If you’ve been dismayed at being dropped by your homeowner’s insurer or have seen your premiums rise dramatically the past few years, you should know you’re not alone.
While the insurance crisis is especially severe in California, homeowners across the country are seeing their premiums rise as the cost of home repairs and other factors affect claims costs. There are a number of factors impacting homeowner’s insurers nationwide and policyholders are bearing the brunt of these rapid changes.
Besides the cost of rebuilding, more frequent and intense storms, heat and fires are forcing many homeowners to make hard decisions, including selling their homes due to unaffordable insurance premiums. Many homeowner’s insurers are also in a jam after suffering years of higher-than-expected claims, resulting in billions of dollars in losses.
A convergence of events
There are a number of factors contributing to the mess.
Climate change — The main factor that’s hurting the insurance market is climate change and states that are most at risk, like California, Florida and Louisiana, are now in full-blown crises. Nearly 45% of US homes — or $22 trillion worth of property — face at least one type of severe or extreme climate risk, including:
- Flood,
- Wind,
- Wildfire,
- Hurricane,
- Tornado, and
- Derecho
Higher replacement costs — Rebuilding costs are increasing; CBRE has estimated that construction costs rose 14.1% in 2023. It’s estimated the cost of rebuilding a home has risen 36% between 2019 and 2023. Higher building materials costs and labor shortages are driving those increases.
Higher reinsurance costs — Insurance companies buy their own coverage called reinsurance, which kicks in when claims reach a certain level. Reinsurance typically applies to large loss events. With increasingly erratic weather worldwide and large losses from events like earthquakes and civil unrest, reinsurance premiums soared by as much as 50% early this year.
Also, some reinsurers are refusing to cover carriers writing business in certain states or geographical areas, forcing primary insurers to cover that extra risk themselves.
Fallout is far and wide
A report by the New York Times found that the insurance industry lost money on homeowner’s insurance coverage in 18 states last year.
Home insurance rates jumped by 34% from 2018 to 2023 on average nationwide, going as high as 60% in certain places, according to Realtor.com.
While people who live in areas susceptible to natural catastrophes are in the firing line, the crisis is even affecting homeowners in areas that aren’t. Take Iowa, for example, where several carriers have pulled out of the market and dropped tens of thousands of policyholders this year alone.
Some carriers have also ceased writing business in places like Minnesota, Indiana and Ohio, and others have raised their criteria for underwriting, like not covering homes over 25 years old or those with roofs older than 10 years, or for homeowners who have filed claims in the last three years.
In some places, they are raising rates by 50% or more. Homeowners who have been unfortunate enough to file a claim, are often dropped by their insurer and finding new coverage can be a nerve-wracking experience.
Homeowners have raised rates in all states, and some have stopped writing policies in high-risk areas, leaving few options for coverage. Many homeowners who can’t get coverage are forced to go to their state’s market of last resort, or FAIR plan, which can be expensive and sometimes provides less coverage than a typical homeowner’s policy.
What’s next
Homeowners in California and the rest of the country are really at the mercy of insurers at this point.
Regulators and legislators are scrambling to come up with solutions. A new plan that’s taking shape in California seems to be gaining traction and even has the backing of some of the country’s largest home insurers.
Under a plan floated by the state insurance commissioner, insurers will commit to writing more policies in areas with high wildfire risks in return for being allowed to use catastrophe modeling to project future losses when filing rate increases with the Department of Insurance.