Florida, one of the most hurricane-prone states in the U.S., has been grappling with a severe property insurance crisis. What used to be an industry adjusting to natural disasters and market volatility has now evolved into a struggle for both insurers and policyholders to stay afloat. As premiums continue to rise, many homeowners are discovering that they’re paying more for less—a trend known by the buzzword, “shrinkflation.” 

Policy Shrinkflation 

In the property insurance market, shrinkflation manifests in policies that offer reduced coverage or higher deductibles without significantly lowering premiums. Insurers, faced with rising costs from natural disasters, litigation, social inflation, and rising fraud costs, have found ways to minimize their risk exposure while maintaining the appearance of stability for consumers. However, this practice raises concerns about the long-term effects that may be experienced as a result.  

Policies today may still cover the same perils as before, but with more limitations or exclusions. For instance, roof coverage may now come with depreciation schedules, water losses may be subject to reduced limits, or there could be higher deductibles for windstorm or hurricane claims. While these changes help insurers mitigate their financial risks, they can leave policyholders exposed which is likely to play a larger role for carriers down the road. 

The Role of Legislation and Market Forces 

Florida’s insurance market is a delicate balancing act. On one hand, the state needs a vibrant insurance industry enticing for carriers that is also capable of absorbing the significant risks posed by hurricanes and natural disasters. On the other hand, homeowners must be able to afford their coverage. Recent legislative changes, including efforts to curb insurance fraud, have aimed to stabilize the market, but many argue that more needs to be done to ensure consumers are adequately protected. 

It's important to recognize that while some of these changes are aimed at reducing costs and preventing fraud, they have also inadvertently contributed to shrinkflation. While it’s easy to place blame on insurers or legislators, the reality is that both groups are working to address a complex and evolving market. The challenge is finding the right balance between maintaining a sustainable insurance industry and providing homeowners with the coverage they need at a price they can afford. 

Insurer Appetite for Shrinkflation isn't Shrinking 

For insurers, the appeal of shrinkflation lies in its ability to provide short-term relief in a highly volatile market. In states like Florida, where hurricane risks are compounded by social inflation, insurance fraud, and an overburdened litigation system, shrinkflation allows carriers to remain competitive and avoid the steep premium hikes that might drive consumers away in the immediate. 

The year 2023 was a profitable one for many Florida insurers, partly due to the absence of major hurricanes hitting metropolitan areas. Shrinkflation, alongside recent legislative reforms aimed at curbing frivolous lawsuits, helped companies shore up their financials. But while these measures delivered short-term profitability, they are likely not sustainable in the long run. Insurers' reliance on reduced coverage could worsen the industry as a whole, as inadequate coverage during a major loss could lead to significant financial strain which compounds from the policyholder up the ladder to providers.  

Shrinkflation's Impact on Policyholders 

Since 2017, more than 15 insurers in Florida have declared insolvency, leaving thousands of policyholders in limbo. Policyholders who still have policies in place have seen their premiums rise dramatically, in some cases exceeding their mortgage payments. 

Between rising premiums and insurers tightening their underwriting standards, many policyholders are finding themselves without coverage and being denied coverage for failing to meet stringent new criteria, such as storm windows. This has led to a growing number of Floridians depending on Citizens Insurance, which, while providing much-needed relief, has its own limitations, including being subject to the same shrinkflation trends we’re seeing with private carriers.  

Even after coverage being obtained, policyholders are finding themselves paying a premium that comes with reduced key areas of coverage, such as roof repairs, water damage, and hurricane protection. For instance, many insurers now cap water loss coverage at a fixed amount, regardless of the value of the home or extent of the damage. Roof coverage, once offered at replacement cost value (RCV), has now shifted to actual cash value (ACV) for many policies, leaving homeowners with steep out-of-pocket costs if their roofs are damaged in a storm. 

The running joke among some Floridians is that the fastest-growing insurance provider in the state is “self-insurance.” With private insurers either pulling out of the market or pricing their premiums beyond what many can afford, some homeowners have begun opting to self-insure, setting aside money in personal reserves to cover potential damage. However, this strategy is incredibly risky and often impractical, especially when dealing with catastrophic storm damage. 

In an industry already facing trust issues due to the complexity of claims processes and rising premiums, the long-term impact of shrinkflation could be damaging. Homeowners may begin to feel that they are paying more for less, leading to higher levels of dissatisfaction and increased scrutiny from regulators. 

The Sustainability Question 

The central question is whether shrinkflation is a sustainable practice. While it has allowed insurers to turn a profit in the short term, relying on reduced coverage is not a long-term solution to the challenges facing the property insurance market. In fact, shrinkflation can exacerbate the very issues insurers are trying to mitigate, as underinsured homeowners may find themselves unable to repair or replace property after a disaster.  

In the aftermath of a major event, this prolonged recovery is likely to result in many properties left in a state of disrepair due to a lack of sufficient coverage, and insurers will see a significant decline in the quality or "hardness" of the risks they are underwriting. As homes deteriorate without proper maintenance or repairs, the likelihood of more severe damage escalates, increasing the probability of future claims. This exposes carriers to higher risks, leaving them more vulnerable to larger, costlier claims in the long run. What may seem like a cost-saving measure in the short term could have a much longer and more determinantal impact than what is being considered.  

Looking Ahead: Finding Solutions 

The Florida property insurance market is at a critical crossroads, and addressing deficiencies in the market will require a multifaceted approach. Insurers need to strike a better balance between managing their own risk exposure and providing adequate protection to policyholders. Policyholders must work to further harden their properties to entice carriers to provide coverage at reasonable rates. Lawmakers must ensure that consumers are informed about their coverage and that new regulations prioritize transparency and fairness. 

In the months ahead, we’ll work to unpack potential solutions, along with what Florida should expect, even in best-case scenarios, given that the light at the end of the tunnel is only barely visible in the distance.