The Daily - Did Hurricane Ian Bust Florida’s Housing Boom?

Episode Date: October 18, 2022

Since Hurricane Ian devastated southwestern Florida last month, residents have filed a record number of insurance claims for the damage caused by the storm.Today, Chris Flavelle, a climate reporter for The Times, discusses whether the insurance companies can survive. And if they can’t, what will the effect be on Florida’s housing market, the cornerstone of its economy?Guest: Christopher Flavelle, a climate reporter for The New York Times.Background reading: The hurricane’s record-breaking cost will make it even harder for many to get insurance, experts say — threatening home sales, mortgages and construction.Aerial videos and photos show the destruction caused by Hurricane Ian on Fort Myers Beach, Fla.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

It is as bad as the experts feared. Hurricane Ian has made landfall in Florida. From the New York Times, I'm Sabrina Tavernisi, and this is The Daily. You can see how high the water is, how fast it's moving. This is the storm surge. You feel like you're in a war zone. You don't feel like you're in your little community, your beautiful little beach town. Since Hurricane Ian devastated southwest Florida last month.

Analysts are expecting $70 billion worth of damage from this hurricane. Residents have filed a record number of insurance claims for the damage caused by the storm. Officials say more than $207 million in claims have already been paid out by insurance companies. One state senator told us he expects rates to increase 20 to 30 percent. Today, my colleague Chris Flavell on whether the insurance companies can survive, and if they can't, whether Florida's housing market, the cornerstone of its economy, could be at risk too. It's Tuesday, October 18th.

So Chris, you've been reporting on Hurricane Ian and the aftermath in Florida and what the costs are to the state. So how bad is it? We don't have full numbers yet, but from the initial estimates, it looks like Hurricane Ian could produce the highest amount of privately insured losses, losses to insurance companies, insured losses, losses to insurance companies of any storm short of Katrina. And it may even pull close with Katrina. We don't really know at this point. But by all measures, this is the most expensive storm to hit Florida and one of, if not the most expensive storm to hit the U.S. in terms of the amount of insured damages. Wow. And when you say that it's the most expensive storm for private insurance companies, what do you mean exactly?

Yeah. So when you talk about hurricane damage, you're really talking about two things, flood and wind. A big part of the damage from events like this is from flooding. Flooding is covered by a federal program, the National Flood Insurance Program. So that's separate. Private insurers don't have to worry about those losses in terms of their own business model. That leaves wind as the main hazard that insurers cover. And the wind damage when you get a storm this strong is immense. So if you're a private insurance company, just the sheer number of homes

that were heavily damaged or destroyed by Hurricane Ian are going to be a real shock to your books. But the numbers that we're seeing in terms of the damage estimates, those aren't really the story. Those don't capture why this is so important. The story is that the entire insurance markets in Florida, which in turn underlays the entire real estate market in Florida, could be facing its greatest shock in decades and potentially could fundamentally change in ways that are going to ripple through the entire state's economy.

And that's what everyone I talk to is worried about. They are bracing themselves to find out what those numbers are, because those numbers will determine if this is the storm that tanks Florida's insurance market. Okay, so that sounds huge, but what do you mean exactly? Like, how is that even possible? How would this thing lead to that? So the story of Florida's insurance market really begins in August of 1992. This is how Hurricane Andrew looked as the winds roared ashore.

Which is when Hurricane Andrew slammed into Miami-Dade County. Well, Dave, it's nights like this that make you marvel at the power of Mother Nature. Vehicles piled atop each other. Rooftops deposited on the beach. Destroying tens of thousands of homes. And then it just about completely took out the Tamiami Airport out there. That was a complete shambles. The hangars were gone. The airplanes were ripped apart. The kids were saying, Mommy, what happened? Why is God doing this to us? Causing billions and billions of dollars of damages.

Without question, this is going to be the most expensive natural disaster ever to hit the United States. And one of the effects of that storm, beyond the physical damage, was it really upended the state's insurance market. You had a number of private insurance carriers go bankrupt. And I think the takeaway for many insurers, especially national insurers, was this might be more risk than we want. I think Hurricane Andrew caused a lot of insurers to realize that there's something inherent to the risk level in Florida, right? It's got so much coastline. It's a peninsula. It's in Hurricane Alley. Both coasts are subject to hurricanes.

