Soaring Homeowners Insurance Costs: Understanding the Challenges
Homeowners across the nation are facing a financial squeeze: rising insurance premiums. From 2020 to 2023, average premiums jumped by over 30% (adjusting for inflation, that’s about 13%). Some insurance companies are hesitant about offering coverage in certain regions.
Meredith Fowlie
As a result, more homeowners can’t find insurance in the regular market. This is causing them to opt for limited “last resort” insurance.
Policyholder numbers for these last-resort plans have doubled in Florida, California, and Louisiana from 2018-2023. Florida’s insurer of last resort has even become one of the top 10 largest homeowner insurers in 2023.
These developments are a big deal. Homeowners insurance is a requirement for most mortgages. Consequently, most American homeowners must have this coverage. Rising premiums and limited options have broad effects on housing markets, potentially lowering demand and home values in high-risk areas.
Because of this, there’s a push for policy changes to keep insurance affordable and accessible. However, artificially keeping costs low in risky areas could expose markets to climate risks. This article investigates these issues.
What’s Driving Up Homeowners Insurance Prices?
Increasing Insurer Expenses
The prime reason behind rising home insurance premiums is increasing costs for insurers. Construction materials and skilled labor costs have gone up, alongside interest rates. The Insurance Information Institute (a trade group) estimates that total home repair costs jumped 55% between 2020 and 2022—far higher than the general inflation rate. Insurers pass these cost increases on to homeowners through higher premiums.
Climate Change as a Key Factor
Climate change is a big factor, pushing premiums higher in several ways.
First, climate-related disasters are increasing insured losses, and thus insurance claims. This is partly because more development is happening in high-risk zones and partly due to more frequent and intense natural disasters.
Wind, hail, water damage, freezing, and fire have always been major causes of property damage. This explains why Florida, Louisiana, Oklahoma, and Texas consistently have the highest homeowner insurance costs.
Recent increases in wildfire losses across Western states are also adding to the pressure on premiums.
Second, extreme weather events are becoming more frequent and damaging. To cover claims in these worst-case scenarios, insurers must increase capital reserves and/or buy more reinsurance. These risk-management adjustments increase insurers’ costs, leading to higher premiums.
Third, as damages from extreme weather become more apparent, insurers are improving their climate risk modeling. Assessing the risk from hurricanes or wildfires is difficult. This is because there’s limited historical data to support the traditional actuarial analysis insurers use.
Furthermore, climate change means historical data can underestimate future climate risks. Catastrophe models, which simulate potential disasters, are changing how insurance companies assess and price risks. The adoption of more sophisticated risk modeling will push prices up if insurers realize they have been underestimating climate risk exposure.
Finally, new risk modeling tools help insurers price climate risk more precisely. This results in a more tailored premium for individual levels of risk.
This means higher prices for high-risk homeowners who were previously pooled with lower-risk homes.
Homeowners Insurance Regulation in the Face of Climate Change
Homeowners insurance is regulated at the state level. Regulations aim for rate adequacy (insurers must charge enough to remain solvent) and fairness (no excessive profits). Affordability, availability, and rate transparency guide regulations in many states.
State regulators use different methods to regulate insurance rates. In “prior approval” states, regulators review rates before they’re offered. Other states depend on market forces, with some regulatory oversight.
Regulations intended to limit price increases can have unintended consequences. Limiting insurers’ ability to charge rates that match costs can reduce their willingness to provide insurance in high-cost areas.
Therefore, as costs rise, regulators face the tough job of balancing insurer solvency, insurance availability, and fair pricing.
Looking Ahead: Policy Interventions
As private insurers pull back from high-risk zones, there might be a temptation for state and federal entities to step in with insurance.
Judd Boomhower headshot
However, increasing reliance on publicly funded climate risk insurance doesn’t address the core issues that are destabilizing the private market. Public insurers would face many of the same challenges as the private sector, including managing rising costs and increasing climate risk, plus political pressure to keep premiums artificially low. Subsidizing insurance in high-risk areas would burden residents in less risky areas and distort the price signal about the true cost of living in hazardous locations.
Instead, state regulators can promote private insurers in high-risk areas. This includes making sophisticated catastrophe modeling tools and reinsurance more accessible to all insurers.
Innovative technologies, such as virtual home inspection tools and fire safety certification programs, could help insurers offer premium discounts for more resilient properties by lowering monitoring and verification costs.
Beyond price regulation, governments can push policies that encourage risk-reducing investments. More and more evidence shows that investments like wind-resistant roofing or fire-resistant siding can cost-effectively reduce losses during extreme weather.
Successfully implementing risk mitigation investments could limit insurance premium increases by reducing vulnerability to climate catastrophes. Building code mandates like California’s wildfire building codes or Florida’s hurricane wind codes have been successful.
Daniel Richter headshot
While regulatory reforms, risk modeling advancements, and building codes are all promising, the reality is that property insurance premiums will need to increase in high-hazard areas to reflect climate risk exposure. Property insurance markets are crucial in helping households and communities when disaster strikes. To fulfill this critical role, insurance prices must increase to properly reflect the real and rising costs of climate change.
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