The cost of homeowners insurance has seen a significant increase between May 2022 and May 2023, with prices rising by an average of 21% at the time of renewal. This surge in prices can be attributed to the rise in catastrophic severe weather events, according to experts. As insurers grapple with higher costs, they pass on the burden to consumers through higher premiums. The rate of price hikes is not expected to slow down, posing a challenge for homeowners looking to renew their policies.
Carlos Martín, the director of the Remodeling Futures program at the Joint Center for Housing Studies of Harvard University, highlights the shifting risk landscape that properties are exposed to. With evolving hazards and increasing confusion among both homeowners and insurers, pricing policies accurately has become a daunting task. The levels of risk associated with climate change are constantly in flux, making it difficult to gauge the impact on insurance premiums.
While the spike in home insurance premiums may seem like a recent phenomenon, data shows that the average premium increased from $1,034 to $1,411 between 2012 and 2021. Kenneth Klein, a professor at California Western School of Law, mentions that some annual increases during this period were more significant than others. The unpredictability of climate change introduces the potential for economic losses, as insurers struggle to adjust premiums based on past events like storm damage.
Insurers face the challenge of adapting to the impacts of climate change on weather-related risks. With minimal data available and limited reporting on individual premiums, pricing policies in response to severe weather events remains a complex task. Scott Shapiro, KPMG U.S. insurance sector leader, emphasizes the importance of using weather-related loss data to inform premium rates, highlighting the uncertainty of predicting future losses based on historical data.
For homeowners residing in high-risk areas prone to floods or fires, the availability of affordable home insurance options may be limited. Some insurance companies, like State Farm and Allstate, have stopped accepting new applications for certain policies in areas with heightened risks. This leaves homeowners with few alternatives, as insurers prioritize profitability within legal and regulatory constraints.
State-run insurance programs, such as Citizens’ Property Insurance in Florida and California’s FAIR plan, serve as a last resort for homeowners unable to secure coverage in the private market. While these programs offer some protection, they may not always provide the same level of coverage as private insurers. Klein points out the differences in actuarial principles between state-run programs and private insurers, highlighting potential shortcomings in coverage quality for homeowners.
The rising cost of home insurance presents a significant financial burden for homeowners, especially in the face of increasing severe weather events. Insurers are grappling with the challenge of accurately pricing policies in response to climate change, while homeowners in high-risk areas may face limited and costly insurance options. With the evolving risk landscape and uncertainties surrounding future weather-related losses, finding affordable and comprehensive home insurance coverage remains a pressing issue for many individuals.