California Wildfires vs. Florida Hurricanes

Some news stories have reported the recent California wildfires will cause lots of trouble for Florida home insurance consumers when hurricane season rolls around this June.  California wildfires have, in fact, affected our insurance pricing in years past. But, this time, it seems unlikely they will have much of an impact.  There are a couple of reasons for this conclusion.  

As a frame of reference, the insured losses in these fires will cost the insurance industry around $35 billion, depending on which data source you believe.  For scale, that’s nearly five Hurricane Michaels; we remember that all too well.  Density and property values are more significant in the wildfire area than in Bay County, claims tended to be total losses, and homes burned to the ground.  As bad as Michael was, most damaged structures were not total losses.  Two other factors that may be less well understood are at play here, too.  One is the reinsurance component, and the other is how much the state-run insurer of last resort will be paying.

Florida is VERY heavily reliant on reinsurance.  We mostly have relatively small insurers insuring Florida homes, and they buy insurance from much larger companies called reinsurers.  When we lose a Florida home to a hurricane, 80% or more of that cost may be passed on to a reinsurance company.  In contrast, most California insurers rely less on reinsurers, paying more out of their own bank accounts for events such as the recent fires.  Think of these regular insurance companies and reinsurance companies as being two different pots of money.  Florida mostly pays losses out of one pot, while California pays losses out of the other.  Also, the California FAIR plan, the state-run insurer (like Florida’s Citizens Property Insurance Co.) is on the hook for a big chunk of these fire claims, which will blunt the effect on the industry.

Will there be some effect?  Sure, but it’s not likely to be much, and the trend in Florida, finally, is for homeowners premiums to go down, not up, which is a nice change from the last few years.  So, turn off the news for a bit and take a look at your policy.  Before it renews again, call your agent and ask them to go shopping for you, because now is the perfect time.