US’ Homeowners Insurance is Getting More Expensive

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Homeowners insurance is becoming increasingly expensive and difficult to find in many areas. There is no indication that the situation will improve anytime soon.

Climate change, increased expenses to rebuild or repair, and a rapid spike in premiums from reinsurance companies, which insurers employ to limit their risks, are the culprits.

Major insurance firms have essentially exited the Florida market, leaving homeowners with premiums nearly four times higher than elsewhere in the country. Hurricane risk is part of the problem in Florida; Hurricane Ian last year was the most expensive storm to hit the state.

However, Florida is not the only state where natural disasters are prompting insurers to exit the market.

State Farm and Allstate, two of the largest national insurers, are no longer issuing new homeowners policies in California, owing to the heightened danger of wildfires to houses.

Climate change isn’t the only factor. Insurance companies also point to the rising cost of replacing homes, as inflation for building supplies and labor has soared. The companies also blame limits placed on insurance premiums in some states, including California.

“The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes, and higher reinsurance premiums,” said a statement from Allstate explaining its decision to stop writing new policies last fall.

Rising costs for insurers, homeowners

According to the insurance sector, reconstruction and replacement costs increased by 55% between 2019 and 2022. According to Matthew Carletti, an insurance industry analyst with JMP Securities, reinsurance, the type of insurance employed by insurers to reduce their risks, has increased by 30% to 40% following years of losses in the business.

“If you are a reinsurer, you have lost money for the last five years,” said Carletti. “They’ve had enough.”

The increased frequency of natural disasters is a major factor driving insurers to pull out of some markets and for reinsurers to raise their rates, which affects the premiums everyone pays, according to the experts.

“For the reinsurers, it’s not just inflation but increases in frequency of events,” Carletti said.

According to the Consumer Price Index, the government’s main inflation gauge, insurance rates have risen only 1.6% in the last year. However, double-digit premium increases are prevalent in locations where insurance is becoming more difficult to obtain.

Given the state’s spate of climate change-fueled wildfires, Allstate and State Farm pulling back from writing new policies in California “shouldn’t be a surprise,” said California’s former insurance commissioner Dave Jones.

“Insurers are responding rationally to the growing losses and growing risks by declining to write new insurance,” Jones said. “The risk is too great for the insurer to make any money. That has been occurring for some time now.”

The spread of uninsurable places

According to experts, uninsurable areas are increasing across all 50 states, but this is especially true in California, Florida, and Louisiana, which suffer greater and more frequent disasters like hurricanes and wildfires.

Different causes are at work in each of the three states, but the results are similar: More people are being driven to the insurer of last resort, where they often have to pay more money for a smaller insurance. While Allstate and State Farm have refused to write new policies, smaller insurers in places such as Louisiana and Florida have gone bankrupt, forcing individuals to drop their insurance completely.

For instance, in Louisiana, 17% of homeowners insurance policyholders had their policies canceled last year, according to an annual report from Louisiana State University. Meanwhile, more than two-thirds of policyholders said homeowners and flood insurance are more expensive in Louisiana than other states.

More and more governments are attempting to establish state-backed insurance companies to serve as the “insurer of last resort” for homeowners who can’t find policies elsewhere. In Florida, on the other hand, Citizens Property Insurance, the state’s insurance provider for the last 20 years, has seen the number of policies increase by approximately 50% in the last year alone, to 1.3 million, representing 16% of the market and significantly more than any national insurer writes in the state.

Carletti believes that major insurers exiting large markets, as they have already done in Florida, will soon spread to other states, particularly those that limit the percentage increase in premiums they can charge.

“A lot of states can learn a lesson from Florida,” he said. “Insurers don’t have to write policies in all 50 states. They are going to write policies where they think they can get a return on the capital.”

Wildfires growing risks

California wildfires are down in 2023 compared to the same period last year, with 1,200 reported so far this year – nearly half the figure from the first five months of 2022.

In addition, wildfires have decreased in each of the last two years since the state’s record wildfire year of 2020, when 8,648 wildfires burned more than 11,000 structures. There were over 7,500 wildfires in 2022, however only approximately 772 structures were destroyed.

However, wildfires may become more prevalent later this year. Recent high rains have fueled the development of grasses and other plants, which may dry up later this year and provide fuel for future fires.

Globally, rising temperatures may raise the probability of extreme wildfires in the future years. According to a UN Environment Programme research, the number of intense wildfire incidents would increase by up to 14% by 2030. According to projections, the growth will reach 30% by 2050.

By the end of Frank Frievalt’s four-decade career as a fire chief in California and Nevada, the megafires that leveled the region year after year had begun to blur together.

“You used to remember your career fires,” Frievalt said. “Initially, you’d see it as a one-off year. Then we had (the Paradise, California, fire in 2018) and thought that was as bad as it could get. And we just kept stacking them one on another.”

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