It gets more hurricane strikes than any other state in the U.S. And the result was sort of a natural contraction of the insurance market, at which point lawmakers realized they had to step in. So the insurance companies basically bail on the Florida market because it's too risky and too hard to make money. Yeah. And it's important to note the reason that the healthy insurance market matters is that if you can't get insurance, you can't get a mortgage. Right. And for most people without a mortgage, you can't get a mortgage. And for most people, without a mortgage, you can't buy a house. And Florida, of course, is a state that is heavily dependent on number one, real estate,

especially high value real estate along the coast. Number two, tourism, people need a place to stay. And number three, the construction industry that supports all that. So if you talk about anything that shakes the insurance market, that causes insurers to flee and reduces access to insurance, all of a sudden you're talking about really the health and survival of Florida's economy as we know it. This is the sort of invisible underpinning of Florida's economy. And I think it's one of those things you don't realize how important it is until you can't get it. Right. Insurance is kind of the lifeblood of Florida's economy. This is a huge problem potentially for Florida.

So what do they do? So after Hurricane Andrew, lawmakers in a frantic attempt to avert a real loss of their insurance market is they start building sort of an infrastructure for insurance, almost a public system that can backstop private insurers. So number one, they create a company that is now called Citizens, that is sort of a public backstop, a public safety net insurance company that you can turn to if you can't find private insurance. And also they created a fund now called the Cat Fund, which can also be a financial backstop to whatever insurance companies remain in the state. And those two institutions, Citizens and the Cat Fund, become kind of the linchpin that's meant to hold this otherwise

and the Cat Fund become kind of the linchpin that's meant to hold this otherwise wobbly system of insurance together in the face of the next storm. So the state is basically propping up the real estate market in Florida. That's right, because lawmakers understand that insurance holds together the real estate market, and that without it, that market would collapse. Okay, so how does this actually work? I mean, if you're a person trying to buy a home in Florida after Andrew, what's the situation? So after most of the national insurance companies pulled out of the state, a lot of people wound up going with this new public option, citizens. But there's drawbacks with citizens. Number one, you can only get

access to citizens if you're turned down by a number of private companies first, or if the coverage from those companies would be significantly more expensive than what you can get through citizens. Number two, even if you get coverage through citizens, there are caps. Citizens will only cover a house if it's less than $700,000 in most of the state. There's one exception. If you live in Miami-Dade or the Florida Keys, that cap goes up to a million dollars. But those are not big numbers in Florida. So many homes are too expensive to even qualify for coverage from citizens. Got it.

But even though many private national insurance companies left after Andrew, there were still a significant number of smaller private insurers operating just in Florida. And they had a really specific business model. So typically, if you think of an insurance company, they set the price of their premiums at a rate where they feel they can pay out the claims they expect to get, plus room for profit. Okay. What they learned after Andrew was they probably didn't have enough money coming in from premiums

to cover the full risk. So normally, what you do is raise premiums even further. But if they did that, if they charged a premium that reflected the full risk of living in Florida, the price to get insurance would be unaffordable for most people. So what they do instead is they keep the premiums a bit lower, meaning they get less cash on hand, which is obviously a problem if you need to pay out a lot of claims. The way they addressed that was by spending heavily on something called reinsurance. What's that? Reinsurance, as the name suggests, it's insurance for insurance companies. If you're an insurance

carrier in Florida or anywhere else, and you're worried that you might not have enough money in the bank to pay all of your claims for whatever might happen, you can turn to a handful of global giant companies. Think of Lloyds of London or Swiss Re or Munich Re. They tend to be based in Europe or in Bermuda. And these insurance companies can get additional coverage from those reinsurers, sort of like a rainy day fund. So if they get hit by a big hurricane and they exceed the amount of money they have in the bank to pay out their claims, they can turn to reinsurers and say, hey, the time has come. I bought protection from you. Now I want you to pay these claims for me. And we should make clear, this isn't specific to Florida.

