Florida home insurance is no longer viable at current rates. State subsidy fund is wiped out.
Either insurance rates explode or federal bailout down the road…
And all that implies  pic.twitter.com/Do7sNciVnx

— VBL’s Ghost (@Sorenthek) October 13, 2024

There's a 500 billion to a trillion dollars of real estate value on the Florida coastline and what used to be a one in 100 Year event the average Florida homeowner historically has been paying about 1% of the real estate value and insurance so now if your real estate is likely to be wiped out one out of every 20 years instead of one out of every 500 years the cost of insurance gets to the point that it is untenable for most people to pay for their insurance Florida has a state backed reinsurance provider called the Florida hurricane catastrophe fund and this fun issues debt to meet its coverage demands because reinsurers insurance companies in order to incentivize them to come into the state and underwrite homeowners insurance.

00:42. You should explain the loop here which is you go and get a mortgage the bank says you need to get insurance if I'm going to lend you the money to buy the home so then a bunch of insurers need to decide that they are willing to underwrite that area and then when they give you that insurance they then want to lay that risk off and go to a reinsurer is that the cycle?  

01:03. That's right, and what's happening is they would normally underwrite that risk.  They would say this is going to cost.  You're going to lose the value of your home.  Every hundred years or every 200 years, but now the models are showing, because of the frequency of these sorts of hurricane events and the severity of the hurricane events, that maybe you'll lose the value of your home once every 20 years or once every 30 years.  And no consumer is going to be willing or able to pay that much for the insurance on their home.  So the state, over the last several years, has had to step in and effectively subsidize the insurance and now the state reinsurance vehicle only has statutory liability maximum of 17 billion dollars in a single hurricane season now I think they got lucky with Milton today but some were estimating that the Milton losses were going to be in excess of $100 billion dollars bigger than Katrina it's likely as of this morning the reinsurance websites are all saying it's probably a 40 to 50 billion loss events which still exceeds the states reinsurance capacity.  So you can kind of think about Florida State's reinsurance thing being effectively bankrupt.  It doesn't really have the capacity to underwrite the insurance anymore so the real question for everyone is is the federal government going to have to step in and start to support the price of homes because if they don't . . .

02:17. Well that's a terrible precedent to set because if you do it for Florida, then you'll have to do it in Texas and Louisiana and Mississippi 

. . . and California with wildfires . . .

. . . and Arizona and Texas.

There's going to be no way to create a clear demarcation of who gets a bailout and who doesn't, which will mean that everybody will get a bailout, or nobody gets a bail out.

02:37. That's right.

02:38. And if everybody gets a bail out and if you think about how systematically unpredictable at least in the southern states the weather is you're going to be talking hundreds of billions of dollars a year probably.

02:49.  The total value of all mortgages in home homeowner mortgages in Florida is $454 billion dollars and those people typically have you know a debt to equity ratio probably on the 50 to 80% range so with the value of your home dips by 25% because everyone starts selling their homes leaving Florida or they can't get insurance then the people that live in Florida most of them have their net worth tied up in their home are going to see their personal net worth wiped out or cut in half.  So it's not just an economic problem it's a social problem that now there are so many people that have put their entire net worth into their home the value of their home is written to a point that it no longer makes sense given the frequency at which homes are going to get destroyed.

03:28.  Well that's probably the reason why they'll have to do it because they'll exactly but then that calculation will have to happen for every single homeowner in every single state where this is a an issue. 

Exactly.

03:38.  Wait, Friedberg, are you saying the entire Florida coastline is no longer economically viable?

03:43. No, it's totally viable.  It's just the question is, what are you willing to . . . 

03:47.   . . . at what price.

03:48.  At what price?  Will you pay 5% of your home value for insurance every year you know will you pay 2%, 3%? 

03:54.  If the expected life of a house is 20 years, then no, that's not viable.

04:00.  It becomes very very untenable.

04:01.  Well, it used to be a 1-in-500-year event.  Now it's probably 1-in-50, right?

04:05. My question is does this apply to the entire coastline or just parts of it?  

04:08. Well I mean you saw that the range at which these events can happen is all over the place and the challenge is the events are getting more significant because of this warm ocean weather that we see this warm ocean temperatures.

04:20.  The only good news, Friedberg, is that now people are building the first couple of floors in high-rises in Miami and homes on stilts with concrete and with resistance you know saltwater resistant material so there is a counter to this so we might be looking at . . .

04:36. An investment in climate resilience that's right.  

04:37.  Yeah, so it might actually be an opportunity to upgrade all these homes to resistant ones using another set of Technologies but the bailout is really interesting too, Sachs,  because Florida's got a lot of Electoral College votes doesn't it like I hate to bring this back to politics but you know promising people bailouts is how these politicians seem to be getting votes these days.

05:02. Yeah but is anyone talking about a federal bailout I mean is that this is something you're predicting.

05:06.  I think what Freidberg is saying is that there's a pretty obvious parade of Parables here where the question will have to be answered one way or the other because of you only have a 17 billion dollar reinsurance fund and there's 50 billion dollars of damage somebody is going to have to come in and cover the gap and if it's the insurance companies expect your insurance premiums to double or triple.

05:27.  That's right and that's what happened in California and by the way State Farm left a lot of California . . . 

05:31.  This is what I was going to say.  Most of these big insurance companies have already done the calculus to realize that these regions are no longer profitable enough to justify the downside risk.

05:40.  100%.

05:41.   That's the bigger problem. So then the ones that are left are insolvent reinsurers or ensures that are just funding short-term Arbs (arbitrages) because they know that the odds are they're going to get wiped out.  So they'll price gouge, effectively.