American homeowners living in vulnerable regions have long been accustomed to dealing with extreme weather events, but climate change is changing the landscape for the home insurance industry in ways they could not have prepared for.
Faced with greater risks and potentially higher claims, property insurance is simply disappearing from the most dangerous areas of the country; in others, premiums have become so expensive that some homeowners are voluntarily choosing to forgo coverage altogether.
“The insurance market has been rocked over the past decade by the increasing frequency and severity of disasters. If you look at the California wildfires or the major hurricanes of recent years, it’s estimated that these disasters have wiped out insurers’ profits for many years,” said Benjamin Keys, an economist and professor of real estate and finance at the Wharton School of the University of Pennsylvania. Newsweek.
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The number of major disasters has increased significantly in recent years, as has the overall damage caused by these events. For Keys, this trend is the result of two things: “First, climate change is increasing the frequency and severity of disasters,” he said.
This year, the country has already been hit by disasters with a total loss of $19 billion, according to the National Centers for Environmental Information of the National Oceanic and Atmospheric Administration (NAIAS). These include a tropical cyclone, 15 severe storms, a forest fire and two winter storms. The total damage caused by these extreme weather events is almost $50 billion.
After Hurricane Beryl left a trail of devastation stretching as far as New England in early July, experts estimated damage and losses across the country totaled up to $32 billion. A few weeks later, Hurricane Debby stormed the east of the country, causing an estimated $12.3 billion in damage in a region where the vast majority of homes are not covered by flood insurance.
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“The second factor is that more and more people are living in danger. If you look at migration patterns over the last 30 years, or even longer, Americans have been moving south and west,” Keys said. “More and more people are moving to areas where they are at risk of disasters.”
“We continue to see people moving to parts of the U.S. where loss costs are rising,” said Steve Bowen, chief scientific officer at Gallagher Re. Newsweek.
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“This will not only increase pressure on insurance companies in terms of their risk assessment, but also on state and federal authorities to either improve their building codes and/or enforcement requirements and provide more clarity on cost-effective ways to retrofit the current building stock.”
And what is currently happening as a result of this concentration of potential risks in these areas is that “insurers are responding to the impacts of climate change by passing those costs on to consumers,” Keys says, especially in the less regulated states.
That’s why premiums have skyrocketed in some parts of the country in recent months. According to a recent study by virtual insurance company Insurify, Florida homeowners paid an average annual premium of $10,996 in 2023 – the highest in the country. The national average premium was $2,377 per year in the same year.
However, insurance premiums are also rising because the costs of reinsurance – essentially the insurance of private insurers – have increased.
According to Keys, who cited data from a reinsurance broker named Guy Carpenter, costs have “virtually doubled from 2017 to 2024.” This is another cost that insurance companies try to pass on to their customers when possible.
What we don’t yet know, says Keys, is whether insurers have finished pricing in this increased risk or whether prices are expected to continue to rise.
There are other costs that insurers must take into account, such as inflation.
“The cost of materials has gone up tremendously and the cost of labor has gone up tremendously. The unemployment rate is extremely low. When you think about a disaster and you have to repair hundreds of roofs that were damaged by a tropical storm, where do you find the construction crews to do that? To replace all those roofs? So I think the cost per claim has gone up quite a bit.
“In addition, there are a number of legal costs that have long been a problem for insurers in connection with fraudulent claims,” Keys said.
“There is a view that states have generally had overly lenient regulations that favored adjusters over insurance companies. And we have seen states like Florida drastically change their regulations,” he added.
“For example, (Florida Governor Ron) DeSantis and the Florida State Legislature passed a number of bills last year that tried quite loudly to lure insurers back to the state by making the market more insurance-friendly.”
“I think that’s one of the big questions,” Keys said. While some states have yet to reach a “tipping point” on home insurance, others have already reached that stage.
“If no private insurer is willing to insure a homeowner at a reasonable price, then there is some kind of government insurance that will fill that role, but it is not designed to handle tens of thousands of policies,” Keys said.
“They are designed for very short-term market disruptions to ensure that people are continuously protected, because without insurance they cannot get a mortgage and the housing market collapses.”
But the number of insurers of last resort in states like Florida has grown so much in recent months that this is no longer sustainable. Citizens, Florida’s state-supported insurer of last resort, is now the largest insurer in the state.
“From 2018 to 2023, its size has quadrupled in terms of footprint,” Keys said. “In the most exposed states, it feels like the market is being held together with a piece of duct tape.”
As for the idea that a tipping point has been reached in the home insurance sector, “I think we’re already there in some of the riskiest states. Hopefully this is a warning to many other states where premiums are also rising and where there may be some kind of regulatory backlash to prevent a further increase.”
Bowen believes the sector can – and must – reform. “As technology improves and the quality of data becomes more detailed, this should lead to new innovations to better adapt to the new climate reality and mitigate (the risks) we face today,” he said.
“Insurers continue to play an important role in addressing the core issue of reducing carbon emissions from fossil fuel combustion. By supporting the transition from fossil fuel-heavy portfolios to those on track to meet their net zero commitments, the industry can take a leading role in helping the world achieve critical targets that reduce the risk of missing dreaded tipping points.”
