed in Florida, yet the state accounts for 79% of homeowners’ insurance lawsuits.

After a 2017 state Supreme Court decision made Florida a favorable litigation environment by allowing courts to award plaintiffs’ attorneys more than two times their hourly billing rates when courts rule in favor of policyholders, litigation expenses incurred to fight rampant, fraudulent roof-replacement schemes — orchestrated through contractors’ manipulation of assignment of benefits agreements — became a key driver of property insurers’ massive underwriting losses over the past few years.

One of DeSantis’s reforms eliminates one-way attorney fees for property insurance claims, which state regulators expect will have an immediate impact on the industry. One-way attorney fees entitle policyholders to reasonable attorney’s fees in any lawsuit in which any amount of recovery is awarded, granting policyholders leverage to fairly engage in disputes with insurers.

“I think you will start to see insurers come back into the state,” LaRue says. “Maybe not all at once, but I think you will see a trickle of carriers back into the state because of that tightening and getting those fraudulent claims out of there.”

Bitzas, of NEXA Mortgage, disagrees. “I don’t see it getting any better. What happened over in Sanibel last year doesn’t help things. We’re a peninsula. Natural disasters happen.”

Sanibel Island, off the coast of Fort Myers, took a catastrophic hit from last September’s Hurricane Ian. The Sanibel Causeway, which directly links the island to the Florida mainland, was broken into six pieces. As many as one in 10 structures on the island were destroyed. At $112 billion in damage, Hurricane Ian was the costliest hurricane in Florida history, and the third costliest in United States history, according to the National Oceanic and Atmospheric Administration.

Williams, of Florida Mortgage Pros, also doesn’t see the situation improving anytime soon.

“If you can’t go through the standard companies that are available, the next step is Citizens insurance, which is the state-funded insurance,” he says. “So, I don’t really see this being resolved quite yet until we get a lot more insurance companies coming back into the market and offering competitive prices.”

In zip codes hard hit by hurricanes or flooding, searching for coverage — let alone affordable homes — can be next to impossible, with carriers unwilling to write new policies for older homes borrowers want to buy in those high-risk locations. Of course, homeowner’s insurance is a requirement for originators to close mortgage loans. Limited options for carriers mean originators have to get creative to help borrowers make the insurance aspect of mortgage applications work.

New flood insurance guidelines

As an added hardship, redrawn floodplain maps that the Federal Emergency Management Agency (FEMA) released in November 2022 are forcing many Floridians who’d never had to buy flood insurance add those premiums to their list of monthly bills. The new maps incorporate many non-coastal areas that are now deemed to be at-risk for flooding, such as properties near canals.

According to Alan Crummack, a mortgage broker from Lakewood, depending on the property and where it’s located on the floodplain maps, flood insurance ranges from $485 a year to as much as $4,000, if not more.

“A lot of homes that previously were not in flood zones are now finding themselves in flood zones,” he says. “If you have a mortgage and you’re in a flood zone, even if you didn’t have flood insurance, the lender’s going to require you to get it.”

It’s just another cost for buyers to factor into the affordability equation.

Williams acknowledges that there are companies which may provide insurance on a consistent basis, “but you may try one thing today and it’s not going to work tomorrow. All of a sudden it changes, just stops. The companies are no longer there. They’re dealing with term exposure management. They’re saying, ‘Hey, we’re a little exposed here so we’re no longer writing in this area.’”

Making matters worse, policyholders are paying higher insurance rates for less coverage, according to Rateplicity Mortgage’s Mackie, who’s been analyzing the new policies insurers are writing.

“In the details of what they actually cover now, it’s probably about a 10-25% decrease in coverage; however the insurance premiums have skyrocketed an extra 30%,” Mackie says.

Of particular significance, property insurers have reduced the lifespan of roofs from 20 years to 15 years. Mackie says replacing a roof used to be $30,000-$40,000. With reduced coverage and inflated prices for building materials and labor, replacing a roof can now cost homeowners upwards of $60,000-$70,000. It’s wholly unaffordable, he says, especially for Florida’s large retirement and fixed-income communities.

