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It’s not hyperbole to say that the United States may very well be on the brink of a homeowners insurance crisis, at least in its coastal areas.
Consider what’s happened just this year:
What’s driving this upheaval? Climate change. Extreme weather, including devastating California wildfires and costly Gulf coast hurricanes, are forcing insurers to reassess their risk tolerance.
And many are simply deciding the increased risk of extreme weather combined with rising construction costs due to inflation make offering insurance in at least some locations untenable.
The problem isn’t confined just to coastal areas of the country. As Steve Bowen, chief science officer at global reinsurance broker Gallagher Re told Axios last month, “this is a 50-state problem as insurers are being forced to re-assess their risk tolerance as climate change leads to more common and severe extreme weather events.
Believe it or not, we could be facing a future where certain parts of the country are literally uninsurable or where insurance is affordable only for the wealthy.
Only a handful of states appear to have considered legislation this year explicitly aimed at stabilizing their property insurance markets, but a few of those measures have been enacted.
Acknowledging that “THE GROWING THREATS POSED BY WILDFIRES AND OTHER NATURAL DISASTERS IN COLORADO HAVE PUT NEW PRESSURE ON THE RESIDENTIAL AND COMMERCIAL INSURANCE MARKETS,” lawmakers in that state enacted HB 1288, providing for a state property insurance plan.
“This will be (a) product of last resort—almost a safety net—to make sure that someone can secure property insurance,” said Colorado House Speaker Julie McCluskie (D), who was also a lead sponsor of the measure, as the Colorado Sun reported.
Florida lawmakers considered at least three bills addressing “a critical need in the state’s problematic property insurance market.” Those measures were HB 15a, which included a provision requiring property insurers to cap their premiums or create sliding fee scales for their premium rates; HB 1477, which included provisions restricting property insurers’ ability to claim insolvency and allowing those in the property insurance business in other states to engage in the property insurance business in Florida; and SB 1688, which included a provision prohibiting property insurers from denying claims for certain reasons.
All three of those measures failed, but the state also enacted a bill (SB 7052) dealing with insurer accountability, which among other things mandates that insurers comply with certain requirements when temporarily discontinuing the writing of new residential property insurance policies.
A bill pending in New York (SB 1495) would provide protection from rehabilitation or liquidation orders for small property/casualty insurers that write commercial auto insurance policies in the state.
And Louisiana enacted legislation (HB 1) appropriating $45 million for an incentive program to attract new insurers to the state and encourage existing insurers to write new policies.
“The incentive program, which has a proven record of lowering rates and stabilizing our market after hurricanes Katrina and Rita, is only one part of our plan to protect our homeowners and our way of life from the ongoing crisis in the international insurance market,” Louisiana Insurance Commissioner Jim Donelon said in a press release.
These measures are likely just the very beginning of a wave, because all of this disruption points to one likely outcome: rising homeowner insurance costs.
As California Insurance Commissioner Ricardo Lara wrote in the foreword to an April 2023 report by the University of California-Berkeley on the impact of climate change on homeowners insurance rates: “Climate change is intensifying many of the risks faced by our society—shifting the playing field on which financial regulators and companies operate. Our goal must be maintaining reliable, affordable insurance.”
Lawmakers in just four states appear to have considered legislation this year explicitly aimed at stabilizing their property insurance markets, according to the LexisNexis® State Net® legislative tracking system. Several market stabilization measures were introduced in Florida, where the insurance market has struggled for decades. Two other states, Colorado and Louisiana, enacted stabilization measures.
The UC Berkeley report states bluntly: “Insurance companies in California and around the world face significant financial risks due to climate change as both investors and insurers. These include both the significant transition risks facing investors worldwide as the global economy shifts toward decarbonization and the particular combination of compounding physical risks–wildfire, drought, coastal hazards, extreme heat–that threaten California’s landscape.
The report goes on to say: “Accurately assessing and managing these risks will be vital to ensuring the long-term viability of the insurance market in California, the availability and affordability of insurance for California residents and businesses, and the state’s physical and financial resilience in a changing climate.”
The report couches the potentially burgeoning homeowners insurance crisis as essentially a risk-managing exercise. But while that may sound simple, it’s anything but, as climate change has thrown insurers expectations out the window, making it difficult if not possible to plan for risks.
To put it another way, insurers used to be able to plan around concepts like so-called “100-year floods,” events so devastating but rare they only happened about once a century. But now with the havoc climate change is wreaking on our environment, insurers have no idea if 100-year floods could be coming to a given area every half century, every decade or even every year.
Climate change isn’t the only source of rising costs and uncertainty. Fraud and lawsuits—particularly in Florida—are believed to be having a major impact on the homeowners insurance market as well.
A professor at Florida International University, for instance, found that in the wake of hurricanes, contractors go door-to-door promising homeowners repairs if the homeowners agree to assign the contractors their insurance benefits.
“The contractors can then claim whatever they want from the insurance company without needing the homeowner’s consent,” wrote Shahid S. Hamid, a professor of finance at FIU, in October 2022. “If the insurance company determines the damage wasn’t actually covered, the contractor sues. So insurance companies are stuck either fighting the lawsuit or settling. Either way, it’s costly.”
Hamid said the legal cost of insurance companies fighting these kind of lawsuits was more than $3 billion in 2019 alone.
Indeed, the Insurance Information Institute wrote in February 2023 that Florida has “some of the most generous attorney-fee mechanisms in the country,” causing costs to skyrocket for insurers.
Also contributing to the industry turmoil are the regulatory challenges insurance companies face.
Insurers in California, for example, complain that they can’t cover the cost of their policies because regulators have blocked them from raising their rates above a certain threshold. The average cost of homeowners insurance in California is $1,300 per year, or $108 per month—a rate that insurers claim is “artificially low” and creates a “very high risk” for writing policies.
There are some signs, however, that insurers in the Golden State might be getting a break from regulators soon. In early June, the California Department of Insurance invited the public to a workshop to explore insurers’ use of risk assessment tools to combat growing wildfire threats. The announcement of the workshop came in the wake of calls for the state to change its stance on the use of modeling in rate setting.
Insurers say that California’s restrictions on the use of catastrophe modeling prevents them from adequately pricing the risk of wildfires. Current regulations direct insurers to use historical losses as guides and prohibit them from using models that can account for land-use changes or weather trends.
“Unlike every other state, California regulations prohibit the use of forward-looking climate models to project future losses, and instead require wildfire risk to be priced using an insurer’s average wildfire losses over the last 20 years, Michael D’Arelli, executive director of the American Agents Alliance, recently wrote in an opinion column in the Insurance Journal: This makes no sense, since today’s climate is very different than it was 20 years ago.”
In short, there are some weighty issues driving the looming homeowners insurance crisis. Deft policymaking will be required to prevent homeowners from getting priced out of the insurance market. We’ll be watching this issue closely.
—By SNCJ Correspondent BRIAN JOSEPH
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