Escalating Home Insurance Premiums Reflect Underestimated Climate Change Impacts

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

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