Meanwhile, the Insurance Information Institute, an organization focused on industry research and consumer education, projects premiums could increase by up to 40% statewide this year. The projections are accurate, given what La Rue has seen so far. “A majority of them have been Citizens policies, but I have had other policies where I have seen premiums go from $1,800 to $2,700 – so, I would say that 40% is probably pretty close,” he says.

The net result is homeowners’ insurance is getting costlier and scarcer in Florida.

To Close Loans, Get Creative

Borrowers across the state are experiencing these affordability constraints, not just those living on the coasts or in catastrophe-prone areas.

“It’s been harder across the board, absolutely,” says Naples-based Mackie. “When I say that roughly the premiums have gone up 30%, that’s across the state. And then if you go into those flood-prone zones, that’s additional.”

Williams, the Lakeland originator, agrees, according to his conversations with other originators and professionals within the market. In the context of rising insurance premiums, he hasn’t seen a slowdown in mortgage applications, but rather a slowdown in going from the application to closing, or the application to pre-approval to finding a home in that price range.

As of March 2023, home prices in Florida had risen 3.2% year over year to reach a median home price of around $400,000. Tampa, where Bitzas is based, has outperformed the rest of the state, with median home prices around $405,000, up 8% year over year, per Redfin’s data.

One of the deals that fell through for Bitzas was with an investor — the homeowner’s insurance comprised almost 35% of the monthly mortgage payment.

“Florida, we’re busting at the seams,” Bitzas says. “We’re getting people from everywhere, which has increased the values tremendously. This used to be a safe haven to retire, to get a cheaper home, and for those borrowers who are looking to purchase something for $250,000, it’s extremely limited.”

Relative to the rest of the country, Florida has a low income-to-home-value ratio, with the typical home priced 15% higher than the typical U.S. home and the median household income in the state 10% lower than the median U.S. income. If premiums do increase the projected 40%, by year’s end the average Florida homebuyer with a gross monthly income of $5,000, a 20% down payment, and a mortgage rate of 7% would see an 11% decrease in the home they could afford. That means a homebuyer who could have afforded a home worth $182,000 would now be able to afford one worth $162,000.

“Where the insurance gets you today,” Crummack says, “is when you have an older roof, you don’t have hurricane-proof doors and windows, and the property is not elevated above the floodplains. Elevating the property, making the house hurricane-proof, and having a new roof will reduce those insurance costs. Not only that, if you have, let’s say, just 5-10% to put down, by the time we get finished, your LTV (loan-to-value) that we can use puts you more at like 60-70%. So, you’re not going to have mortgage insurance, and you’re going to get better terms because you have a lower LTV. Not only that, but you have a brand-new home that’s also energy efficient and has [fewer] energy costs associated to it.”

Lengthening the amortization schedule to 40 years has helped to keep Mackie’s volume from declining. Mackie also thinks borrowers and originators should know that with significantly fewer all-cash buyers than a year ago, borrowers have more leverage to negotiate prices with sellers.

“The market has changed, so make it in your favor,” Mackie says. “Try to negotiate a better price point on the property. And that’s where I find a lot of people are coming back able to knock off 10-15% on the purchase price, and you’re actually able to get them squeezed into a mortgage. It’s definitely harder — I’d say about 10% of the book has suffered from the changes, not just insurance, but interest rate increases, too. Everything’s gone up, as a whole.”

Redfin data released at the end of May support Mackie’s assertion, as the rate that home sellers nationwide giving concessions to buyers rose to 42.9% during the three months ending April 30, up from 25.5% a year earlier.

Tampa saw a bigger year-over-year jump in seller concessions than any other metro Redfin analyzed, with sellers giving concessions to buyers in 58% of home sales for the time period analyzed, up from 12% a year earlier.

Bitzas also notes how, following the cash craze, the Tampa market has settled into a more balanced playing field between buyers and sellers, with more 3.5% down mortgages and more down payment assistance.

“Now we’re starting to see insurance being more of a factor because those mortgage amounts are higher, which means principal and interest payments, higher PMI payments if they’re putting less than 20% down, and then you factor in the insurance and that can blow it up,” he says.

