Consumers renewing their homeowners insurance policies are likely to encounter significant price increases. Between May 2022 and May 2023, home insurance premiums surged an average of 21%, according to Policygenius.
Factors Driving Premium Increases
- Severe Weather Events:
- The rise in premiums is largely attributed to an increase in catastrophic weather events. Insurers are passing higher costs onto consumers as they adjust to the growing frequency and severity of these events.
- Lack of Transparency:
- Insurers do not disclose how climate risk specifically impacts individual premiums, making it challenging to understand how much of the increase is due to climate-related factors.
- Historical Trends:
- From 2012 to 2021, average premiums climbed from $1,034 to $1,411. Some annual increases during this period were more substantial than others.
- Economic Implications:
- Kenneth Klein, a professor at California Western School of Law, notes that climate change introduces “fat-tailed losses,” where storm damage is unpredictable and uneven, complicating insurance pricing.
Industry Challenges and Responses
- Data Limitations:
- Carlos Martín from Harvard’s Joint Center for Housing Studies points out that the lack of comprehensive data and reporting makes it difficult for both homeowners and insurers to navigate pricing adjustments.
- Insurer Withdrawals:
- In high-risk areas, insurers are pulling back. For example, State Farm stopped accepting new applications in California in May 2023, and Allstate paused new policies in the state in November 2022.
- State Programs:
- To address gaps in coverage, state-run programs like Florida’s Citizens’ Property Insurance and California’s FAIR Plan offer last-resort options. However, these programs may not provide the same level of coverage as private insurers.
Impact on Homeownership
- Increased Barriers:
- Rising insurance costs and limited options can create barriers to homeownership, especially since most mortgages require insurance.
- Existing Homeowners’ Struggles:
- Existing homeowners are particularly affected as they compare their current premiums to what they paid when they first purchased their homes.
Scott Shapiro of KPMG highlights that while insurers use data on weather-related losses to set rates, the data is not publicly available, adding to the uncertainty for homeowners.
Overall, the combination of severe weather events and limited data transparency continues to drive up insurance premiums, posing challenges for homeowners across the U.S.
