American homeowners living in vulnerable regions have long been used to coping with extreme weather events, but climate change is changing the playing field for the home insurance sector in a way that they couldn’t have prepared for.
Confronted with greater risks and potentially higher damage claims, property insurance is simply disappearing from the most dangerous areas in the country; in others, premiums have become so expensive that some homeowners are willingly choosing to “go bare,” quitting coverage altogether.
“The insurance market has been rocked by the increased frequency and severity of disasters over the last 10 years or so. If you go back to the wildfires in California, or the major hurricanes in recent years, it’s estimated that those disasters have wiped out years and years of insurers’ profits,” Benjamin Keys, an economist and a professor of real estate and finance at the University of Pennsylvania’s Wharton School, told Newsweek.
The number of serious catastrophic disasters has gone up considerably in recent years, as had the total damage from these events. For Keys, this trend is the result of two things: “One is climate change is driving the frequency and severity of disasters,” he said.
This year, a total of $19 billion disaster events have already hit the country, according to National Oceanic and Atmospheric Administration’s National Centers for Environmental Information. These include one tropical cyclone, 15 severe storms, one wildfire and two winter storms. The combined damage caused by these extreme weather events is nearly $50 billion.
After Hurricane Beryl left a trail of destruction stretching out as far as New England in early July, experts estimated damages and losses to have reached a total of up to $32 billion across the country. A few weeks later, Hurricane Debby stormed the east of the country, causing an estimated $12.3 billion in damage in a region where a vast majority of homes aren’t covered by flood insurance.
“The second factor is that more and more people live in harm’s way. If you look at migration patterns over the last 30 years, even longer than that, Americans have moved south and west,” Keys said. “More and more people are moving into the locations where they’re exposed to disaster risk.”
“We continue to see people moving into parts of the United States where damage costs are accelerating,” Steve Bowen, chief science officer at Gallagher Re, told Newsweek.
“This will only put more pressure on insurance companies on how well they assess risk, but also pressure on state and federal government agencies to either improve their building code and/or enforcement mandates and provide more clarity on cost-efficient ways to retrofit the building stock that currently exists.”
And what’s happening as a result of this concentration of potential risk in these areas, at the moment, is that “insurers are reacting to the impact of climate change by passing those costs on to consumers,” Keys said, especially in the less regulated states.
That is why in some parts of the country premiums have skyrocketed 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 in the same year was $2,377 per year.
But insurance premiums are also surging because the cost of reinsurance—basically, insurance for private insurers—has become more expensive.
According to Keys, who mentioned data from a reinsurance broker called Guy Carpenter, the cost has “basically doubled from 2017 to 2024.” This is another cost that insurance companies are passing on to customers, when they can.
What we don’t yet know, Keys said, is whether insurers have finished pricing in this increased risk or whether we should expect prices to continue rising.
There are other costs for insurers to keep into consideration, including inflation.
“The cost of materials has gone way up and the cost of labor has gone way up. You have an extremely low unemployment rate. It’s hard, if you’re thinking about a disaster and you need to repair hundreds of roofs that have been damaged by tropical storm, where do you find the construction crews to [do it]? To replace all those roofs. So, you know, I think the costs on a sort of per-claim basis have gone up quite a bit.
“There’s also a set of legal costs that insurers have been frustrated with for a long time in terms of fraudulent claims,” Keys said.
“There’s a view that basically states had too lenient rules that really favored claims over the insurance companies. And we’ve seen that states like Florida dramatically change their rules,” he added.
“For example, the [Florida Governor Ron] DeSantis administration and the Florida state legislature passed a number of bills last year that were, pretty vocally, trying to lure insurers back into the state by making the market more insurer-friendly.”
“I think it’s one of the big questions,” Keys said. While some states still have to reach a “tipping point” when it comes to home insurance, others have already reached that stage.
“When no private insurer is willing to cover a homeowner at a reasonable price, then there’s a sort of state backstop that’s in place to take that role, but it’s not designed to handle tens of thousands of policies,” Keys said.
“They’re designed for very short-term disruptions in the market to make sure people have continuous coverage because without insurance they can’t get a mortgage, and the housing market shuts down.”
But insurers of last resorts in states like Florida have grown so massively in size in recent months that it is unsustainable. Citizens, Florida’s state-backed insurer of last resort, is now the largest insurer in the state.
“It quadrupled its size from 2018 to 2023, in terms of exposure,” Keys said. “In the most exposed states, it feels like the market is being held together by a bit of duct tape.
When it comes to the idea of reaching a tipping point for the home insurance sector, “I think we’re already there in some of the riskiest states. Hopefully, this is sending a warning for a lot of other states that are also seeing premiums rise and where there may be some sort of regulatory pushback to prevent those from rising.”
Bowen believes that the sector can—and will have to—reform itself. “As technology improves and the quality of data becomes more granular, this should drive new innovation to better adapt and mitigate [risk] against the new climate reality in which we face today,” he said.
“Insurers also continue to play an important role in addressing the core issue of reducing carbon emissions from the burning of fossil fuels. By aiding the transition of fossil fuel-heavy portfolios to ones that are on track to meet net zero commitments, the industry can take a lead role in helping the world achieve critical goals that lower the potential of surpassing feared tipping points.”
