Climate risk guarantees home insurance policies will keep getting more expensive

A photo taken from above on October 1, 2022 displays a damaged portion of Pine Island Road and ruined residences following the devastation caused by Hurricane Ian in Matlacha, Florida.

Ricardo Arduengo, a photographer represented by the renowned AFP and Getty Images,

Regular weather disasters, influenced partly by changes in the climate, are approaching closer to homeowners and potential buyers.

Certain insurance companies have chosen not to offer coverage for new homes in states that are severely affected by natural disasters like Florida, which is currently at risk due to Hurricane Idalia, and California, as well as other parts of the country. Alternatively, some insurers are increasing their prices or limiting the coverage they provide. This trend is expected to have a widespread impact throughout the country, as climate change-related weather events become more frequent, insurance companies become more cautious with their risks, and securing reinsurance becomes more challenging. This information comes from experts in the industry.

According to Aon, natural disasters led to insured losses of over $130 billion worldwide in the previous year. The second most expensive event, Hurricane Ian, played a significant role in this, causing immense storm surges, destructive winds, and floods in Florida and Cuba. Aon estimates that Hurricane Ian alone accounted for approximately $50 billion to $55 billion of the total insured loss globally.

John Dickson, the president and CEO of Aon Edge, a provider of private flood insurance and various other insurance offerings, expressed that consumers worldwide will encounter more difficult decisions regarding the available limits, coverages they can opt for, and deductibles.

Here are some tips for customers to navigate the home insurance industry in the face of growing weather risks caused by climate change:

Home Insurance Market Disruption Worsens

Homeowners and individuals looking to buy a new house are expected to face more difficult circumstances. With the occurrence of phenomena such as wildfires, thunderstorms, tornados, hail, floods, and other natural calamities, insurance companies are compelled to reconsider the level of risk they are willing to bear in these specific regions. This statement was made by David A. Sampson, who serves as the president and chief executive of the American Property Casualty Insurance Association.

According to George Hosfield, the senior executive responsible for home insurance solutions at LexisNexis Risk Solutions, insurance providers are bound by pricing regulations in the majority of states. This implies that they cannot arbitrarily set the rates for their customers. However, if the financial feasibility of a particular market diminishes, insurance companies have the option to withdraw from it, a strategy that has been employed by some insurers.

For instance, State Farm declared in May that it would no longer receive new requests for home insurance in California. Allstate also revealed a comparable decision in November of the previous year. In June, Farmers Insurance became the most recent provider to withdraw from the Florida market, which has experienced significant instability for a prolonged period of time.

Higher Prices Expected For Policyholders

According to Insurance.com, a service that helps consumers compare insurance prices, the average yearly cost of homeowners insurance in the United States is $2,777. However, this amount can vary depending on the state you live in. For example, Oklahoma has the highest rates, with homeowners paying an average of $5,317 per year. On the other hand, Hawaii has the lowest rates, with an average cost of $582 per year. It is worth noting that despite its low insurance rates, Hawaii recently dealt with a severe wildfire that Moody's has estimated will result in economic losses ranging from $4 billion to $6 billion for the state.

In the meantime, expenses keep rising. Policygenius reports that during the period from May 2021 to May 2022, 90% of individuals who own a home experienced an escalation in their yearly insurance premiums compared to the previous year. According to data from Policygenius, the typical rise was $134.

According to Rich Sorkin, who is the CEO of Jupiter Intelligence, a company that focuses on analyzing climate risks, there are situations where homeowners may face difficulties in obtaining insurance, requiring them to pay higher premiums or receive less dependable coverage.

Currently, there are homeowners who are taking chances on owning a property without insurance rather than dealing with rising premiums.

According to Stephen Bennett, the chief climate officer at The Demex Group, states like Arkansas, Louisiana, Nebraska, Iowa, Kansas, Oklahoma, Illinois, Kentucky, and Tennessee may experience significant effects on their insurance options or costs due to weather-related events. These states, alongside California and Florida, could see the most impact on coverage availability and pricing.

Insurers: Shop Smart For Better Deals!

As the situation develops, customers may still have numerous options, and it is recommended to explore different possibilities at least annually. AM Best evaluations can assist customers in comparing crucial aspects such as the financial stability of an insurance company, as well as its creditworthiness in both the short and long term, according to Sorkin.

Insurance companies that operate solely online might provide cheaper choices, however, customers must go through the same process of assessment as they would with conventional providers. This entails evaluating premiums, financial stability, claim settlement speed, and the required paperwork, as stated by Bennett.

Costs Can Be Saved With Proactive Weather-proofing

Consumers have the opportunity to access reduced prices and enhance the ability of their property to withstand adverse weather conditions by implementing specific measures to make it weather-proof or using durable building materials. Enhancing the strength of windows, installing hurricane straps, implementing landscape modifications, and cultivating fire-resistant plants are some of the improvements that can potentially lead to decreased insurance premiums.

Dickson gives the example of a house in Mexico Beach, Florida, that was spared from the fury of Hurricane Michael because it was built with durable materials. "You shouldn't wait for the storm to hit to start preparing and getting ready. The right time to do so is when the weather is calm and sunny," Dickson advised.

Moving: The Best Choice For Homeowners

Relocating to a new place, whether it's within the same state or a completely different part of the country, might be a favorable choice for certain individuals, especially considering that remote work opportunities are still being offered by certain companies even after the pandemic. "I believe individuals will contemplate these factors, particularly in a time when changing residences has become more convenient," remarked Bennett.

Hosfield recounted the warning story of a colleague who relocated from Georgia to Florida and was given an estimate of $6,000 to $7,000 for an yearly home insurance plan — roughly 10 times what she had paid in Georgia. Eventually, she managed to negotiate it down to approximately $3,500, but it was still a significant amount of money, more than she had anticipated. Furthermore, it took a considerable amount of time and effort as she had to switch insurance providers and cover retrofitting expenses out of her own pocket.

Prior to making a purchase, individuals should inquire: "What will be the lasting effect on my residence and its worth if I decide to acquire a property in a region exposed to substantial climatic danger?" Hosfield expressed.

Individuals have the opportunity to utilize a complimentary resource known as Risk Factor, established by the not-for-profit organization First Street Foundation, to gain a clearer comprehension of environmental hazards specific to their region. By inputting their postal code into the tool, users can readily identify local risks associated with flooding, wildfires, extreme temperatures, and strong winds.

Changes In Regulation Will Require Long-term Planning

In a recent report by the Treasury in June, it was recommended that states should examine and tackle the potential dangers linked to climate change. Certain states, namely New York, Connecticut, California, and Vermont, have made significant progress in taking actions towards this.

Regrettably, homeowners have no option for an immediate solution apart from safeguarding their properties or relocating, according to Sorkin.

They have the capacity to encourage regulators and policymakers to assist in repairing a malfunctioning system. "Certain aspects of this issue need to be tackled at a broader community level," Sampson stated.

Update: Allstate declared that it ceased the acceptance of fresh requests for home insurance in California as of November 2022. An earlier edition of this post erroneously mentioned the timing of this alteration.