Insurers all over the world use reinsurance. What's different about Florida is the degree to which the Florida insurance market is built on this heavy reliance on reinsurers as a means of keeping down premiums from what they would otherwise be. Got it. Okay, so despite the fact that this is an incredibly risky place to do business if you're an insurance company, if you're someone looking to buy a home in Florida, you still can because, number one, the state of Florida created their own public insurance system, and number two, because there's this system of reinsurance which backs up insurance companies. That's right. Okay, so how does it go? Does it actually work to prop up the housing market? So it worked. In fact, it really worked. There was explosive growth in Florida after Andrew, especially along the coast in places like the Southwest, where we saw much

of the damage from Hurricane Ian. So lawmakers in Florida tweaked the system enough that people were comfortable enough spending money on homes. And the result was, again, a massive boom in home building all along Florida's coast. What they didn't realize, or seem not to have realized, was that this elaborate system that Florida these handful of global reinsurance companies, Florida made itself vulnerable to a change of heart for those companies. It left itself open to the risk that those companies might one day say, you know what, we're not really interested in Florida either. We also think it's too risky. Maybe we'll leave as well. And it looks like that might be about to happen. We'll be right back. the insurance market in Florida is pretty precarious, and that these big global insurance companies that are the insurers of insurance companies are eyeing the situation pretty

nervously. And then, of course, the second biggest storm in modern American history blows through. Ian, what happens? Let me lay out for you the scenario that everybody I've spoken with is afraid of. Presented in terms of dominoes, right? The first domino to fall would be a huge number of insurance claims coming into companies across the states that match the estimates we've seen, that in fact do present insurance companies with the highest volume of claims they've ever faced in the state of Florida. So the first domino is, well, what does that mean for these insurance companies? Can they survive? And we know if they don't have the reserves, they'll have to go to

reinsurance. Right. And reinsurers are watching probably more closely than anyone to see whether or not the private insurance companies in Florida can actually sustain the claims that they're facing. So the second domino, potentially, is it reinsurers say, you know what, maybe this in fact is not a market where we want to grow. Maybe it's a market where we want to shrink. And they either make their coverage more expensive, offer less of it, or stop offering it altogether. That's the second

domino to fall. And do you see any evidence of that? Any evidence that that is actually happening? You know, there's already evidence that reinsurers are getting cold feet in Florida. This past summer, even before Hurricane Ian hit, reinsurers reduced the amount of coverage they were willing to provide to Florida insurance companies, even citizens. The state-run public option was unable to get all of the reinsurance it wanted this year. It got about half of the reinsurance it had planned to buy. So I don't think it would surprise anyone if following Hurricane Ian, those same reinsurers come next spring and summer when it's time to renew or not renew their annual contracts, said to themselves, we're going to do one of two things, either raise rates even more than they already have, which would be just financially crushing

to Florida's insurance companies, or even worse, leave the market altogether. And that's the thing that Florida policymakers and insurance companies are really bracing for, that kind of exit. So if they raise rates or just leave altogether, that essentially means people wouldn't really be able to access private insurance, right? private insurance, right? What would happen if private reinsurers were to pull back dramatically or just leave would be, you would have nothing left, but again, the infrastructure that Florida built after Hurricane Andrew. So if that doomsday scenario comes around and private reinsurers flee, then Florida will have to really twist itself into a pretzel to find out just how much of that load can be carried by those public companies from after Andrew. Well, what would that load mean for the public companies? It would mean a couple of challenges. The first problem they'd have is they'd have to raise the cap. Remember, you can only get citizens' coverage in most of the

state if your house is under $700,000 in value. So they could raise that cap. That's within the power of state lawmakers. The problem is, if they lifted the cap, there'd be more people coming into citizens. And that creates a second problem. Because just like private insurers rely on reinsurance, so do citizens. They've got the same model. They rely on the access to other companies swooping in if their claims exceed their money on hand. This is really tough because lawmakers can't do anything to increase access for citizens

to the private reinsurance market. So what do they do then? The magic sauce at citizens is if they don't have enough money coming in from premiums and they can't get enough coverage through private reinsurance, they have the power to levy what are called assessments or surcharges on almost all the private insurance policies in Florida, not just homeowners insurance, but things like car insurance or boat insurance, with just a few exceptions. That way, they can find a way to raise money from almost every household in the state. So taxes? It begins to look a lot like a tax increase in a state that famously does not like taxes.

