U.S. homeowners are facing a significant increase in property insurance costs, according to new research. Premiums have surged an average of 33%, or $500 annually, from $1,902 in 2020 to $2,530 in 2023. This increase is largely driven by higher reinsurance costs, the study found.
The findings come from a paper titled “Property Insurance and Disaster Risk: New Evidence from Mortgage Escrow Data” by Benjamin Keys, a Wharton professor of real estate and finance, and Philip Mulder, a professor of risk and insurance at the University of Wisconsin-Madison. The study highlights that these premium increases are particularly pronounced in areas exposed to climate-related risks, such as hurricanes and wildfires.
Climate Risk Drives Premium Hikes
Home prices and disaster risk are the primary factors influencing variations in insurance premiums. However, income levels and socioeconomic statuses also play a role. For instance, lower-income areas often see a higher percentage of their income dedicated to premiums. Additionally, zip codes with larger nonwhite populations tend to pay higher premiums, even after factoring in disaster risk and income.
The financial stakes are substantial. In 2022, U.S. insurers collected $133 billion in gross premiums for homeowners insurance products, according to data from the Insurance Information Institute, as cited in the study.
“You see a staggering increase in insurance premiums… [which is] much faster than the rate of inflation,” Keys said in a recent episode of the Wharton Business Daily radio show on SiriusXM. “One of our big takeaways is that there has been a sharp increase in the cost of living in harm’s way over the last few years. Climate risk is being translated into the cost of living in risky areas.”
Reinsurance Costs Soar
Premium increases are especially high in certain states: the study indicates that 2023 insurance costs in Florida are 90% higher, and in Texas 50% higher, compared to 2018 levels. Highlighting the urgency of the situation, Keys stated, “[The higher premiums] are the canary in the coal mine for a lot of homeowners living in risky areas trying to think through what to do.”
The paper also noted that premium increases in disaster-prone zip codes largely correlated with states exposed to reinsurance markets, while increases in less exposed states were more modest. Reinsurance costs, which insurers secure from global companies such as Swiss Re or Munich Re to mitigate concentrated disaster risks, have doubled between 2017 and 2023.
Several factors are contributing to these rising reinsurance costs, including inflation, a “climate epiphany” where reinsurers reassess climate exposure, increasingly concentrated disaster exposure, and the end of the low-interest rate environment that led to a capital crunch, according to the paper. “Reinsurance prices provide an important window into the cost of insuring risks that are expected to increase with climate change,” the researchers wrote.
Keys explained that reinsurance serves as a crucial safety net for insurance companies. “An insurance company that has a lot of policies in New Orleans, for instance, could be wiped out if New Orleans is hit with another Hurricane Katrina-type disaster.”
“There has been a sharp increase in the cost of living in harm’s way over the last few years. Climate risk is being translated into the cost of living in risky areas.” – Benjamin Keys
Based on current trends, the study projects that those homeowners most exposed to climate risks could see average premiums rise by an additional $700 by 2053 if reinsurance costs remain high. This prediction is considered a conservative estimate, assuming no further increases in reinsurance costs, the continued availability of policies in risky areas, and the continuation of regulatory cross-subsidies. It also does not account for climate impacts on disaster risks beyond hurricanes and wildfires.
If the reinsurance markets return to their 2018 prices, climate change would still increase the average annual premiums of climate-exposed homeowners, but the increase would be a more modest $480, the paper noted.
Impact on Housing Markets
While the reinsurance market can react swiftly to changing conditions, the study suggests that the effects of higher premiums on housing markets will unfold gradually, given the durability of homes and the relatively infrequent movement of homeowners. Keys added, “But most obviously, this should be setting off alarms to say, ‘Let’s not build any more durable housing in those most risky areas.’”
The research offers the first estimate of the link between disaster risk and premiums, utilizing granular data on monthly mortgage payments into escrow accounts. A one standard deviation increase in expected disaster losses is connected to a $450 rise in average premiums. The study also provides new insights into private insurance market pricing and its relationship with the cost of capital in secondary markets, thus helping us understand the price signals reaching climate-exposed homeowners.
The study prompts questions about adaptation strategies for homeowners and communities facing these increased premiums. According to Keys, “The next wave of research that builds on this agenda is to understand the ramifications of these increases in insurance premiums. Will it lead to distress in the mortgage market? Will we see a lot of mortgage defaults… What are the consequences on asset values? What happens to home prices when there’s this higher cost of using the house each year? The higher insurance premiums should ultimately be capitalized into house prices.”
