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How severe weather is affecting homeowners insurance rates

Long periods of drought followed by flooding rains; record snowfall followed by wildfiresā€”it seems like much of the country is experiencing headline-producing weather events. Many of the hurricanes making landfall are stronger and more powerful than ever, causing more destruction on the coastlines and retaining sufficient force to cause more damage farther inland.

These deviations from the norm have led insurance companies to conduct updated analytical assessments about the financial impacts of a changing climate. Because these events are causing more damage over a widespread area, homeowners insurance rates are going up in many parts of the country. In some areas, the risk has become so great that insurers are pausing the writing of new policiesā€”or they are withdrawing from markets altogether.

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Insurers are withdrawing from entire statesā€”not just risky areas

In late May, State Farm, one of the largest homeowners insurance companies in California, announced that it would stop selling policies in the state. In early June, Farmers Insurance Group announced it would stop writing new policies in Florida, a step in following the lead of a number of big insurers that have pulled out of that stateā€™s insurance market completely.

In each of these cases, insurers arenā€™t just avoiding parts of the states deemed to be riskiestā€”they are treating the entire state in each case as too risky to write policies. American International Group (AIG) cut back on writing new policies in California and is now doing the same in a number of other states, including Colorado, Florida, New York, Delaware, and others. Allstate also recently confirmed that it had decided to stop writing new policies in California in 2022, citing increased wildfire risk.

What is driving homeowners insurance companies to withdraw from markets?

The biggest factor driving these decisions is damaging weather events. The American Property and Casualty Insurance Association estimates that insured losses from natural disasters in the three years spanning 2020-2022 total some $275 billion. Insurance carriers are worried not just about the losses but also about the overall increase in these events.

The National Oceanic and Atmospheric Administration (NOAA) tracks ā€œbillion dollarā€ events, and since 1980 there have been 357 weather and climate disasters that reach this level, an average of just over eight events per year. The pace is increasing. Looking at the last five years, the average annual rate of weather events causing $1 billion in damage or greater is 18 events per year. There is no question that expensive, damaging weather events are becoming more frequent.

More frequent storms mean that insurers cannot count on a few years of quiet or low activity during which they can recoup losses. When storms cause extensive damage year after year, thereā€™s a risk that some insurance companies could become insolvent.

Wildfires, floods, and hurricanes cause destruction over large areas, leading to big losses for insurers. An additional factor is rebuilding costs are also climbing. Rapid increases in wages and materials ā€”and combined, itā€™s too much risk for carriers.

Although the risks posed by increasingly damaging weather are the primary reason behind these changes, itā€™s not the only reason insurance companies are pulling out of certain state markets.

State insurance regulatory environments are increasingly challenging

Insurance is regulated at the state level, and in a number of states, the regulatory environment is producing its own challenges. For example, regulators in California limit the amounts by which insurers can raise rates. Over time, this has the effect of artificially suppressing premium rates. At the most basic level, homeowners in California have been paying such low rates that insurers are unable to cover the costs of their policies.

In Florida, hurricanes are just one part of a complex and expensive insurance environment. Florida homeowners are paying well above the national average rate for homeowners insurance, about $6,000 a year. The national average is $1,700 a year. These cost increases are too much for some homeowners to handle, so the stateā€™s insurance pool of last resortā€”Citizens Property Insuranceā€”is now the stateā€™s largest insurer. This state-backed program is designed to extend coverage to homeowners who cannot get insurance from private, or who cannot afford it at the rates they are quoted.

It shouldnā€™t come as a surprise that Floridaā€™s weather losses are a factor. Hurricane Ian, a Category 5 storm that hit Florida in September 2022 is the costliest storm in Florida history, causing more than $113 billion in damage, with insurers estimating it to be a $60 billion insured loss event. But itā€™s the strength of storms like Ian that is concerning to risk analysts. Strong storms are far more likely to sustain hurricane-force winds well beyond the coastline, leaving homes and structures further inland susceptible to damage.

A changing climate is impacting insurance

Homeowners in some states like California, Florida, Texas, Louisiana, and Colorado are already seeing dramatic changes in the insurance market, which is being reflected in their homeowners insurance premiums. While these states are the hardest hit right now, the damage climate change is causing will gradually have an impact on homeowners everywhere.

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I live in a hard-to-insure area and my rates are rising- what can I do about it?

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