Why are so many insurance companies pulling out of providing coverage in Florida?
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Former actuary here.
A major cause is that climate change is breaking some of the basic ideas behind insurance. Insurance works by pooling *unrelated* risks, charging the average cost of loss to each customer (plus a buffer for profit).
An example of this: say 1 in 100,000 people will get a rare disease that costs $1M to treat. An insurance company might charge $11 to insure against this risk ($10 expected claims +$1 expected profit). As long as everyone’s chance of getting the disease is unrelated, if the insurance company sells enough of those $11 policies, it’s practically guaranteed to make a profit and stay in business.
A funny thing happens when risks are related though. If our example disease was contagious, then it’s possible that a pandemic could happen, and lots of people catch this rare disease at the same time. Even if the insurance company is charging the “right” amount for the long run, they still have a limited supply of money, and one really bad year could run the company out of business, regardless of how many policies they sell.
Climate change is causing average weather damage to increase in Florida, but this doesn’t scare insurance companies away all on its own. After all, they could just raise rates an equal amount and continue business as usual. Higher sea levels and stronger hurricanes are also causing losses to be more closely related. This scares the insurance companies
To exaggerate just a little, no insurance company can afford to rebuild the entire state of Florida after a bad hurricane. Insurance companies think the chances of such a big/widespread loss are getting uncomfortably high. Rather than risk going out of business after one bad hurricane, the companies decide to stop selling insurance in Florida.
(I’m not clear on some of the legal challenges others are mentioning, but that could easily be a factor as well.)
Edit: typo, emphasis
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