So citizens, in theory, could carry that load, but at a significant price, literal and political, to the state. So not a great option if you're a politician in the state of Florida. Yeah. Florida has been trying for years to prevent its insurance system becoming basically an extension of the government. So that would blow away that sort of anti-public system mentality. The ideology in Florida is they say they don't want to have a public insurance system. Everyone rushing into citizens, if private insurers start to collapse, looks a whole lot like a public insurance system. Everyone rushing into citizens, if private insurers start to collapse, looks a whole lot like a public insurance system. And the cost would be borne directly by Florida homeowners. So given all of that, Florida really doesn't want insurers and reinsurers to leave the state. But is there anything that lawmakers can do to prevent that?

The first thing that reinsurers and insurance companies tell me that they want policymakers in Florida to change to make life easier for the insurance sector is to make the state less litigious, to make it harder for homeowners who are unhappy with their insurance outcome to sue their insurance company. The number that you always hear is that though Florida only has about 8% of the homeowners insurance policies in the country, it has almost 80% of the lawsuits filed by homeowners against insurance companies. So my guess is lawmakers will try to start with that. But will that be enough to prevent insurers and reinsurers from leaving? It's hard to say, but there's reason to be skeptical. Lawmakers have for a few years

been passing bills, try to cut back on lawsuits. It doesn't seem to have made much of a difference. So if that doesn't work, what it means is eventually you might not be able to get insurance at all, or at least not at a price you can afford. And that's the third domino. That's where the real trouble starts. Because that's where Florida's entire coastal economy starts to teeter. starts to teeter, right? If you're a homeowner and you've got most of your life savings wrapped up in a home near the beach in Florida, and all of a sudden your prospective pool of home buyers who might want to buy that home from you shrinks by half or more because they can't get mortgages, because they can't get insurance, the value of that home falls, right? The desire to build homes falls.

The property tax that cities are getting from those homes falls. The tourism economy that relies on all that falls. So if insurance isn't available, then all of a sudden the mortgage market doesn't work and the financing doesn't work. And the gold rush that has made Florida what it is stops. And that's really the nightmare scenario that Florida's facing post-Ian. Not today and not next week and not this month, but sometime in the next 12 months, once we find out what the claims are like and how reinsurers are responding and whether or not Florida lawmakers can adjust fast

enough, if those things don't pan out, then the scenario we're looking at is a significant earthquake hitting the Florida real estate markets. And that's what is everyone's worst fear. Basically, that the Florida real estate market would have a heart attack. And that is a central part, as you say, of the entire economy of the state. Absolutely. It's impossible to overstate how bad that would be for Florida's economy if the mortgage market clams up because people can't get insurance. It's one of those types of climate financial shocks that people warn about when they say climate change doesn't just mean physical shocks, but economic and financial as well. And no one knows how bad they'll be. So, Chris, obviously, you know, underneath all of this is a lot of people

losing the lives that they want to live. I mean, losing their ability to live in the place that they wanted to live. And that's a whole lot of pain. But there's also an element that just makes a ton of sense because, I mean, this feels like it would actually reflect the true risk of living in this place when we think of climate and when we think of, as you say, where Florida is and what blows through. There's really two ways of looking at this, right? The sort of cold-hearted, technocratic view from 30,000 feet might be good. Climate adaptation means we want a situation where people are living in a way and living in places that reflect the actual risk and the growing risk from climate change. And that might mean we don't have rows and rows and rows of

expensive homes by a beach. And there's logic to that. And I think most people who study climate adaptation would say that's the kind of outcome you want to get to, where building patterns reflect the risk. But it's hard to get there from here without a lot of pain, because that would be fine in the abstract. But today we have millions of people who have their entire life savings sunk into homes on the beach, including some who aren't rich, right? I think for some people, it can be difficult to muster sympathy for those who are very wealthy and who bought homes on the beach and are working class or they have been there for generations. They are not going to be able to pick themselves up if the value of their home collapses. And for them, the question of what is fair is really hard because if access to insurance dries up, the very rich will be okay. At some level, they can self-finance and self-insure, but the people who can't, it's hard to see what their options are. So one of the challenges that Florida demonstrates for the rest of the country is how do you actually change the system that already exists, the built landscape that already exists and doesn't make sense anymore in face of the risk. How do you change it in a way that doesn't mean

