The US home insurance market is heading for disaster as premiums soar and private insurers pull out of high-risk states, threatening to affect millions of homeowners nationwide.
In the past 12 months, major insurers in California and Florida have either pulled out of the states altogether or announced plans to drastically scale back their coverage, citing exposure to natural disasters such as wildfires, hurricanes and floods and, in California’s case, a difficult reinsurance market. But experts say the two states are just a microcosm of a problem that’s beginning to play out nationally as natural catastrophe losses rise, putting millions more people at risk.
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Speaking to Senate lawmakers last month, the American Property Casualty Insurance Association’s vice president of government relations, Nat Wienecke, said the increase in natural disaster losses has driven up the cost of property insurance in many parts of the United States, forcing some insurers to rebalance their risk and reduce their exposure, including by raising premiums or pulling out of higher-risk states altogether.
“Reducing our risk must continue to be a shared priority for all of us, and we must work together to adapt and increase our resilience in the face of climate-related disasters,” she said.
In California, non-renewals of homeowners insurance policies in 2021 are up a whopping 30% from the previous year, according to the latest data from the California Department of Insurance. In Florida, meanwhile, homeowners are paying premiums four times higher than in other states amid a mass exodus of at least six major property insurers over the past two years.
As a result, many policyholders have been driven into the arms of so-called insurers of last resort, or state-run insurance programmes designed to protect people deemed too risky to obtain private coverage.
In Florida, the state-run programme, Citizens Insurance Agency, has now become the largest single insurer in the state, with its policyholder base growing from just 500,000 in 2016 to 1.3 million today, a 168% jump.
These programmes are limited, high-risk and usually only cover those who can prove they’ve been denied coverage or faced a rate increase of more than 20% from their current provider. But they are also increasingly serving as a “relief valve” for states that have seen an uptick in natural disasters, including California, Louisiana and Texas, according to the American Property Casualty Insurance Association.
Experts at the non-profit group First Street Foundation predict that not only will the frequency and severity of natural disasters fuelled by climate change increase, but the number of states and properties considered at risk will also balloon.
There’s a “whole bunch of states where prices are going up a lot, insurance companies are pulling out, and coverage is getting hollowed out,” Michael DeLong, a research and advocacy associate at the Consumer Federation of America, told the Washington Examiner. “We think it’s largely due to climate risk and the increasing number of major catastrophes and more extreme weather events.”
“Most of the big companies, the ones with significant revenues and the capital to weather tough situations, have stopped writing coverage in Florida and Louisiana and California,” he said.
Certain Gulf Coast states, including Louisiana and Texas, have seen significant rate increases due to their hurricane exposure, and DeLong says he expects premiums to rise to a lesser extent in other parts of the country as well. “That includes places like the Midwest, where you’re getting more unusual storms, [and] places like Kentucky and Appalachia, where you’re getting more unusual rain events,” he said.
Home insurance premiums in the US are on the rise. Between May 2021 and May 2022, average US premiums increased by an average of 21%, according to data published by independent insurance broker Policygenius. National rates are about 35% higher than two years ago,
This year, private insurers such as USAA and Farmers Insurance increased homeowners insurance premiums by double digits, raising costs for policyholders in more than 40 US states by 14.7% and 14.8% respectively.
It’s only in recent years that companies have begun to recognise the broader threats posed by climate risk and extreme weather events, including the hefty price tag that comes with them, Delong said. “So they’re now pricing that into a lot of their calculations, and as a result, costs are going up,” he said.
The First Street Foundation estimates that 39 million US homes are insured at artificially suppressed prices compared to the actual risks they face, including at least 6 million homes covered by policies of last resort.
But as climate-related risks and losses continue to rise, the authors predict that the insurance market will be forced to make major rate adjustments, sending premiums through the roof and eventually bursting what they call a “climate insurance bubble”.
“Property owners’ over-reliance on government insurers of last resort is a big, flashing sign that standard insurance market practices are failing to keep pace with our current climate reality,” said Matthew Eby, executive director of First Street, in a statement.
