California, Florida and Texas have been affected the most so far - with premiums in Florida having tripled since 2019 - but other states are beginning to see the same trend.
Builders report that these costs are starting to negatively impact home sales. JL
Rithwik Kalale reports in APM Research Lab:
Homeowners in areas prone to disasters – including wildfires, floods, and hurricanes – are finding it difficult to get insured. California and Florida are going through an insurance crisis. In California, 6,545 wildfires have occurred in 2023 so far. Since 2020, 7.5 million acres have burned in California’s wildfires, putting thousands of people and homes at risk. In Florida, the regulatory environment coupled with an increased frequency of severe weather, including floods and hurricanes has led to Florida leading the country in high insurance rates. This is a growing trend in other states such as Louisiana and Georgia.In May of this year, State Farm announced it will stop granting new homeowners insurance policies in the state of California, due to increased risk of natural disasters in the region such as wildfires and rising construction costs. Another major insurer, Allstate, quietly pulled out of writing new home and condo insurance policies in California.
This presents a growing problem, and not just for California.
Homeowners in areas prone to disasters – including wildfires, floods, and hurricanes – are finding it difficult to get insured.
The climate-disaster duo
This year, there have been 24 confirmed climate disasters in the U.S. which resulted in losses exceeding $1 billion, according to the National Centers for Environmental Information.
According to the Insurance Information Institute, the top claims for homeowners insurance losses between 2017 and 2021 across the U.S. were: fire and lightning damage, bodily injury, wind and hail, and water damage and freezing.
Although California and Florida are both going through an insurance crisis, California is unique due to its high risk of wildfires. In California, a whopping 6,545 wildfires have occurred in 2023 so far, burning over 319,000 acres of land. Since 2020, a total of 7.5 million acres have burned in California’s wildfires, putting thousands of people and homes at risk. Since 2019, an average of 7,443 wildfires per year have taken place in the state.
Insurers of last resort
In Florida, the regulatory environment coupled with an increased frequency of severe weather, including floods and hurricanes has led to an overreliance on the state’s “last resort” policy provider.
An insurer of last resort is a state-mandated plan that provides coverage to homeowners who are unable to get coverage under the private insurance market. Florida’s insurer of last resort is Citizens Policy Corporation.
“Almost every homeowner [in south Florida] has to go to Citizens’ because virtually no companies are writing business in those counties,” said Mark Friedlander, director of corporate communications at the Insurance Information Institute. “Climate risk certainly plays into the equation of the problems with the Florida market. Hurricane Ian, which we estimate to be a $60 billion insured loss event, [was] the second most on record only behind Hurricane Katrina.”
Citizens is restricted by law on how much it can increase the premium rate to charge homeowners. If a major disaster strikes, it risks running out of funds for insurance claims. Florida residents would then be at risk of being charged a “hurricane tax” to replenish Citizens’ funds.
In other words, the next time a hurricane or other major climate disaster hits the state, Citizens’ funds can quickly deplete, putting further burden on Floridians to fund the damages.
Florida is not the only state with an insurer of last resort. States like California, Oregon and New Mexico have insurers of last resort known as FAIR (Fair Access to Insurance Requirements) plans.
“The good news in California is that, if no carriers will write you (policies) right now, you can go to the California FAIR Plan and get insurance,” said Janet Ruiz, director of strategic communication at the Insurance Information Institute. “That is our insurer of last resort. It's usually more expensive because all their policies are in high-risk areas, but it is insurance, and it is available to all homeowners.”
On average, home insurance through the California FAIR plan is more expensive than the state average by about $1,700 per year.
Insurance market in a frenzy
According to consumer advocates, the recent spike in insurance rates goes beyond just recent climate disasters and has to do with the history of insurance policies itself.
“For decades the insurance industry cherry-pick only the richest policyholders who are going to be the most profitable for their business across the board because they might buy six different policies instead of a cheap home insurance coverage,” said Carmen Balber, executive director of Consumer Watchdog, a consumer advocacy group. “We saw that play out decades ago, when the industry was actively redlining communities of color.”
