Summary:
Real estate properties in Florida are increasingly at risk due to climate change.
Established insurers ran their numbers and noped out of Florida quickly.
New low-quality insurers came in and filled the vacuum.
Established rating agencies looked at the new low-quality insurers and came to the conclusion that they are trash.
New low-quality rating agencies came in and declared those new low-quality insurers to be a-ok.
Lenders, fearful of being left holding the bag (from climate losses that are likely to bring down the low-quality insurers), sold mortgages in Florida to Freddie Mac and Fannie May (i.e., the GSEs, which are financial institutions that purchase mortgages en masse and implicitly backed by the US Government).
Freddie Mac and Fannie May bought those mortgages because the properties are insured by (low-quality) insurers declared a-ok by (low-quality) rating agencies.
As is usually the case, the government will be left holding the bag.
> As is usually the case, the government will be left holding the bag.
The taxpayers, really. We’re going to pay for stupid decisions by politicians voted in by Florida people.
Its malicious not stupid. The florida politicians and businessmen are all getting what they want while externalizing all the risk
Kind of; we mostly pay in the form of not getting services other countries with our wealth get.
The alternative is the NFIP [1], isn't it? The federal government was always going to be left holding the bag.
Meanwhile, responsibly run solvent programs like the California FAIR Plan for fire insurance have to fund it all from premiums and can survive major fires no problem.
[1] https://en.wikipedia.org/wiki/National_Flood_Insurance_Progr...
Wouldn't that only cover flood damage? I grew up on the Gulf Coast and what counts as flood damage from my experience is very little
NFIP is really strict about what is covered and takes ages to settle. It's specifically designed to NOT cover dumb decisions by home builders/buyers.
Which is why many homeowners are losing coverage in CA.
At this point its probably cheaper for an acreage owner to build natural barriers to fire vs getting fire insurance.
Similar in a way to non-dischargable student loans. When lenders are not exposed to the real risk of their loans, someone always ends up holding the bag.
Mortgage loan rates in Florida probably ought to be in double-digits.
> Similar in a way to non-dischargable student loans. When lenders are not exposed to the real risk of their loans, someone always ends up holding the bag.
Students (people) are more likely to suffer from climate change and will have to fight it during their lifetime than those new low-quality insurers will have ever to, regardless of who hold the bags.
Let the fuckers hold the bag and give a fighting chance to the people rather than building our economy on the back of debt ridden slaves.
> Lenders, fearful of being left holding the bag
This is where the logic breaks down - lenders are selling these mortgages irrespective of any other conditions.
The only loans that aren’t sold are unsaleable investor and boutique loans. These wouldn’t be offered to normal borrowers in the first instance (since the loans of a normal borrower would be targeted for resale)
What I am missing is how do you profit from this. Many of these new entries have to know that the big insurance companies left for a good reason. That the smaller entries cannot absorb the risk they will be facing.
So, what’s the play? I have to assume there is some smart money who has identified a way of discharging the liabilities while still collecting pay, but how does it work?
I have no idea about these circumstances, but speaking generally...
It is really easy to make money from an irresponsible insurance company if customers have confidence in you. You take in a large amount of money from people insuring their stuff, invest it, make lots of money in the stock market, distribute the money back to the company owners as profit. Good times.
Then the highly predictable crisis that "nobody" predicted happens, the insurance company goes bankrupt, the customers get no payouts and the company owners don't really lose anything because they got their profits out years ago. Sucks to be a customer.
Under modern theory there is a Phase 3 where the government steps in to pay the insurance company extra money and keep them ticking over. It is an optional step and depends on political connections.
The basic idea is that insurance companies are paid to assume risk. But if, when the risk materialises, it turns out that the risk was actually held by the customers or government then it is a bit like the insurance company was making free money in the intervening period.
The goal is to underprice risk to drive out competition then grow to a point where you are too big to fail. All the while you collect bonuses as the leader of this scammy enterprise. You bank on events that happen every 50 or 100 years not happening before you grow so big you get bailed out when they do.
