Jul 5 2006 8:00AM | Permalink | Email this | Comments (2) |
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Soaring property insurance premiums are playing a major role in reducing new home demand in some parts of the country even though the national CPI for home insurance is essentially unchanged in the last two years. The impact is the largest in Florida because of the huge recent hurricane damage claims. But all hurricane and flood prone areas now have property insurance cost problems which will worsen immediately after the next huge storm. Note that this will not reduce the national demand for housing but only move it inland from the coast.

For prospective homebuyers in Florida the monthly cost of property insurance has increased as much as monthly interest payments in the last two years. Florida premiums increased almost 20% for the policy year beginning on June 1st. Over the next year, a typical homeowner with an adjustable mortgage will have to pay $100-150 more each month in interest but could get an increase next June of $100 or more in monthly home insurance premiums if 2006 Hurricane damage is as big as most forecasts expect.

There were no hurricanes in June and none in sight in early July according to the National Weather Service but we have wait five more months before we can tote up the seasons’ damage. Florida’s residential insured losses were $30 B in 2004-05, more than enough to consume all of the insurance reserves. Florida’s public reinsurance fund is broke. The Florida Hurricane Catastrophe Fund used up its $6B reserve accumulated over a decade. The fund got an $715 M emergency grant from the state legislature and is assessing all insurers in Florida to rebuild its capital. But it will not meet its obligations to insurance carriers if the weather forecasts are correct.

The federal flood insurance program, administered by FEMA, is also broken. Katrina was the last straw. Congress has not yet faced this problem. The current Pennsylvania floods may force Congress to act quickly. While it is likely the program will be bailed out with your tax dollars, much higher premiums will be part of the solution together with tougher prohibitions on flood zone construction.

Since people always buy less of what has become relatively more expensive, expect the higher insurance costs to cause a measurable reduction in Florida construction. Some would be beach retirees will change their plans and retire elsewhere. All of Florida will have higher insurance costs because the populist traditions in Florida mean that coastal property owners are and will continue to be spared from paying for the full risk they impose on their insurance carrier. This is the obvious conclusion from the recent announcement that the high risk insurance pool, Citizens Property Insurance Corporation — which is subsidized but still have a $B plus deficit — is now the largest property insurer in the state with nearly half of the market in some coastal areas.