From an industry perspective, fraud is a main driver of price increases. The Insurance Information Institute released a report in May, stating that Florida led the country in high insurance rates largely due to an increase in fraudulent lawsuits against insurance companies, resulting in higher premiums to cover legal fees and settlements.
Friedlander says this is a growing trend in other Gulf Coast states such as Louisiana and Georgia, but legislation is being introduced to combat this issue.
“On the other hand, legislators in Michigan and Texas are introducing new legislation to make it easier to sue insurers, basically backing up on previous regulations. So certainly, that's very concerning to the insurance industry,” Friedlander said.
Ruiz says that other factors such as inflation and the high cost to reinsure also contribute to these companies halting new policies.
“The cost to rebuild a property is outpacing inflation,” she said. “Having the cost to rebuild rise and the cost of reinsurance— all these things came together with the increased wildfire risk.”
California’s Prop 103
California's approach to insurance changed in 1988 when its citizens voted to pass Proposition 103, which gave consumers a means to be involved in the insurance rate decision process.
“Prop 103 made California a ‘prior approval state.’” said Balber. “What that means is insurance companies have to go in, open their books and justify the rates they want to charge before they can increase prices, and that has kept rates lower in California than in many other states by reigning in the excess profits that insurance companies enjoy across the country.”
“When an insurance company files for a rate increase, public intervenors can come in and dispute the request for an increase and in doing so, slow down the process, even to a couple of years at times,” said Ruiz. “So that has actually kept the insurance rates in California artificially low.”
Consumer Watchdog, whose founder authored the ballot measure, argues that it has done more good than harm.
“What Prop 103 has done is keep rates transparent and reasonable for consumers in California,” said Balber. “The industry is using climate change as an excuse to go after their real goal— the goal that they have had for decades, which is deregulation.”
Balber says Florida’s insurer of last resort (Citizens’) has five times the market share of the state’s insurance industry as California’s insurer of last resort (FAIR) does, largely due to the different approaches toward rate approval.
"Florida has what's called ‘file and use’ and that means an insurer can say, ‘This is what we're going to charge,’ start charging it, and the Department of Insurance only has the power to go back after the fact,” she said.
Further, Balber says private insurers should be required to issue homeowners insurance. "In California we have a rule that says if you're a good driver, insurers have to sell you auto insurance. We need the same protections for homeowners who do the right thing to protect their homes.”
Homeowner responsibility
Both consumer advocates and insurance industry professionals can agree on one thing: Home improvement is the number-one way homeowners can mitigate their damage risk.
“What can you do as a homeowner or as a business owner to mitigate your risk? In Florida that means strengthening the key vulnerabilities of your home: fortifying your roof, making it stronger to wind impacts, making your windows and doors stronger, including your garage door,” said Friedlander.
“Mitigation and home hardening is the number one solution for reducing cost and access problems in California because every single study, including those by the insurance industry, make very clear that if homeowners protect their homes, harden their homes and clear brush, they’re less likely to burn down,” said Balber.
Beyond short-term solutions, Friedlander said market factors may change the way the home insurance industry operates when it comes to climate disaster-related impacts. Insurance companies now have to predict and prevent recovery losses as opposed to being a reactionary measure.
“Whether it's a hurricane, tornado or wildfire, insurers are the financial first responders for their customers,” said Friedland. “Our focus today is how (both parties can) predict and prevent. What could you do as a homeowner or as a business owner to take steps to mitigate your risk from catastrophe losses so that: number one, you won't have as severe a loss in terms of damage, and number two, is if you do you could recover quicker. It is a big part of the process of not only preparing for catastrophes, but if one does strike [preparing for] the recovery process.”
Hurricanes, flooding, wildfires and other natural disasters are all likely to become more common due to a continuing rise in global temperatures. This will continue to place pressure on homeowners' insurance. In addition to improving the preparedness of homeowners themselves, states will continue to grapple with potential policy solutions ranging from anti-fraud protections for the industry to the citizen involvement of California’s Prop 103.
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