There are some gaps in this argument.
First, insurance boards by each state set the rules of the game, and one of the rules is to have an asset coverage ratio for the risk. Its effectively a sort of liquidity measure. Another one is minimum capital etc. Both are traditionally paid by the original owners.
So, in effect, if the insurer goes belly up owners do lose some of the capital, and owners cannot loot the assets, either. But I agree that overall it is the customer who is most short changed because although they will get a partial payout in a crisis, it wont match their expectation - most of the missing funds will be gone as you have explained.
This should be the abstract for a paper on "Modern Insurance Theory"
Thanks for this. I was anticipating some grand conspiracy, but nothing need be so complex. Just swoop in offering a product for a market who is required to buy. Pay yourself above market rates, and if you get lucky, you can maintain the system for years before ruin.
A mismatch in risk and term duration. In the worst case its short term cashflow, converted to profit ona regular basis. the huge tail risk is of a longer (likely) term. On a normal year reinsurance pays out expected losses, the primary insurer keeps their couple of percent margin, business continues. Eventually their optimistic/naive/malign actuarial numbers are shown up, reinsurance doesnt cover it, huge losses, bankruptcy, the profits are long gone and paid out, remaining share and debt holders are wiped out. Their insured customers are covered by the state after much bad pr, or just not covered.
Duh, I suppose this is obvious. Just take inflated pay as long as the good times last. I was trying to envision some grand huge payout, but methodical grind until apocalypse is fine too.
The Great Recession 3.11 For Workgroups?
(v2 was covid.)
> As is usually the case, the government will be left holding the bag.
To be fair last-resort bag-holder is one of government’s primary jobs right behind monopolizing violence.
Then what the hell are we paying insurance companies for?
There are two reasons, one virtuous and one sinful:
* People hate saving money, money in our hand now must be spent now. Buying High and Selling Low is in our DNA, quite literally. Nobody wants to save a buck a day for a potential externality when they can spend that buck on something right here right now. Mandatory insurance forces people to save a buck (the monthly premium) for the potential externality, forcing people to Buy Low and Sell High.
* People want wealth, some moreso than others. The secret sauce? Being the middleman has the biggest revenue compared to effort. You are literally moving money from Person A to Person C, and you as Person B can take some of it. This is textbook rent seeking.
If you just want a TL;DR, here: People are shit.
The government can do #1 just fine.
You greatly underestimate the sheer effort undertaken by most people to not pay Social Security tax.
So a lot of people like to use the Florida insurance crisis (which is real) to push their particular issue but the truth here is more complex than "climate change".
First, you cannot talk about this issue without talking about the 2017 Florida State Supreme Court case Joyce v. National Federated [1]. Basically, this made it much easier for policyholder plaintiffs to recover costs in insurance litigation, sometimes punitively so. If a court deems a case to have been likely to succeed from the outset, it can award up to 2.5 lodestar costs for attorney fees.
This is well-intentioned. It should encourage insurers to settle rather than go to court but it had the opposite effect because of how rife Flroida is for roofing scams and insurance fraud [2]. Basically, dodgy companies would offer to inspect your roof, find a fault and then file a claim to replace the roof. Nothing was really done to curb this fraud and, because of Joyce, it was unprofitable to fight these cases.
This compounds to Florida accounting for 76% of homeowner's insurance lawsuits but only boasts 9% of claims [3].
Third, the current Florida government has shown no interest in actually tackling this problem. One bill in recent years simply gave insurers $1 billion [4] for really nothing in return.
Fourth, a lot of issues are mistakenly attributed to climate change. Take the coastal erosion in Cape Cod [5]. People like to say "climate change" (to be clear, I 100% believe in man-made climate change) but really it's just a longstanding trend of coastal erosion that probably has almost nothing to do with climate change.
[1]: https://www.propertyinsurancecoveragelaw.com/blog/court-reaf...
