This post is part of a series sponsored by CoreLogic.
Insurers affected by Hurricane Ian’s damaging path across Florida in late September 2022 faced operational, statutory requirements for accurate forecasts of the ultimate economic cost of the damage. Accustomed to using catastrophe risk models to forecast their ultimate losses, the uncertainty limits of their loss estimates were significantly higher for this event. Although hurricane loss models can estimate damage and insured losses to buildings and assets with some known degree of certainty, there are other sources of loss that are less certain.
These uncertainty factors are called post-loss amplification factors. These include a demand growth factor ie. a short-term rise in prices driven by the extraordinary costs of importing outside workers and materials, and cost inflation factors arising from regulatory aspects such as Florida̵7;s assignment of benefits law (AOB). These post-loss amplification factors have plagued Florida’s insurance market for many years and have gotten progressively worse, culminating in a seemingly never-ending upward spiral of damage costs for Hurricane Irma in 2019.
Recent levels of historically high inflation due to material shortages and high energy costs have contributed to significant increases in the cost of everyday goods and services, with consumer price inflation peaking at just under 10% earlier this year. Labor shortages also continue to be a problem, with the National Federation of Independent Businesses reporting that hiring is as difficult as ever.
The costs of building materials and labor used to rebuild have increased faster than general inflation, with levels just below 15% in early 2022. We can see in the graph below that these costs have seen an even steeper rise in Florida.
CoreLogic’s loss estimates have been calculated using the most recent figures for rebuilding costs. The problem is that insurance companies or agents may be looking at schedules or values from twelve months or more ago that may be undervalued with little or no future inflation built into the schedule. Costs to insurers are incurred when the repair is completed. As of November 22, 2022, nearly 50% of insurance cases were still open and 25% were still open as of January 20, 2023. The most expensive claims take the longest to repair with inflation driving final costs higher. This lag is even longer for reinsurers.
In 2017, Florida made a significant change to the building code for existing buildings that required an entire roof section to be replaced where 25% or more of a roof section is damaged and where there were permit, installation or inspection errors.
Assignment of benefits is an established practice in Florida that allows a property owner to hire a contractor to repair their property and to assign the benefits of their insurance to the contractor in lieu of an outright payment. Designed to deliver flexibility and speed to homeowners looking to repair their property, the addition of attorney fees to the claim has increased the cost of settlements to insurance companies and has ultimately increased the cost to homeowners. In May 2022, the Florida Legislature enacted reforms to the AOB laws and the effectiveness of these reforms is unproven.
The revised 2017 rules on AOBs such as reduced claims periods, price for cancellation and contingent fees will have a significant impact on reducing costs only if insurers can stop dodgy actors from contacting their customers and proactively start handling regulated claims early. Additional reforms passed by an emergency legislative session have now (at least for the time being) prohibited the ability for policyholders to assign the benefits of their policy to 3rd parties and limited the ability to recover legal fees. However, the legislation is not retroactive, so claims from Hurricane Ian may still be subject to AOB inflated losses.
Hurricane Ian and Housing: By the Numbers
CoreLogic estimates that nearly 900,000 homes were exposed to hurricane-force winds, and 600,000 of those were exposed to severe Cat 2 or Cat 3 wind speeds. According to the Florida Office of Insurance Regulation, there were approximately 475,000 residential claims filed on January 20, 2023, up from 440,000 filed claims as of November 2022.
The continued stabilization of these claims numbers may be a testament to the improvements made to home strengthening regulations in the years since Hurricane Andrew (1991). This high volume of claims will be a test of not only the adequacy of the recent AOB reforms to reduce the overall repair/insurance costs for homeowners to repair/insure their homes, but also a test for insurers and reinsurers to manage the uncertainty in determining the final cost of Hurricane Ian.
To learn more about the impact of Hurricane Ian 6 months after landfall, watch a recent CoreLogic webinar that explores the results of a damage survey in Southwest Florida, including a detailed breakdown of the modeled losses and what made this hurricane event so unique.
©2023 CoreLogic, Inc. CoreLogic® statements and information contained in this article may not be reproduced or used in any form without express written permission. Although all CoreLogic statements and information are believed to be accurate, CoreLogic makes no representations or warranties as to the completeness or accuracy of the statements and information and assumes no responsibility whatsoever for or reliance on the information and statements.
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