financial ruin for more modest families? And that's really hard. That process is going to be jarring and bumpy and for many people, ruinous. And that's the great test of Florida. Not just what will it become, but can Florida figure out a way to get to a safer, more realistic kind of a landscape that doesn't mean financial ruin for millions of people? Right. you could equally ask, well, is it fair for everyone in Florida who has insurance to pay a surcharge so that people who do live on the beach can stay there? Yeah. Right? So one of the most compelling parts of what's happening in Florida is it's forcing people to address this previously unanswered question, what is fair as we try to grapple with the effects of climate change? Who should bear the cost? What do we owe people who are going to've only just begun asking those questions. So there aren't even camps we can retreat into. They're not even philosophical or ideological questions. They're just unknowns. So Florida, on top of everything else we've been talking about, Florida will push us as taxpayers to start asking what is fair to people who used to enjoy life on Florida's coast

and maybe won't be able to. What do we owe them? And that's maybe the hardest debate of all. Chris, it's making me think back to the period after Andrew, when the state stepped in, after Andrew, when the state stepped in, propped up all the real estate market, as you've described it, and made it possible for all these new people to come and live in Florida. And in the short term, that was very good for the state, right? All of these new people came to live in Florida. But it also seems like it was the thing that now put all of these people in this terrible situation. Absolutely. And there's an analogy here to levees or dikes, barriers that get built in flood-prone areas to reduce flood risk. Often, when you build those flood barriers, you'll see a big burst in home development right behind them. People will think, well, the barrier's there. It's not

going to flood anymore. This is a great place for a house. And it is until the barrier breaks, until water comes over and all those homes that have been clustered right behind that flood wall get washed away. Right. So in your metaphor, the levee is the way that Florida propped up the market effectively. And the lesson seems to be, be careful where you build that levy. Exactly. And the levy in Florida wasn't holding back the water. It was holding back the market.

And it was holding back the force of the insurance market, which by itself would have compelled people maybe not to build in these high-risk areas. And by building that levy, Florida allowed that building to happen and supercharged it. The number of new homes along Florida's coastline since Hurricane Andrew is astounding. On the other hand, you've left all these homeowners exposed to a collapse in the insurance market. And if that happens, I think one question to ask will be, was it worth it? Will all the economic benefits from this fantastic rush of home building in the last 30 years in

Florida have been worth it? Or will people feel like they've been duped? And we won't know for a few months, but maybe a year from now, we'll have a much better idea what the aftershocks of Hurricane Ian mean, not just for the insurance market, but for those homeowners. And maybe some of them will say, I should have been warned. Chris, thank you. Thank you. Thank you. We'll be right back. Here's what else you should know today. On Monday, the application process for President Biden's debt cancellation program has begun, and about 8 million people have already applied for relief. Federal student

loan borrowers have been able to skip their payments since March 2020, a pandemic pause that was scheduled to end in January. Biden announced in August that he would use executive action to cancel billions of dollars in student debt. The initiative is projected to be one of the costliest programs in Biden's agenda, with an estimated price tag of $400 billion. About 95% of the 37 million borrowers with direct loans owned by the government are expected to meet the plan's income criteria. loans owned by the government are expected to meet the plan's income criteria. And the Justice Department said that Stephen Bannon, a former top aide to Donald Trump, should spend six months in jail and pay a fine of $200,000 after a jury found him guilty of willfully disobeying a subpoena from the House Committee investigating the January 6th attack. Prosecutors said that Bannon pursued a, quote,

bad faith strategy of defiance and contempt. They said he deserved a penalty harsher than the minimum term of one month in jail because he had brushed off the committee's demands and then attacked it publicly. Bannon is scheduled to be sentenced in federal district court in Washington, D.C. on Friday. Today's episode was produced by Michael Simon Johnson and Carlos Prieto, with help from Diana Nguyen and Muj Zaydi. It was edited by Paige Cowett, contains original music by Dan Powell, Marian Lozano, and Rowan Nemisto, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly. That's it for The Daily.

I'm Sabrina Tavernisi. We'll see you tomorrow.