Climate Extremes Are Growing and Home Insurance is Reacting – by Community Contributor

New research from the Brookings’ Center on Regulation and Markets has focused on the effects that climate change is having on U.S. home insurance markets. As homeowners know, insurance rates are rising, and insurers are beginning to pull out of some markets. This is contributing to a need in some areas for policymakers to intervene to ensure homeowners can get insurance.

The past year has brought a raft of extreme weather events across the nation, from massive hurricanes, tornado outbreaks, floods and mudslides, and now the devastating Los Angeles County wildfires.

Chaffee County is among many rural Colorado counties that has become familiar with the risks of wildfire. In the past five years it has experienced two wildfires on its southern border (Decker Fire) and northern border (Interlaken-Twin Lakes).

The Brookings Institution is a nonprofit organization based in Washington, D.C. Its mission is to conduct in-depth, nonpartisan research to improve policy and governance at local, national, and global levels.  A new report by Brookings Nonresident Senior Fellow Meredith Fowlie, University of California San Diego Assistant Professor Judson Boomhower, Richter Capitol Hill Strategies Founder and Principal Daniel Richter, and Brookings Senior Research Analyst Riki Fujii-Rajani investigated why homeowners’ insurance premiums are rising.

They looked into the reasons for the homeowners insurance industry upheaval, specifically the role that climate change is playing, and in this report, make suggestions on how policymakers might respond.

Across the country, average homeowners insurance premiums have climbed by more than 30 percent between 2020 and 2023. Some insurance companies have stopped writing policies in certain areas, forcing households to resort to limited “last resort” plans. Since most home loans require homeowners’ insurance, owners have no choice but to pay higher prices as premiums climb.

Those price hikes have been fueled by several factors. Rising insurer costs have played a major role, particularly as the costs of construction materials and skilled labor have increased alongside interest rates in recent years. The Insurance Information Institute, a trade organization of insurance companies, estimates that cumulative replacement costs for home repair increased 55 percent between 2020 and 2022. This significantly outpaced the general rate of inflation over this time period. These cost increases are being passed through to households in the form of higher premiums.

Climate change is an important factor, putting upward pressure on premiums through several channels:

• Insured losses from climate-related disasters are increasing — which means the number of insurance claims is growing.
• Catastrophic weather events are becoming more frequent as the climate changes — and this increase in extreme weather — leads to more damaging events.
• To pay out claims in these worst-case scenarios, insurers must increase their capital reserves. So as damages from extreme weather events grow, insurers are investing in better climate risk modeling. This can drive prices higher if insurers learn they have been underestimating climate risk exposure.
• New risk modeling tools can support more granular pricing of climate risk which brings the premium that a customer pays more in line with the best available assessment of their individual risk.

This implies higher pricing for high-risk homeowners who previously were pooled together with low-risk homes under coarser pricing structures.

The report’s authors point out that as private insurers retreat from high-risk areas, it may be tempting for state and federal insurance entities to take on more of the climate risks going forward. Such publicly funded climate risk insurance is a short term solution. But it doesn’t address the fundamental challenges destabilizing private insurance markets.

Solutions for the Colorado Statehouse

Homeowners insurance is regulated at the state level. While regulatory regimes vary across states, all are guided by objectives of rate adequacy (i.e., insurers should charge prices that are high enough to keep them solvent) and fairness (i.e., prices should not result in exorbitant profits). Insurance affordability, availability, and rate transparency are additional imperatives guiding regulations in many states.

In rural mountain counties already facing housing shortages, most housing legislation is being targeted to increase the housing stock, not to make it fire-safe.

Not that the current Colorado 2025 budget year (facing a $1 billion shortfall) is the place to solve this threat, but there are some proactive steps that could be launched. First, state regulators can take proactive steps to encourage private insurers to write policies in high-risk areas. This includes initiatives that make more sophisticated catastrophe modeling tools and re-insurance more accessible to all insurers.

The writers of the report point out that there are some promising new technologies — such as virtual home inspection tools and fire safety certification programs — that can help insurers offer premium discounts.

Beyond insurance price regulation, federal and state governments can implement policies that more effectively promote risk-reducing investments such as wind-resistant roofing and fire-resistant siding, the authors add.

If that falls apart, and insurance companies begin to pull back from insuring homes in the state of Colorado, it could fall back to catastrophe insurance products. These protect businesses and residences against natural disasters such as earthquakes, floods, and hurricanes and against human-made disasters such as riots or terrorist attacks. These low-probability, high-cost events are generally excluded from standard homeowners insurance policies.

Frankly, there are things  that can happen to a property that are excluded from standard home owners. They include things like:

Floods usually are not covered by homeowners insurance, including floods from:

• Storms
• Typhoons
• Tsunamis
• Hurricanes

 

This article was prepared by the Brookings Center on Regulation and Markets. Read the full piece below:

How is climate change impacting home insurance markets?

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