Home Insurance in a Changing Climate
Home insurance, a relatively recent addition to the financial landscape, has become a crucial part of homeownership. Most mortgage lenders now require it to protect their investments. However, homeowners are increasingly facing rising premiums and reduced coverage, making them vulnerable to damage and financial setbacks.
Home insurance premiums have been increasing, raising homeownership costs for first-time buyers. However, increased climate risk poses a challenge for insurers, often leaving homeowners on the hook to cover expenses. – Shutterstock
As the frequency and intensity of extreme weather events increase, the insurance industry faces growing risks and expenses. This has led to reduced profitability for many firms and, consequently, decreased coverage options for homeowners.
Tia Boatman-Patterson, former Housing Director at the White House Office of Management and Budget and current President and CEO of the California Community Reinvestment Corporation, recently discussed the impacts of the California wildfires and offered insights into how insurance policies must adapt to climate change. She also shared advice on practical steps homeowners can take to protect their homes.
Climate Risk and Policy Adaptation
The escalation of extreme weather events is causing record levels of home damage annually. This damage translates to higher costs for insurers, which are then passed on to homeowners in the form of increased premiums.
According to Progressive Insurance, the average home insurance policy ranges from $1,191 to $2,136 annually, or about $139 per month. However, a Brookings Institute study revealed that home insurance premiums rose by a staggering 30% between 2020 and 2023 alone. Insurers are grappling with increased claims from frequent hurricanes, floods, and wildfires, prompting some to withdraw from high-risk areas, or reduce or eliminate policies for at-risk properties.
Boatman-Patterson highlighted the crucial role of proactive measures, such as fortifying homes with fire-resistant materials, as seen in the aftermath of the southern California wildfires in January. She emphasized the effectiveness of upgrades like fire-resistant stucco and ember-resistant screens.
“During the Altadena fires, houses with newer roofs with the screens that didn’t allow the embers to get into the screens could be right next door to a home that didn’t have those,” Boatman-Patterson said. “The house next door would be completely burned down, but those houses with fire retardant stucco and screens had taken on that kind of fire protection because they had either been upgraded or built to different standards.”
She suggests insurance companies should offer premium reductions to homeowners who invest in these measures to help to lower the costs of insuring high-risk regions. Doing so offers a practical way to reduce the financial burden.
“Updating insurance methodology on how risk is calculated and ensuring that folks taking on climate resiliency and preventative measures, because they know the disaster will come. If folks are upgrading their home to mitigate climate risks, should not their insurance come down? Right now, insurance doesn’t account for those kinds of things.”
The Path Forward for Home Insurance
According to NOAA (National Oceanic and Atmospheric Administration), climate-related housing damage in 2024 reached a total of $182.7 billion across 27 natural disasters. Investment in preventative measures such as the installation of hurricane shutters or the adoption of fire-resistant materials for home exteriors could significantly reduce these costs for the insurance industry.
Boatman-Patterson stresses the need for industry-wide reform, which likely would need federal legislative support.
“For so long, we didn’t want to talk about climate resiliency and disaster recovery. But it’s all tied together — you can’t talk about disaster recovery without talking about climate resiliency and some of those things you should do on the front end to mitigate the things that will happen with disaster recovery,” she explained.
“It takes political will to have those hard conversations. But when you build back, build back better. Build it back and include those features to mitigate for the next event.”
The Congressional Budget Office has recommended a public-private insurance program that would share risk. This should provide more financial stability and lessen the federal government’s need for disaster relief following natural disasters.
