Notes from Jim Haughey

Jan 25 2007 9:03AM | Permalink | Email this | Comments (1) |
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By Jim Haughey

Florida new home demand will get a major boost over the next year from the homeowner property insurance reforms just approved overwhelmingly by the legislature in a special session called to deal with the insurance crisis. The new law cancels a more than 75% rate increase that had been scheduled in the next few months in the assigned risk pool, Florida’s largest home insurer. Instead, 20-25% rate cuts are expected.

Already high homeowner insurance premium more than doubled after insurance company reserve funds were depleted by eight hurricanes in 2004-05. Now the state will provide subsidized reinsurance to home insurers, eliminating the need for further huge rate increases to rebuild claim reserves. Also, part of the rate reduction will come from new homeowner options to increase deductibles, get discounts for home improvements that reduce potential wind damage and limit or forgo coverage on home contents and wind damage.

It is hard to estimate how much high property insurance premiums, and the risk that they could double, contributed to the plunge in home demand in Florida because demand is also being restrained by the collapse of speculative home buying. But the insurance impact was substantial and now it will be less.

The quick fix put in place by the legislature may only postpone dealing with the real insurance risk of hurricanes. A renewed hit to housing demand may be ahead when homeowners eventually have to pay the full cost of hurricane insurance. Notably, the Miami Herald reports that the only two “No” voters in the legislature were cast by former member of the insurance commission which had opted for a solution that required homeowners to pay higher premiums immediately to restore claim reserves.

But for now, homeowners and prospective homeowners have a reasonable certainty what the premium will be. The situation has returned to the pre-hurricane status. This will be reassuring to prospective migrants to Florida. There were lots of anecdotal reports that households near retirement were delaying buying in Florida and cancelling purchases for fear that home insurance premiums could soar much higher.

Long-term, the real cost of hurricane insurance will have to be faced either through state tax increases to fund reinsurance subsidies or a new round of large premium increases.