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Wednesday, January 5, 2022
Higher Rates and Replacement Costs Will Raise Property Insurance
By Ron Hurtibise
Every Florida property insurance company calculates “replacement cost” differently, but almost all will charge more next year – in addition to other standard increases.
FORT LAUDERDALE, Fla. – Embattled by years of property insurance rate increases, Florida homeowners are about to get hit by a double whammy: Your insurance costs will likely rise even higher than you expected next year as companies increase the replacement value, or the estimated cost of replacing a damaged home, to reflect the skyrocketing costs of construction materials and labor.
And those higher values will be multiplied by higher rates approved by state regulators over recent years in response to increased claims costs and related litigation.
“I empathize [with policyholders], but it is reality,” said Paresh Patel, founder and CEO of Clearwater-based Homeowners Choice and TypTap insurance companies. “Costs of labor, materials, etc., are going up. This is inflation.”
If you are a customer of Citizens Property Insurance Corp., the so-called insurer of last resort, your replacement value is likely to increase sharply and drive up your overall renewal bill. In some cases, inflation will push your replacement value over $700,000 – the eligibility threshold for Citizens coverage in all counties except Miami-Dade, where the coverage threshold is $1 million.
Citizens customer Bob Colgan was stunned in early December when his agent told him he would have to shell out $900 more next year to renew coverage for his Lake Worth home.
Colgan knew that state law requires Citizens to cap annual rate increases at 10%. But the premium-cost increase his agent showed him – from $2,673 to $3,573, or 34% more – far exceeds the rate-hike limit adopted by the state Legislature a decade ago to keep coverage affordable for Citizens customers.
“I was shocked,” Colgan said. “Why do they need these big increases? We haven’t had a major hurricane in years. I don’t understand it.”
The increase was driven by a dramatic hike in what Citizens estimated it would cost to rebuild the home and replace its contents if destroyed by a hurricane, fire or other calamity. And because premiums are determined by multiplying rates by a home’s value, those replacement-cost increases can make that 10% rate increase cap feel like a bad joke.
According to the estimate, the cost to replace Colgan’s home increased from $233,000 to $278,700 – a 20% hike. After getting the estimate, Colgan asked another insurance agent to recalculate the renewal price. That agent said the replacement-cost increase seemed higher than it should have been and resubmitted the renewal application based on new calculations. Citizens has not yet approved the revised application, Colgan said.
But Citizens spokesman Michael Peltier said a 20% replacement cost hike is in line with what all single-family homeowners can expect to see on their next Citizens bill.
Rising construction costs blamed
Until this year, the company typically increased replacement values by 1% to 3% annually to keep up with normal inflation rates, Peltier said. This year, replacement values have been increased from 15% to more than 20% in some areas, he said.
One possible reason is that Citizens changed the software used to determine replacement values. As of July 1, agents have been directed to use a new cost estimator developed by CoreLogic Spatial Solutions LLC.
CoreLogic officials did not respond to requests for comment.
In an Oct. 5 bulletin, Citizens alerted agents that “inflation factors for renewal policies are higher than previous years to address increasing costs in building materials and to ensure the dwelling is insured for full replacement cost.” Inflation factors, the bulletin said, may increase replacement values as high as 25%.
Inflation impacts are adjusted quarterly in CoreLogic’s cost estimator and could result in further premium hikes after Jan. 1, the bulletin said.
Replacement value increases “do increase the premium,” Peltier said in the email, “but failure to make the adjustment could leave the policyholder significantly underinsured.”
Construction costs skyrocketing
Replacement values are rising for property insurance customers across the nation, said Mark Friedlander, spokesman for the Insurance Information Institute, an industry-backed research and trade group.
A big reason is the price of lumber, which increased 16.5% in 2020 – significantly higher than last year’s 1.4% overall inflation rate. So far this year, lumber prices have moderated and increased just 2.8% compared to 2020. But overall inflation, which includes costs of labor and other building materials, is up 6.3%, institute data states.
Between August 2020 and August 2021, costs of construction materials increased 23% while labor costs rose by 4.5%, according to figures from the Associated General Contractors of America provided by Citizens.
