Escalating Home Insurance Premiums Reflect Underestimated Climate Change Impacts

by Ryan Lee
Climate Change and Home Insurance Premiums

An increasing number of American homeowners are grappling with unaffordable home insurance premiums, a trend exacerbated by the underestimation of climate change effects by both insurers and legislators, according to a recent study.

The research, conducted by First Street Foundation and released this past Wednesday, highlights that states such as California, Florida, and Louisiana are particularly susceptible to this increase due to their vulnerability to wildfires, storms, and flooding. However, unexpected events like the wildfire that obliterated the community of Lahaina in Hawaii on August 8, as well as record-breaking floods in Vermont and Maine this past July, suggest that this issue may also plague homeowners in states not traditionally considered high-risk.

California Senator Bill Dodd, whose jurisdiction includes counties severely affected by the LNU Complex fires in 2020, warned, “Complacency is not an option.”

Incorporating climate models to assess property financial risk, First Street Foundation estimates that nearly 39 million U.S. homes—about one-quarter of the total—are inaccurately priced in terms of their climate risk exposure for insurance purposes.

Jeremy Porter, Head of Climate Implications at First Street and one of the study’s co-authors, cautioned, “While some areas may experience nominal changes, other locations could face significant insurance premium hikes in the near future.”

First Street Foundation, a New York-based nonprofit, is a well-regarded authority on the fiscal ramifications of climate change, and its findings are consulted by organizations such as Fannie Mae, Bank of America, and the Treasury Department.

Alarmingly, the American home insurance sector has suffered underwriting losses for three consecutive years, reports credit rating agency AM Best. Losses for the first half of 2023 alone amounted to $24.5 billion—approximately the total loss for all of 2022.

Todd Bevington, Managing Director at VIU by HUB, noted, “The crisis is already upon us,” adding that in his three-decade career in insurance, he had “never witnessed the market shift this dramatically or rapidly.”

The skyrocketing insurance premiums particularly impact places like Paradise in Northern California, a town nearly decimated by the catastrophic 2018 wildfire. Jen Goodlin, a local resident, saw her family’s insurance premium increase from $2,500 to $11,245.

Numerous Americans now rely on state-associated “insurers of last resort,” such as California’s FAIR Plan or Florida’s and Louisiana’s Citizens property insurance companies. These programs, initially intended as a safety net, have now become the primary option for a growing number of homeowners.

Policymakers, in some instances, have inadvertently made matters worse by imposing legal limits on how much insurers can raise premiums, thereby inadvertently contributing to risk underpricing. Such regulations have led major insurers like State Farm and Allstate to withdraw or halt new policies in markets like California.

The urgency of addressing these issues was emphasized by Senator Dodd, who was engaged in legislative negotiations that unfortunately did not yield a consensus.

Jeremy Porter warned of impending insurance market collapses, drawing comparisons to the beleaguered National Flood Insurance Program, which is currently $22.5 billion in debt.

Reinsurance firms, including Swiss Re and Munich Re, have reacted by elevating their property catastrophe reinsurance premiums in the U.S. by an average of 20% to 50%.

Lara Mowery, Global Head of Distribution at reinsurance brokerage firm Guy Carpenter & Co., stated, “This is a global challenge; almost every region is witnessing a repricing of risk.”

Amid these complications, additional factors like inflation, high home prices, and labor shortages are further straining the insurance industry, making their traditional risk-assessment models based on historical data increasingly obsolete.

Experts like Todd Bevington advise prospective homebuyers to thoroughly investigate insurance costs related to potential climate risks before finalizing mortgage rates, given the escalating insurance premiums.

In summary, the insurance industry, traditionally reliant on historical data for risk assessment, finds itself ill-equipped to deal with the mounting challenges posed by climate change.

Contributions to this report were made by reporter Adam Beam in Sacramento, California, and reporter Janie Har in San Francisco.

Frequently Asked Questions (FAQs) about Climate Change and Home Insurance Premiums

What is the primary focus of the article?

The primary focus of the article is the rising cost of home insurance premiums in the United States, a trend exacerbated by the underestimated impacts of climate change.

Which states are highlighted as being particularly affected by rising insurance premiums?

