The insurance markets in California and Florida are in trouble. Citing difficult operating conditions, several insurance companies have recently announced plans to abandon both states. In recent months, the largest insurers in both California and Florida stopped renewing policies. This move leaves a gap in the marketplace and creates a situation where thousands of policyholders may be unable to find replacement coverage.

Firms Exiting the States

Throughout the spring and summer of 2023, a number of property insurers in Florida stopped renewing homeowners policies. In May, State Farm revealed plans to exit the market. Within weeks of that announcement, Auto Club Insurance Company of Florida (AAA), Allstate and Farmers Insurance followed suit.

This contributed to an increase in homeowners turning to Citizens Property Insurance, Florida’s state-backed not-for-profit provider. Citizens, originally the insurer of last resort, became the state’s largest insurer as private insurance companies exited the state.

Citizens predicts that it will write nearly 2 million new policies in 2023 as consumers find it increasingly difficult to obtain insurance from commercial carriers.

State Farm, which has long been the largest insurer in California, stopped writing new policies in June. That move alone put a significant strain on the market.

State Farm controlled some 20% of the California insurance market with more than $2.6 billion in premiums. Months earlier, Allstate put a moratorium on new underwriting in the state.

Causes of Insurance Market Instability

The causes leading big insurers to stop writing new policies in California and Florida are different.

In the Sunshine State, insurers cite the increased risk related to hurricanes. In California, the blame goes to wildfires. 

Moreover, rising home values and the cost of rebuilding have outpaced insurers’ ability to increase premiums, which are regulated by the individual states. This has made it difficult for insurers to recoup losses.

The Insurance Information Institute (III), an industry association dedicated to educating consumers, reports that there are more than 1.2 million homes at risk for extreme wildfires in California. Insurers may be leaving California to avoid future market instability, while Florida has struggled to maintain a stable insurance market since 1992.

What Insurance Market Instability Means for Homeowners

Homeowners insurance is a component of property and casualty (P&C) insurance. According to III, inflation is expected to contribute to future losses in the overall P&C market.

When added to the already high cost of rebuilding in California and Florida, inflation could have a compounding effect on homeowners in both states. 

This leaves homeowners with a difficult choice: risk being uninsured or pay dramatically higher prices for new coverage.

Insurers also face some difficult choices. Do the ongoing threats of hurricanes and wildfires cause them to limit coverage, leave the states or stay and absorb losses?

Will Property and Casualty Insurance Turmoil Affect Annuities?

Large carriers like the ones leaving California and Florida provide multiple lines of insurance to businesses and consumers. Those lines are within separate operating units of the parent companies.

For example, a large insurer will have a P&C division and a life and annuity (L&A) division. Each is separate from the other. The company cannot commingle the losses in one division with the profits in another. Insurance company regulators require this separation.

Companies must also maintain financial statements for their L&A divisions that are separate from their other accounts.

This provides regulators and consumers with transparency into the financial health of the companies that sell annuities. This should offer consumers a degree of comfort when shopping for an annuity.

Annuity Investors Have a Safety Net

Annuity owners in California and Florida need to know that there are investor safeguards in place in both states. These reduce the risks caused by an insurance company’s failure.

Both California and Florida have state insurance guaranty associations. Guaranty associations can protect annuity owners if the issuing insurance company fails; however, there are limits in each state.

Guaranty associations behave much like the Federal Deposit Insurance Corporation (FDIC). The loss reimbursement available may not always cover the full extent of damages.

Nevertheless, coverage limits in both California and Florida can have a significant impact on reducing the severity of losses caused by an insurer’s failure.

For example, in California a portion of policies are covered up to a maximum of $250,000. In Florida, the limit is $300,000.

While industry regulation and guarantee associations may provide peace of mind to consumers, a better measure of the stability of the overall annuity market can be found in its underlying economics. This strength is supported by robust demand.

The Annuity Market is Growing

In its 2024 Global Insurance Outlook, consulting firm, Deloitte, reported that many annuity providers are proactively repositioning their operations for more sustained and predictable growth.

As part of this strategic shift, Deloitte noted that annuity sales in the United States reached record highs in the first quarter of 2023. Fixed-rate deferred annuity sales grew by 47% during this period, and fixed-indexed annuities were up by 42%.

This upward trend persisted into the second quarter, with individual annuity sales experiencing a 12% increase compared to the previous year, marking another record.

Insurers scaling back renewals of homeowner policies in California and Florida may be offsetting those losses with increased annuity sales.

Although data connecting the two is not available for 2023, Deloitte’s findings suggest that annuities are emerging as significant revenue generators for insurers, independent of their property and casualty operations in California and Florida.

What’s Ahead for California and Florida Insurers?

The Swiss Re Institute, part of the global reinsurance powerhouse, forecasts robust annual growth for 2024 in the U.S. P&C business. This is despite restricted availability of coverage in some “catastrophe-prone markets” like California and Florida.

The report notes that 2023 was a challenging year, where claims costs exceeded premium growth. But it expects an inflection point sometime in 2024. 

As a result, consumers in California and Florida may find comfort in the knowledge that the worst may be over for property insurers. More importantly, the separation of P&C and L&A divisions is likely to prevent further problems in the homeowners market from spilling over to the annuity market.

Editor Bianca Dagostino contributed to this article.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: March 7, 2024