Inflation’s effects on insurance costs are particularly painful in Florida, where premiums have been rising as much as 40% to cover costs of increased litigation and aggressive claims solicitation by roofing and water restoration companies.
Facing even more price hikes, typical Florida homeowners are two years away from seeing average home insurance costs exceed what they pay each month toward their mortgage loans, said Ryan Papy, president of Palmetto Bay-based Keyes Insurance.
Patel estimates that most private market insurers will increase replacement values of their customers’ homes between 7% and 15% when policies come up for renewal over the next year. Rather than reevaluating each insured home separately, Patel said his company will increase replacement value of all houses by 7% after Jan. 1.
Each insurer approaches replacement value calculations differently, Papy said, which can make it difficult to predict how any individual policy premium will be affected by the rise of inflation.
Locke Burt, president and CEO of Ormond Beach-based Security First Insurance Co., also acknowledged that his company increased replacement values. He didn’t estimate the average replacement value increase, saying that company officials who could determine that number were out of the office between Christmas and New Year’s Day.
Keeping Citizens from growing
Citizens, created to provide affordable insurance coverage for homeowners otherwise shut out of the insurance market, might be seeking steeper replacement value hikes as part of a strategy directed by Carlos Beruff, chairman of the company’s board of governors, to ward off further growth by raising prices as high as legally possible.
Beruff and the board are asking state insurance regulators to approve rate increases even higher than those recommended by the company’s actuaries to scare off potential new customers and force existing customers to seek coverage from private market insurers. As private market insurers have been withdrawing from South Florida and other urban markets in recent years, tens of thousands of homeowners have had no choice but Citizens.
Meanwhile, those homeowners have caused Citizens to grow from 420,000 policies in 2019 to 748,000 in early December. Beruff and other officials say they are worried that if Citizens were to grow too large, it wouldn’t be able to pay all claims after one or more catastrophes. If that happens, Citizens customers will face surcharges of up to half of their annual policy costs. If that money doesn’t cover all claims costs, all property insurance customers in Florida will face surcharges to cover any shortfall.
Those officials, which include state legislators, say the annual 10% rate cap has made the company too attractive as an alternative to private-market companies that cost more.
To make it less so, the Florida Legislature last spring approved increasing the rate cap from 10% to 11% on Aug. 1 and to 15% by 2025. Then on Dec. 15, Beruff led the board of governors to approve average rate increases at the maximum 11% for all customers statewide.
New customers can only be eligible for Citizens if no coverage is available from a Florida-regulated private market insurer, or if the only available coverage exceeds the cost of Citizens by more than 20%.
Citizens did not respond to questions about whether its high replacement value increases are part of the company’s strategy to drive up costs.
A comparison of total insured value per policy from insurance company data downloaded from the Florida Office of Insurance Regulation showed that average property values of 189,328 Citizens customers in Broward, Palm Beach and Miami-Dade counties increased 11.5% between the third quarter of 2020 and the same period in 2021.
Insured values of properties insured by four private-market carriers increased at lower rates, ranging from 3.2% to 5.4%. Those numbers will climb in future reports, Patel said.
Papy said it would make sense for Citizens, restricted by the rate-hike cap, to disproportionately increase replacement costs as part of the company’s effort to keep pace with private-market insurers’ prices in hopes of driving customers back to those companies.
“Overall, the more private market carriers we have, the better it is for the consumer,” he said.
Citizens policyholders have the right to challenge replacement cost estimates. But they must use estimates from recognized sources – such as CoreLogic or a competing replacement cost estimator; a licensed insurance appraiser; property inspector; general contractor; architect or engineer.
Many homeowners will decide not to seek an alternative valuation because it can cost $500 and more, said Paul Handerhan, vice president of the consumer-focused watchdog group Federal Association for Insurance Reform.
Papy and Dulce Suarez-Resnick, vice president of the Miami-based Acentria Insurance agency, both said by increasing replacement values at steep rates, Citizens is pushing out customers whose home values climb above $700,000 in most of the state, or above $1 million in Miami-Dade.
If no private market offers are available, “how are they going to get coverage?” Papy asked.