December 12, 2022

Florida Senate Banking and Insurance Committee

Chairman Boyd and Members of the Committee:

Good afternoon. My name is Caroline Melear. I am a fellow in Finance, Insurance and Trade at the R Street Institute, a public policy research organization focused on free markets and limited, effective government.

The Florida homeowners’ insurance market is in crisis. Homeowners across the state are experiencing the highest insurance rates in the country at three times the national average, coupled with an ever-lessening marketplace of insurers to choose from.[1] My family and I have experienced this personally. In April of this year, we became first-time homeowners in West Palm Beach. We purchased a modest three-bedroom home five miles from the coast. When the time came to secure homeowners’ insurance, we were surprised to discover via multiple insurance agents that the only provider available to us was the state-backed Citizens Property Insurance Corporation (“Citizens”). Not only that, but our 1,400 square foot home would cost thousands a year in property insurance, despite being part of a condominium community.

Our story is one of thousands across the state experiencing out-of-control insurance costs and limited access to competitively priced policies. To be clear, it is reasonable to expect higher insurance rates in a state susceptible to severe storms. This is basic logic and a quantifiable risk for insurers, who are able to determine actuarily sound rates for insurance through historical precedence, property value, replacement cost and catastrophe modeling.

However, the issues facing Florida are unique and clear to all discerning parties. It is not the risk of hurricanes, which can be reasonably accounted for just as it is in other states across the nation with similar risk profiles. The storm that the Florida Legislature and insurance and reinsurance companies across the state need to be fearful of is the cataclysmic combination of “Hurricane Litigation” and “Tropical Storm Fed.”

Efforts to dismantle one-way attorney fees and assignment-of-benefits is absolutely crucial in quelling this storm. “Hurricane Litigation” has decimated the homeowners’ insurance industry, where homeowners hold 9 percent of the nation’s policies, yet account for 79 percent of the litigation claims in the nation.[2] Arguments will be made this week that this is due to greed and unfair practices of the insurance industry. But this is an impossible idea to defend when only 8 percent of litigation awards go into the pocket of homeowners, with the rest being raked in by lawyers across the state to the tune of $51 billion over the past 10 years.[3] Additionally, the state of Florida had the highest percentage of lawsuits opened compared to claims closed without payment in 2019 at 28 percent. This is nearly eight times more than the next closest state, Connecticut, at 3.4 percent.[4] This is indicative of a legal landscape that allows for handsome attorneys’ fees in exchange for frivolous lawsuits.

These are unfair, out-of-control, fraudulent awards that ultimately harm homeowners more than any other party involved by artificially raising rates statewide and causing insurers to flee the state due to inability to price appropriately or operate profitably. We at the R Street Institute intend to support legislation which broadens the private market, increases access to insurance for homeowners and allows the state of Florida to continue to flourish. This is an impossible task without a strong, resilient insurance market, which will not be achieved without tackling the fiercest storm affecting the state: Hurricane Litigation.

At the R Street Institute, we believe in limited, effective government. However, there are times where government becomes the last resort to stabilize markets and prevent catastrophe. This is the case with the reinsurance marketplace in Florida and “Tropical Storm Fed.” With rising interest rates, the mark-to-market losses for reinsurance companies will come in at 8.4 percent in 2022, a situation significantly more severe in Florida given the litigation landscape.[5] Even financially healthy insurers are fearful of their ability to secure reinsurance. For this reason, we support the implementation of the Florida Optional Reinsurance Assistance program out of necessity for the situation at hand. It is my sincere hope that the proposed legislation will quell the headwinds to such a degree to increase the appetite for reinsurance and negate the necessity of additional state-backed solutions.

We support actuarily sound rates for Citizens, which has shifted from “insurer of last resort” to “cheapest and therefore most desirable option.”[6] Similarly, we support efforts to require flood insurance in tandem with Citizens policies, as both an incentive to protect against flooding in a vastly under-penetrated market and disincentivize enrollment in Citizens. However, we encourage all efforts to broaden the private market for flood insurance lest we find ourselves in a state even more reliant on state-backed solutions for insurance, which are always the least efficient, most burdensome option. Further, efforts to disincentivize enrollment in Citizens will be in vain without creating a landscape which allows consumers a broad range of private market options.

Our primary concern at the R Street Institute is lowering, or at the very least stabilizing, costs of homeowners’ insurance and empowering citizens to select from a broad marketplace of competitively priced insurers. These goals are impossible without ridding the insurance industry of frivolous lawsuits and out-of-control awards which only line the pockets of attorneys at the expense of the homeowner. This is the primary storm to take on, followed closely by the necessity to secure reinsurance. The challenges at hand require bold solutions, and the Florida Legislature would be remiss to miss this opportunity to enact broad changes and begin the road to recovery for homeowners and insurance companies alike. We applaud your efforts to take on serious reforms for your constituency and urge the Legislature to pass SB-2A and keep Florida the freest, most prosperous state in the nation.

Thank you and I welcome any questions.

Caroline Melear

Resident Fellow

Finance, Insurance and Trade Policy

R Street Institute

[email protected]