Those whose income ratios are tight suffer the most from rising premiums, which is why Bitzas helps borrowers shop for more affordable coverage as they’re going through the loan application process. Not only does this help his clients save money, but it helps them qualify for mortgages that might otherwise fall through. He recommends insurance brokers — over agents — who can help borrowers shop a variety of insurance carriers to find the right coverage, and price, for their properties and budgets.

By helping to salvage borrowers’ debt-to-income ratios, originators can help borrower’s qualify and keep the loan from falling through. Like using a mortgage broker, Bitzas says he encourages people to use insurance brokers who can get them multiple quotes from different carriers.

“Insurance can be the difference between borrowers getting a house or not getting a house. That’s why I always recommend for my clients to get insurance quotes prior to going all the way,” he says. “We’ll take your application and we’ll pre-approve you. You find a specific house in mind, we can help you find an insurance broker.”

New Construction, Lower Premiums

Those homeowners struggling to meet their premiums — or worried about future increases — have little opportunity to move elsewhere in the state, with home prices appreciating so rapidly, relatively low inventory, and hurricane season approaching.

“I’m seeing ranches at 1,800 square feet with two bedrooms, one-and-a-half baths for $450,000. That’s levels we’ve never seen here,” according to Bitzas.

In 2018, in the Lakewood area where Crummack is based, “which is only like five minutes from downtown 5th Avenue in Naples and the beaches, a three-bedroom, two-bath, single-family home, around 1,500 square feet, was selling for about $285,000. Now, that same house, they’re asking upwards of $700,000.”

As a result, many borrowers are looking toward new construction, in part because of the greatly reduced cost in homeowner insurance.

Originators are, too.

“The biggest thing we’ve seen as a shift down here is a lot of people going for new construction, because when it comes to new construction, insurance is a lot cheaper,” Bitzas says. “Believe it or not, we still have some land here in Florida that’s being built on.”

Not only is the insurance more affordable, but it’s actually available

“Everybody’s jumping on the new construction,” Bitzas says. “I would say close to 50% of my pipeline right now that we have in contract are homes that were built after 2019. So, instead of paying $550 a month toward insurance in your payment, [homebuyers] are paying anywhere from $100-$150 a month toward insurance.”

Crummack stresses investment strategies with clients as part-and-parcel of affordability considerations. Hurricane- and flood-proof new construction will appreciate more reliably, making new construction a stronger investment opportunity than buying a pre-owned home that’s 15 or 20 years-old and needs updating, such as a new roof.

“Here, there’s a lot of properties that you can buy where the lots are two-five acres, like 600-feet long, and they go from block to block. You could feasibly have your rental units on one side of the property and your own dwelling on the other side with two separate entrances,” he says. “You can create a situation where now you’ve got revenue coming from those properties.

“FHA, believe it or not, will allow you to buy up to four units with as little as 3.5% down and use 75% of the rents from those three units in qualifying. When you do the appraisal, you’ll ask the appraiser to provide a rental survey. Then, what they will do is they will do a rental survey in that area to determine what those units will rent for. FHA will use that in calculating an income that you will get from those rental properties.”

Construct An Alternative

Alternatively, Crummack says borrowers can use construction-to-permanent loans.

“That is, you either own the lot or you buy the lot through the construction loan and you build. When you do something like this, we can structure it in a way where instead of using the cost to construct, we can actually use future market value,” Crummack says. “There are increases in valuations based on the fact you are going energy efficient. So, the appraiser can actually add additional value for that. I did one in Cape Coral not too long ago where the client paid $260,000 for the lot, they put $600,000 into improvements, and the house appraised for $1.2 million. You see, the cost to construct was less, but we can use the additional value in creating the LTVs which will provide you with better pricing.”

In the Lakeland area, too, “there’s a lot of new construction,” Williams says. “So, the availability for insurance coverage is there for new construction, but the older home — and when I’m talking older home, I’m talking maybe 10 years or older — it’s become a task.”

It varies, Williams says, but insurance for new construction can be 50% cheaper or more.

La Rue, the insurance agent, agrees, saying the new-home-build growth rate is strong in the greater Tampa region. Some parts of Hillsborough County are in the midst of a building boom that’s quickly making its way toward the north part of Hillsborough County and the southern part of Pasco County, specifically the Odessa area.