By: Liz Strait, PhD
Introduction
The homeowners insurance landscape has become both increasingly expensive and unstable in the US. Since 2018, the average homeowners insurance cost has increased over 19%.1 In certain areas, such as California and Florida, large national insurance companies have withdrawn entirely—phasing out homeowners insurance to existing customers and no longer accepting applications from new ones. These changes are due to rising construction costs, climate change, and increased reinsurance premiums. The implications of a volatile and expensive insurance market are far-reaching—all homeowners, insurance holders, and consumers will potentially be affected by this developing insurance crisis. As a Financial Professional (FP), it is important to understand how changes in insurance markets can affect your clients both specifically (for homeowners, property holders, or residents of increasingly uninsurable markets) and more broadly (market effects, housing supply and demand, etc.).
Background
While states that have seen insurance companies withdraw are limited—currently, just California and Florida—more areas could join the list, particularly locations where there are increased weather-related risks and where regulations reduce pricing flexibility for the premiums insurance companies can charge. In terms of risk management, other states that could soon see impacts on coverage cost and availability include Arkansas, Louisiana, Nebraska, Kansas, Iowa, Oklahoma, Kentucky, and Tennessee. With California and Florida, these changes would affect 28% of the US population.2 As inflation, the rate of natural disasters, and reinsurance premiums (the premiums insurance companies pay for insurance from another insurance company to mitigate part of the risk from a major claims event aka an infinite loop of insurance)3 all increase, national insurance companies are starting to reassess where they make their homeowners insurance policies available4—focusing on areas where they can make a positive return on investment (ROI).
As insurance becomes more difficult to obtain, premiums will increase dramatically. While overall homeowners insurance premiums across the country are only up approximately 3% in 2023 so far5, rates in areas where large national insurers have withdrawn have seen increases in the double-digits.6 Since May 2021, 90% of policyholders have seen their annual premiums on homeowners insurance increase.7 These increases are expected to continue with inflation, but they are unlikely to diminish even when inflation drops because weather-related risks (e.g., storms, wildfires, droughts, and heatwaves)8 continue to rise.
Even with the existence of insurers of last resort, homeowners and the market are not adequately protected. Many of these insurers are not charging high enough premiums to cover their risk. If a large natural disaster (e.g., a hurricane in Florida) occurs, the insurer of last resort for that area may see their reserves completely wiped out. In these situations, the insurer can impose emergency assessments—and not just on their own customers, but on every insurance customer across every insured product (i.e., automobiles).9
Source: National Oceanic and Atmospheric Administration (NOAA).
Notes: (1) Count is combined across natural disasters: drought, flood, freeze, severe storm, tropical cyclone, wildfire, and winter storm. (2) Costs are in 2023 dollars (CPI-adjusted for inflation). (3) The dotted green line shows the average linear trend over time. (4) During 2022, there were 18 separate billion-dollar natural disaster events. The total cost of these events was over $165 billion.
With increasing premiums, we are already seeing an increased rate of delinquency in mortgage payments. Many lenders are now also considering rising insurance costs in their determination of how much an applicant can borrow—especially in areas like California and Florida.10 This means that, as homeowners insurance rates increase, more prospective buyers will be priced out of the market because they either can’t afford a home, or they won’t qualify for a mortgage. This reduces the demand for homes but does not affect supply (though other factors surely do). As demand decreases and overall supply remains relatively stable or increases, this will put downward pressure on home values for all homeowners.
Going Uninsured
As the cost of homeowners insurance increases and available coverage decreases across the nation, 12% of American homeowners have opted to go without property insurance; and 50% of those individuals have annual incomes below $40,000 (usually older homeowners and retirees).11 Many of the homeowners choosing not to insure their property have done so in the face of non-renewal by their insurer. These homeowners often state that they don’t think the insurer of last resort is worth the cost—while its premiums are 20% lower than those of private insurers, it offers significantly less expansive coverage, making the insurance more expensive. Some wealthier homeowners have also cited the fact that they have the funds and liquidity to rebuild on their own or move if their house is destroyed.12
However, few people can afford to have their homes uninsured—especially as the costs of rebuilding and repairing have increased substantially with inflation. This also holds for the nearly 67% of homeowners who are underinsured13—they are likely underestimating the financial cost of being underinsured should their homes require replacement or repair. Ultimately, with increased costs (both for homeowners insurance and construction/repairs) and increased exposure to natural disasters, more Americans are assuming large financial risks when buying or investing in residential property. Further, as more people are uninsured and underinsured, it will take longer for local economies to bounce back after a natural disaster—this affects more than just the uninsured homeowners.
End Notes
[1] Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[2] Munk, Cheryl Winokur. “Climate Risk Guarantees Home Insurance Will Only Get More Expensive.” CNBC, 30 Aug 2023, https://www.cnbc.com/2023/08/30/how-climate-risk-disaster-era-are-changing-the-cost-of-home-insurance.html.
