I live in Florida and a ton of people are moving here. Even so, there are a ton of property insurance companies pulling out of the state. It makes no sense to me.
In: Economics
Really?
Can’t think of a thing?
Maybe take a guess?
I read a few articles on this and any good answer is much deeper than what can be covered in an ELI5.
I think what’s more important is to show how insurance is different than other businesses. For most businesses it won’t sense to just stop doing business in one specific state.
So why does it make sense for insurance companies to do this?
States, not the federal government, regulate insurance. Insurance companies must set up a special corporation that is approved to do insurance business in that state. Because of this, while big insurers like AllState and State Farm may offer property insurance everywhere in the US, in each state is its own insurance company that operates its own P&L (Profit and Loss). For many businesses, it might not even be possible to ask a question like “are we profitable in Florida?” Because of how insurance must be structured you have a completely independent corporation operating in each state so it is unambiguous whether or not your subsidiary in any state is profitable. No modeling is needed. No strategic concerns are necessary. In insurance, your business in any specific state is either profitable or not.
If a company can’t make a profit, it doesn’t matter if it’s due to market conditions or regulations. If they can’t make a profit, they will cease doing business. And that’s whats happening here.
FL makes up 10% of property claims, but 80% of property claims involving an attorney.
The state also gets crushed by hurricanes and has a shocking amount of sinkholes.
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