Careful What You Wish For – Risk, Property Insurance and the Coast

In the environmental world, property insurance companies are held out as the last great hope to force a serious look at climate change and risk.  Where facts and reason fail, those with a market-based dog in the fight are assigned the role of messenger. 

So here in Florida, the government insurer and messenger of last resort, Citizens, has issued its latest salvo: any condominium complex with more than 25 percent short-term rentals will now be considered a commercial operation and Citizens will cap wind-damage coverage per building at $1 million (not per  unit – per building).  The stated intent is to shore up Citizens’ finances.  Condos that want to maintain higher levels of short term rentals can buy additional insurance at a steep cost.   Some condos have already signaled they will limit rentals to keep rates low.

This may be one of those rare fights where environmentalists and conservative Republicans align: let the market decide.  But is a 25% cap on rentals really going to help?  First – let’s set a foundation for discussion.  

• For starters, there is no doubt that development on the coast and barrier islands is risky and fraught with negative environmental consequences.  Putting climate change risks aside, storms alone have always wreaked havoc on shorelines.  Yet, development (even with the financial fallout) seems to make its way back to beaches.  
• Second, if the conversation is hewing towards letting the market decide rates, then what is the market rate?   Paige St. John of the Sarasota Herald Tribune won a Pulitzer Prize exposing the insurance and reinsurance “markets.”   Seems the market in property insurance is about as “free” as the one in the underlying real estate.
• Florida has its “Bert Harris Act” which requires compensation for property takings.  As such, insurance premium hikes work better than rezoning, planning and land use regulations in managing public policy.

Yes Citizens needs to manage exposure – that’s how insurance works.  But a dose of devil’s advocacy is in order:

• Damage to buildings is dependent on a lot of things, but % rental is likely to play a small role.  Rather, location in a surge zone, building age, materials and other factors are more important.  Citizens is trying to cap exposure, but going after the wrong target with condos, which are usually more fortified than single family structures that make up the bulk of Citizen’s portfolio.
• There is a big access issue here.  While access is typically imagined as a footpath to the beach, access can also include the ability to stay on or near the beach.  This policy will begin to favor condo buyers able to cover costs without renting.   As such, beach communities will become more like gated communities, where snowbird owners drop in for a couple of months out the year.  We may smugly assume that this policy will begin to pressure the financials associated with beachfront development, but is “access for the few” victory?
• Yes there are lots of condos now, but new websites like VROB and airbnb are just now beginning to support a rental market that brings hotel-like dynamism and occupancy to private units.  This rule comes along just as condos begin to mimic hotels in allowing access to some of the most beautiful beaches in the world.

Discussions on managed retreat speak frankly to issues of abandonment, relocation and rezoning, but are only triggered after a big storm.  It seems like the conversation on accommodation until the big one have been less thought out.  If Citizens condo rules stick, then local governments in Florida who want economic development and equal access will need to get serious about what accommodation looks like: fewer condo rezonings, more adaptable hotels, excellent transportation from mainland-based hotels and satellite locations, and serious attention to tourist-dependent industries along the beaches. 

The graphic above is from an excellent presentation from Michael Volk on adaptation policies. For a snapshot of local interests, see this presentation on Sarasota and Sea Level Rise.  Note: the policy is out for comment for a couple of more days but the Sarasota Herald Tribune article does not provide a link, nor did 30 minutes of searching reveal information on the policy and comments.  I'll pass along any additional information readers provide.  Thanks!