Insurers are caught in a conundrum: In a world where the risk of costly catastrophes is rising but high premiums are squeezing policyholders and angering state regulators, how can they keep making money?

That question was at the center of Farmers Insurance’s decision this week to stop renewing nearly a third of the policies it wrote in Florida, becoming the latest insurer to pull business out of the state as the industry struggles with the rising costs of covering damage. . linked to floods, hurricanes, wildfires and other climate-related disasters.

Farmers, one of America’s largest home insurers, did not say what specifically led to its decision. It was the cost of payments that was too high in recent years, which saw record setting numbers of billion-dollar catastrophes, as well as rates charged by reinsurers who sell insurance to policyholders, have risen? Were there too many lawsuits by policyholders? Or is Farmers playing a game of chicken with state regulators, hoping that leaving now will give it leverage to charge customers more in the future?

“A lot of insurers have lost a lot of money in Florida and they’ve been threatening to leave for years,” said Daniel Schwarcz, a professor at the University of Minnesota Law School who specializes in insurance.

In most states, insurers must behave like electric utilities: If they want to increase the rates they charge their customers, they must seek regulatory approval from the state government to do so.

Insurers’ problem with raising rates may be among the reasons they’re pulling back in places like Florida and California, where climate change is causing the costs of paying claims — which insurers call “losses” — to soar. When it is difficult to raise rates as companies have done in some areas, the best business decision is to walk away.

In May, State Farm, the nation’s largest insurance company, said it would stop selling homeowners coverage in California. Last month, Allstate said it would stop selling new home and commercial policies in the state, citing the worsening climate and rising construction costs. Farmers itself said this month it would limit new homeowners insurance in California, citing rising inflation and risks of worsening climate disasters as among the reasons.

Florida law allows regulators to deny rates or even force insurers to refund customers if the rates they charge or hope to charge are “excessive,” meaning they could generate a profit that regulators consider “unreasonably high relative to the risk involved.” Floridians already pay more than the national average for homeowners insurance. Insurance on a $250,000 home in Florida cost an average of $1,981 this year, while the national average was $1,428.

Some experts, such as Mr. Schwarcz, say state regulators have too much control over how insurers set rates, keeping them artificially low even as the cost of paying out claims after devastating and more frequent storms continues to rise.

Other experts say what’s needed isn’t less regulation, but more of it — specifically, better management of so-called reinsurance companies that operate out of sight of consumers and sell insurance to home and auto insurers to help them manage their risk. These companies have sharply raised their rates in recent years. State regulators have less authority over reinsurers, allowing those companies more freedom to charge insurer rates as they see fit.

Industry lobbyists say it’s neither of those things and that insurers are folding parts of their business to reduce the number of claims-related lawsuits from policyholders.

“This business decision was necessary to effectively manage risk,” Trevor Chapman, a spokesman for Farmers, said in an email.

Mr. Chapman added that Farmers is not pulling out of the state entirely, only discontinuing its home, auto and umbrella policies sold under the Farmers brand. Any damage that occurs to the owners’ properties before their year-long policies end will still be covered. The company sells policies under several other brands, which it plans to continue.

A spokesman for the Office of Insurance Regulation said the written notice the company sent to the regulatory agency on Wednesday was marked as a “trade secret.”

Mr. Schwarcz said Florida’s politicians and regulators should have seen this coming.

The Florida insurance industry has also seen smaller insurers disappear. Over the last two years, eight small insurers did went bankrupt in the state. The string of foreclosures and bankruptcies left many homeowners with few options other than going nonprofit, state-supported carrier.

According to the Insurance Information Institute, an industry lobbying group, property and casualty insurers have not earned, as a whole, profits on underwriting — or as a result of their general business activities — in Florida since 2016. The industry’s cumulative underwriting losses have exceeded 1 billion USD over the last three years. Last year, the institute said, the cumulative net income of insurers in the state totaled $900 million.

“While some states have very bad years financially, like Louisiana in 2020 and 2021 due to the record level of hurricanes, no other state has reported sustained losses for property insurers like Florida has since its last profitable year in 2016,” said Mark Friedlander, a spokesman for the an institute that represents consumer insurance companies.

“The problem is that there’s a denial between people who live in Florida and people who live in California — and, frankly, the American population — about the dangers we face,” Mr. Schwarcz said.

His offered solution: Let insurers charge whatever they want for policies in disaster-prone areas. Eventually this would lead people to stop building homes and businesses that are very likely to be destroyed by natural disasters. “That would actually result in a more resilient infrastructure, more adaptive to climate change.”

Birny Birnbaum, an insurance expert who is the executive director of the Center for Economic Justice, a nonprofit working for equal access to economic opportunity, said Mr. Schwarcz’s idea — to let market forces dictate how homeowners respond to climate change risks – wouldn’t fly.

“That’s like saying, ‘As long as I can keep paying more and more every year, I don’t care if my house burns down, because there will always be more to pay for it,'” Mr. Birnbaum said. “That’s crazy.”

Insurers in Florida and other states where catastrophe threats are higher, such as California, are struggling because the reinsurance companies they turn to for help managing their risks charge too much, and no one regulates them, Mr. Birnbaum said.

Reinsurers offer insurance companies a guarantee that if something huge goes wrong like a giant hurricane hitting southwest Florida, they’ll be able to find the cash to pay for it. The reinsurance market, although large, tends to be volatilewith prices rapidly increasing just when insurers are least prepared to handle the increases.

Mr Birnbaum, who sits on a committee that advises the Treasury on insurance matters, said reinsurers should have their rates regulated more like consumer insurance companies. He also argued that the federal government should create a national reinsurance protection similar to its terrorism insurance program, which guarantees that the government will step in and help cover catastrophic losses once they reach a certain dollar amount.

The Reinsurance Association of America, a leading trade group representing dozens of reinsurers doing business in the United States, did not respond to requests for comment on the industry’s role or debates over tighter regulation.

The cost of reinsurance in Florida jumped 40 to 70 percent this year over last year, according to the Insurance Information Institute. But Mr. Friedlander, the group’s spokesman, said reinsurance rates were higher in Florida than in other stormy states because of insurance losses related to lawsuits.

“Legitimate system abuse and claims fraud are the man-made factors that generated Florida’s property insurance crisis, not catastrophic losses,” Mr. Friedlander said. In Florida, insurance companies feel it’s too easy for people to sue them, he said. More than 100,000 lawsuits have been filed annually against insurers in Florida over the past several years, he added.

Insurers have been demanding more protection from lawsuits, and Florida lawmakers just delivered. Starting in 2021, the State Legislature passed five bills to make it harder for policyholders to sue insurers. The new laws change the way property owners can receive compensation for legal costs and prohibit them from transferring liability for a claim to a third party, such as a construction company, willing to fight for payment.

“These are the first steps toward a stable market environment, but it may take several years to see improvements given the treacherous conditions that Florida consumers and insurers have faced for so long,” Mr. Friedlander said.

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