Due to climate change and natural disasters that come along with it, homeowners insurance premium rose by 21% last year!
If you’re going to renew your homeowners insurance, you might notice a significant increase in your premium. According to Policygenius, from May 2022 to May 2023, home insurance prices rose by an average of 21% during renewal.
Experts say this increase is due in part to more frequent and severe weather events. As insurance companies face higher costs, they pass them on to consumers through higher premiums. However, since insurers do not disclose data on individual homeowners’ premiums and risks, it’s difficult to pinpoint exactly how climate risks are factored into the cost of insurance policies.
“The levels of risk and the kinds of hazards that a property can be exposed to are massively changing. And right now there’s a lot of confusion, not just among the homeowners, but also among the insurers about how they should be pricing this actuarially”, said Carlos Martín, director of the Remodeling Futures program at the Joint Center for Housing Studies of Harvard University.
Limited Data from Insurers
Although the price rise in home insurance premiums last year was significant, it’s not a new trend. According to the Insurance Information Institute, from 2012 to 2021, the average premium increased from $1,034 to $1,411.
Kenneth Klein, a professor at California Western School of Law, explained that annual increases vary, partly due to climate change, which can lead to substantial economic losses that aren’t evenly distributed across all insured properties or time periods.
“For many insurance companies in the Gulf Coast area, if they economically survived Katrina, the next year was one of their most profitable years. Because their premiums adjusted for Katrina, but there wasn’t a Katrina event. So that’s the challenge of insuring climate change”, he said.
Scott Shapiro, KPMG’s U.S. insurance sector leader, mentioned that the industry collects data on weather-related losses to set policy premiums, but this detailed information isn’t publicly available.
“This data is crucial for rate making and filings. A key challenge is the increasing exposure to weather-related risks and the uncertainty of whether historical losses accurately predict future losses”, Shapiro highlighted.
Insurance Pullback in High-Risk Areas
On top of that, as home insurance costs rise, homeowners in high-risk areas, such as those prone to floods or fires, may find fewer options. For instance, in May 2023, State Farm stopped accepting new applications for California policies, and in November 2022, Allstate paused new home, condo, and commercial policies in the state.
“[They] are not in the business of giving you money just because you need it, and they are not in the business of doing the right thing just because it feels like the right thing. They are businesses that are trying within a set of laws and regulations to make a profit”, Klein noted.
The reduction in available and affordable insurance options can create significant barriers to homeownership, as most mortgage lenders require insurance. In response, Florida established Citizens’ Property Insurance in 2002 for residents who couldn’t find insurance in the private market. Similarly, California’s FAIR plan provides fire coverage for those unable to obtain it traditionally, though it’s not a state or public agency. While state-run programs can be a last resort, they may not offer the same quality of coverage as private insurers.
“They sometimes are not built on the same actuarial principles as private insurance company would build them. And as a consequence, it’s problematic. It’s often not good coverage”, Klein said.