Why US Home Insurance Rates Are Rising Rapidly – ​​Climate Change is Playing a Big Role

Millions of Americans are watching with increasing alarm as homeowner’s insurance premiums rise and coverage shrinks. Nationally, premiums rose 34% between 2017 and 2023 and continued to rise in 2024 across much of the country.

To add insult to injury, these rates get even higher if you file a claim – up to 25% if you claim a total loss of your home.

Why is this happening?

There are several reasons, but one common thread: Climate change is fueling more severe weather, and insurers are responding to ever-increasing claims. The losses are compounded by more frequent extreme weather disasters hitting densely populated areas, rising construction costs and homeowners facing damage that was once again rare.

Parts of the US saw larger and more damaging hail, larger storm surges, massive and widespread wildfires, and heat waves that bend metal and asphalt. In Houston, what used to be a 100-year disaster like Hurricane Harvey in 2017 is now a 1-in-23-year event, estimates from risk assessors at the First Street Foundation suggest. In addition, more people are moving to coastal and wilderness areas at risk from storms and wildfires.

Just a decade ago, few insurance companies had a comprehensive strategy for addressing climate risk as a core business issue. Today, insurance companies have no choice but to include climate change in their policy designs.

Rising claim costs, higher premiums

There is a saying that to get someone to pay attention to climate change, put a price on it. Rising insurance costs do just that.

Rising global temperatures are leading to more extreme weather and that means insurance companies have had to pay out more. In turn, they raised prices and changed coverage to stay solvent. This raises costs for homeowners and everyone else.

The importance of insurance to the economy cannot be underestimated. You generally cannot get a mortgage or even drive a car, build an office building or enter into contracts without insurance to protect against the inherent risks. Because insurance is so closely tied to savings, state agencies review proposals from insurance companies to raise premiums or reduce coverage.

Insurance companies don’t make political statements with increases. They look at the numbers, calculate the risk and price accordingly. And the numbers are worrying.

Climate risk arithmetic

Insurance companies use data from past disasters and complex models to calculate expected future payouts. They then price their policies to cover those expected costs. In doing so, they must balance three concerns: keeping rates low enough to remain competitive, setting rates high enough to cover payments, and not running afoul of insurance regulators.

But climate change is disrupting these risk patterns. As global temperatures rise, caused by greenhouse gases from fossil fuel use and other human activities, the past is no longer prologue: what happened in the last 10 to 20 years is less predictive of what is coming will happen in the next 10 to 20 years.

The number of billion-dollar disasters in the US each year provides a clear example. The average rose from 3.3 per year in the 1980s to 18.3 per year in the 10-year period ending in 2024, all years adjusted for inflation.

Along with the more than fivefold increase in billion-dollar disasters came increased insurance costs in the Southeast from hurricanes and extreme rainfall, in the West from wildfires, and in the Midwest from wind, hail and damage of floods.

Hurricanes tend to be the most damaging individual events. They caused more than $692 billion in property damage in the US between 2014 and 2023. But severe hail and wind storms, including tornadoes, are also costly; together, those on the billion dollar disaster list did more than $246 billion in property damage during the same period.

As insurance companies adjust to uncertainty, they may have a loss in one segment, such as homeowners insurance, but recover their losses in other segments, such as auto or commercial insurance. But this cannot be sustained in the long term and companies can be caught out by unexpected events. California’s unprecedented wildfires in 2017 and 2018 destroyed nearly 25 years of profits for that state’s insurance companies.

To balance their risk, insurance companies often turn to reinsurance companies; in fact, insurance companies insuring insurance companies. But reinsurers have also raised their prices to cover their costs. Property reinsurance alone is up 35% in 2023. Insurers pass these costs on to policyholders.

What this means for your owners policy

Not only are homeowners insurance premiums rising, coverage is shrinking. In some cases, insurers reduce or drop coverage for items like metal trim, doors and roof repairs, increase deductibles for risks like hail and fire damage, or refuse to pay full replacement costs for things like older roofs.

Some insurance companies simply withdraw from markets, canceling existing policies or refusing to write new ones when risks become too uncertain or regulators don’t approve their rate increases to cover costs. In recent years, State Farm and Allstate have pulled out of the California homeowner market, and Farmers, Progressive and AAA have pulled out of the Florida market, which has some of the highest insurance rates in the country.

State-run “insurers of last resort,” which can provide coverage to people who can’t get coverage from private companies, are also struggling. Taxpayers in states like California and Florida were forced to bail out their state insurers. And the National Flood Insurance Program has raised its premiums, prompting 10 states to sue to stop them.

About 7.4 percent of U.S. homeowners have dropped insurance altogether, leaving an estimated $1.6 trillion in property value at risk, including in high-risk states like Florida.

No, insurance costs are not increasing

According to NOAA data, 2023 was the hottest year on record “by far.” And 2024 could be even hotter. This overall warming trend and increase in extreme weather conditions is expected to continue until greenhouse gas concentrations in the atmosphere are reduced.

In the face of such troubling reviews, U.S. homeowners insurance will continue to get more expensive and provide less coverage. And yet Jacques de Vaucleroy, chairman of the board of reinsurance giant Swiss Re, believes that US insurance is priced too low to fully cover the risk from climate change.

Read the original article here: https://theconversation.com/why-home-insurance-rates-are-rising-so-fast-across-the-us-climate-change-plays-a-big-role-238939

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USA Trends Prices Trends Homeowners Climate Change