The states highlighted as particularly vulnerable to rising insurance premiums due to climate risks are California, Florida, and Louisiana. However, the article also notes that unexpected climatic events in places like Hawaii, Vermont, and Maine indicate that other states may also be at risk.

What organization conducted the research cited in the article?

The research cited in the article was conducted by First Street Foundation, a New York-based nonprofit organization that specializes in studying the financial implications of climate change.

How many U.S. properties are being underpriced for climate risk, according to First Street Foundation?

According to estimates by First Street Foundation, nearly 39 million properties in the United States, or about one-quarter of all homes, are being underpriced for the climate risks they face.

What is the current state of the U.S. homeowner’s insurance industry?

The U.S. homeowner’s insurance industry has had three consecutive years of underwriting losses. For the first half of 2023 alone, the losses totaled $24.5 billion, roughly equal to the total losses for all of 2022.

What are “insurers of last resort,” and why are they relevant?

“Insurers of last resort” are state-associated insurance programs designed to offer coverage when private insurance companies refuse to provide insurance or when private insurance becomes too expensive. Examples include California’s FAIR Plan and Florida’s Citizens property insurance companies. They are increasingly becoming the primary insurance option for many homeowners.

How are policymakers affecting the insurance market?

In some cases, policymakers have implemented laws that limit how much an insurer can raise premiums, leading to the underpricing of risk. For instance, in California, the most an insurance company can raise a homeowner’s premium by law each year is 7% without triggering a public hearing.

What changes have reinsurance companies made recently?

Reinsurance companies such as Swiss Re and Munich Re have raised their property catastrophe reinsurance premiums in the U.S. by an average of 20% to 50%.

What advice is offered to potential homebuyers?

Potential homebuyers are advised to thoroughly investigate the cost of insuring a property against climate risks before finalizing mortgage rates, due to the likelihood of significant rate hikes in the future.

What are some additional factors affecting the insurance industry?

Other factors impacting the insurance industry include inflation, high home prices, and labor shortages, which have made home repairs more expensive and protracted. These factors are adding to the strains on an industry already grappling with the challenges posed by climate change.

More about Climate Change and Home Insurance Premiums

  • First Street Foundation Report
  • AM Best Insurance Industry Overview
  • California FAIR Plan Statistics
  • Citizens Property Insurance Corp. in Florida
  • National Flood Insurance Program Debt
  • Reinsurance Market Trends by Swiss Re and Munich Re
  • Climate Risk Assessment Guidelines
  • U.S. Treasury Department on Financial Risks of Climate Change
  • Fannie Mae and Climate Risk
  • Bank of America and Climate Risk

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GlobalCitizen September 20, 2023 - 5:28 am

It’s a global problem, people! Even reinsurers are reevaluating how they price catastrophes. Let’s hope this serves as a wakeup call.

GreenActivist September 20, 2023 - 5:33 am

The facts are on the table folks. Climate change is affecting us right now. Not in the future, now. We need to act before it gets worse.

JohnDoe123 September 20, 2023 - 6:12 am

Wow, this is eye-opening. Never really thought about how climate change would hit me in the pocket like this. Insurances are skyrocketing, huh?

FinanceWizard September 20, 2023 - 9:12 am

Numbers don’t lie. Three straight years of underwriting losses? The insurance industry is feeling the heat and not in a good way.

SusieQ September 20, 2023 - 10:28 am

moved back to my hometown recently and insurance rates were a shocker. this article explains a lot. Maybe it’s time to think about relocating again.

KarenMills September 20, 2023 - 11:30 am

Are you kidding me? 39 million properties underpriced for climate risk. Thats crazy! And here we thought we were safe.

BillyTheKid September 20, 2023 - 12:07 pm

Anyone else worried about the FAIR Plan becoming the only option? that sounds like a disaster waiting to happen.

MomofThree September 20, 2023 - 12:07 pm

As if life wasn’t hard enough. Now I’ve gotta worry about insurance going up too. Just great.

TechGuy88 September 20, 2023 - 3:02 pm

Super informative article. Makes ya think how many areas of life are affected by climate change, even stuff like insurance premiums. Time for a policy change, I guess.

SarahL September 20, 2023 - 6:28 pm

These lawmakers need to get it together. A 7% cap on premium increases in Cali? Seriously? They’re not helping the situation at all.


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