For population by state see: https://www.statsamerica.org/sip/rank_list.aspx?rank_label=pop1&ct=S18.
[3] One of the major reasons premiums are increasing and large national insurers are pulling out of certain areas is because of increases in reinsurance premiums. In the last year alone, reinsurance rates have increased 30-40% on average. This increase in cost gets passed on to consumers in the form of higher premiums on their insurance policies.
See: Isidore, Chris. “Florida’s Homeowner Insurance Rates Are Four Times the National Average. That’s Not Getting Better Anytime Soon.” CNN, 1 Jun 2023, https://www.cnn.com/2023/06/01/business/florida-homeowner-insurance-rates/index.html.
[4] Farmers Insurance has dropped coverage in Florida—it will no longer renew or give out new car, home, or umbrella policies. This has affected almost 100,000 policies in the state. Bankers Insurance and Lexington Insurance have also withdrawn from the state.
In California, Farmers has limited the number of policies it will accept to 7,000 a month; State Farm and Allstate both stopped accepting new home insurance applications. Two smaller insurance companies—AmGUARD Insurance and Falls Lake Insurance—have also exited the state. Liberty Mutual will no longer offer business owner insurance policies in California starting in the fall (2023), and its subsidiary—Safeco—has dropped almost 1,000 policyholders in the Bay Area.
See: Sandhu-Longoria, Amritpal Kaur. “Farmers Insurance Layoffs: CEO Raul Vargas Makes Cuts to ‘Manage Risk.’” USA TODAY, 28 Aug 2023, https://www.usatoday.com/story/money/2023/08/28/farmers-insurance-layoffs-2023/70702616007/.
See also: Kupfer, Matthew. “Over 50K To Lose Coverage as Two Home Insurers Exit California.” The San Francisco Standard, 15 Aug 2023, https://sfstandard.com/2023/08/15/over-50000-to-lose-coverage-as-two-home-insurers-exit/.
See also: Kupfer, Matthew. “Home Insurance Crisis: USAA To Limit Business in California.” The San Francisco Standard, 31 Aug 2023, https://sfstandard.com/2023/08/31/insurance-crisis-another-major-home-insurer-to-limit-business-in-california/.
[5] Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[6] Isidore, Chris, and Ella Nilsen. “Why It’s Becoming Harder and More Expensive to Get Homeowners Insurance.” CNN, 19 Jun 2023, https://www.cnn.com/2023/06/19/business/homeowners-insurance-more-expensive-climate/index.html.
The rates homeowners are paying in Florida are almost four times as high as in other areas of the country. The average annual home insurance cost for residents of Florida is approximately $6,000; in the rest of the country, it’s $1,700. See: Isidore, Chris. “Florida’s Homeowner Insurance Rates Are Four Times the National Average. That’s Not Getting Better Anytime Soon.” CNN, 1 Jun 2023, https://www.cnn.com/2023/06/01/business/florida-homeowner-insurance-rates/index.html
Rates are also likely to increase further as insurance companies withdraw. This is because fewer insurance companies mean less competition, which gives existing companies more pricing power.
[7] Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[8] According to ValuePenguin, there were 119 natural disasters that resulted in $98.9 billion in insured losses in 2022 alone.
See: Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[9] Isidore, Chris. “Florida’s Homeowner Insurance Rates Are Four Times the National Average. That’s Not Getting Better Anytime Soon.” CNN, 1 Jun 2023, https://www.cnn.com/2023/06/01/business/florida-homeowner-insurance-rates/index.html.
In Florida, the insurer of last resort can impose an emergency assessment as great as 2% of all insurance premiums (i.e., home and car) on residents who are not the insurer’s customers.
[10] Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
[11] Fields, Samantha.“More Americans Are Going without Homeowners Insurance.” Marketplace, 29 Aug. 2023, https://www.marketplace.org/2023/08/29/homeowners-insurance-risk/.
See also: Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
Many mortgage companies require homeowners insurance, so most homeowners choosing not to insure own their property outright.
[12] Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
[13] See: https://www.nationwide.com/lc/resources/home/articles/underinsurance
The average underinsured amount is 22%, but some homeowners are underinsured by as much as 60%.
[14] This example comes from miamidade.gov, using actual chances of a significant flood in the area.
[15] Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
See also: Fields, Samantha. “More Americans Are Going without Homeowners Insurance.” Marketplace, 29 Aug 2023, https://www.marketplace.org/2023/08/29/homeowners-insurance-risk/.
[16] Fields, Samantha. “More Americans Are Going without Homeowners Insurance.” Marketplace, 29 Aug. 2023, https://www.marketplace.org/2023/08/29/homeowners-insurance-risk/.