[2]: https://www.nbcnews.com/news/us-news/roofing-scams-florida-p...
[3]: https://www.roofingcontractor.com/articles/97786-what-you-sh...
[4]: https://floridaphoenix.com/2022/12/16/desantis-signs-billion...
[5]: https://www.independent.co.uk/climate-change/news/cape-cod-h...
Your post is completely off-topic. The paper includes a great discussion about how the property insurance crisis in Florida dates back to Hurricane Andrew in the 90s, not a court decision in 2017. The issue raised in the paper isn't climate change, its weakly capitalized insurers and the conflict of interest created by one particular rating agency (Demotech), that is giving sketchy insurers clean bills of health that allow them to operate.
Tort reform in Florida is a bandaid. The state-run insurer is creating serious market distortions by undercharging for the risk, accumulating very large proportions of the state homeowners insurance policies (since no one else will), and then offloading the policies to undercapitalized insurers while looking the other way about their poor financial condition. When Citizen's claims are in excess of its reserves, the legislature steps in and taxes the rest of the state to cover the shortfall. I'm guessing when the other insurers become insolvent, the shortfall is offload to the state guarantee fund (possibly on the taxpayers dime). This is all covered in the paper.
Does Florida share California’s problem in that areas have been developed that should have never been developed, and we keep paying people to rebuild there?
> the true cause of energy inflation, which was Trump's 2020 OPEC deal for them to cut the global oil supply by 10%
Wow, I missed this [1].
[1] https://www.nytimes.com/2020/04/12/business/energy-environme...
Yes the joke is that this is the whole state of Florida.
And the state of California (earthquakes, wildfires, riots). And the state of Oklahoma (tornadoes). And the entire coastline of the United States (hurricanes, tsunamis, termites) which covers most houses in the US. Most areas along the Mississipi river (flooding). Almost all mountain areas (landslides, wildfires). All riparian areas (flooding, cavitation).
It's about time to start thinking relocating from certain areas...
So, Florida mortgage-related financial gambling is about to explode again? That only took 16 years...
>> Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment.
>> We find that these new insurers would not meet [government-sponsored enterprise] eligibility thresholds if subjected to traditional rating agencies’ methodologies. We then examine the implications of these dynamics for mortgage markets. We show that lenders respond to the decline in insurance quality by selling a large portion of exposed loans to the GSEs.
As a former resident, this is comically on-brand for Florida (and granted, some other regulatory-captured states): allow business to do as it will, ignoring systemic problems, and then when the risk dice finally come up snake eyes exclaim "No one could have possibly seen this coming!"
It’s almost comically familiar. A ratings agency (Demotech) favourably rates small insurers so their policies can be used to sell mortgages to Fannie & Freddie.
If a big storm hits the insurers collapse, borrowers default and Fannie & Freddie have a mess on their hands. The only missing piece is a depository institution (or someone levered by one) with a bunch of Florida mortgages with Demotech-rated insurance, but I’m sure that’s squirreled away somewhere in Florida’s financial system. No doubt each of the small insurers, Demotech, and the mortgage originators will be incredibly sorry about the state of affairs, an apology they will have to regrettably deliver from a yacht moored off Saint Croix.
It's not my state, but in this case, the politics are as much populist as corporatist, aren't they?
As viable, sound insurance is made unaffordable and inaccessible by radical increases in both costs and risks, jeopardizing the ability to buy or sell insured property at all, you can kick the can down the road and protect your next candidacy by quietly easing up on "sound". The catastrophic consequences won't come until later, but the underlying market gets to keep floating and stay liquid in the meantime. Whether it's in their long-term interests or not, voters want that, don't they?
I guess it depends if we're talking individual-voters or aggregate all-voters.
Individual voters (who own property) would very much like to avoid any additional costs.
Aggregate all voters presumably don't feel great about the costs of subsequent bail-outs (especially considering states can't run deficits).
If DeSantis doesn't believe science about climate change maybe he believes money.