The task of obtaining homeowners insurance is increasingly challenging and costly.

The challenge of obtaining homeowners insurance is intensifying, marked by escalating costs and growing difficulty in securing coverage. This situation shows no immediate signs of improvement. The primary contributors to this issue are climate change, heightened expenses for rebuilding or carrying out repairs, and a notable surge in reinsurance premiums, which insurers employ to manage their risks.

Prominent insurance providers have essentially withdrawn from the Florida market, leading homeowners to face premiums nearly quadruple the rates seen elsewhere in the nation. The vulnerability to hurricanes is a central concern in Florida, with last year’s Hurricane Ian ranking as the most costly storm ever experienced by the state. However, Florida is not alone in grappling with insurers retreating due to natural disasters.

State Farm and Allstate, two of the largest national insurers, have ceased underwriting new homeowners policies in California. This decision stems partially from the augmented risk homes face from wildfires. Beyond climate change, insurance companies highlight the mounting expense of replacing residences, attributing it to the inflation affecting construction materials and labor. These companies also attribute the situation to premium limits imposed in certain states, including California.

Allstate’s statement elucidates its autumnal resolution to discontinue issuing new policies: “The expense of insuring new home customers in California surpasses the premiums they would normally pay, a consequence of wildfires, elevated home repair costs, and heightened reinsurance premiums.”

Escalating expenses impacting both insurance providers and homeowners.

According to industry reports, the insurance sector has witnessed a substantial 55% surge in rebuilding and replacement costs between the years 2019 and 2022. This upward trajectory is mirrored in the realm of reinsurance, a type of insurance employed by insurers to mitigate their own risks, which has experienced an escalation ranging from 30% to 40%. This comes after a stretch of years marked by losses within the industry. Matthew Carletti, an astute analyst within the insurance sector representing JMP Securities, has illuminated this trend.

Carletti emphasizes that the past half-decade has not been kind to reinsurers, who have found themselves consistently operating in the red. This has led to a point of reckoning, where the accumulation of losses has spurred a critical threshold. The soaring frequency of natural calamities serves as a pivotal catalyst driving insurers to strategically withdraw from certain markets. In tandem, reinsurers have opted to recalibrate their pricing models, resulting in a ripple effect that ultimately impacts the premiums borne by the general populace.

While the overall national landscape of insurance premiums has not experienced a substantial surge – registering a mere 1.6% increase over the past year, as indicated by the Consumer Price Index, a prominent metric for gauging inflation – it is important to note that localized regions grappling with insurance scarcity have witnessed double-digit rate hikes. Notably, prominent entities like Allstate and State Farm have begun retracting from underwriting fresh policies in California. The rationale behind this decision is underscored by the series of devastating wildfires exacerbated by climate change that have plagued the state.

Former insurance commissioner of California, Dave Jones, weighs in on this phenomenon, asserting that the actions of insurers are grounded in rationality, responding astutely to mounting losses and escalating risks. The decision to abstain from underwriting new insurance policies is a calculated one, driven by the formidable risk landscape that renders profitability a challenging endeavor. This trend, Jones notes, has been unfolding over a considerable span of time, reflecting the evolving dynamics of the insurance landscape.

The proliferation of locations deemed uninsurable.

The expansion of uninsurable areas is a prevailing trend across all 50 states, according to experts. This phenomenon is particularly pronounced in California, Florida, and Louisiana, states that frequently experience larger and more frequent disasters such as hurricanes and wildfires.

While distinct factors contribute to this trend in each of the three states, a common consequence is emerging: a growing number of individuals are being compelled to seek coverage from state-backed insurers of last resort. These options typically entail higher premiums for more limited coverage. Notably, industry giants Allstate and State Farm have refrained from issuing new policies, while smaller insurers in states like Louisiana and Florida have faced insolvency, ultimately forcing policyholders to seek alternative insurance solutions or go uninsured altogether.

Illustratively, Louisiana’s homeowners insurance landscape saw a notable 17% of policyholders experience policy cancellations in the previous year, as reported by Louisiana State University’s annual review. Moreover, a significant majority of policyholders indicated that homeowners and flood insurance expenses in Louisiana outweigh those of other states.

An increasing number of states are now contemplating the establishment of state-backed insurance providers, designed to act as the ultimate recourse for homeowners unable to secure coverage elsewhere. However, in Florida, Citizens Property Insurance – the state’s insurance provider for two decades – has witnessed an unprecedented surge of approximately 50% in policy adoption over the past year alone, now accounting for 1.3 million policies. This represents 16% of the market, surpassing the policies underwritten by any national insurer in the state.

Matthew Carletti, an industry expert, proposes that the withdrawal of major insurers from significant markets, akin to the actions witnessed in Florida, could potentially extend to other states, particularly those imposing restrictions on the permissible percentage increase in premium rates. He underscores the fact that insurers have the autonomy to selectively issue policies in states where they anticipate a favorable return on their investment.

In this regard, Carletti emphasizes the potential lessons to be gleaned from Florida’s experience, highlighting the strategic nature of insurers’ policy issuance decisions and the influence of capital returns on their choices. As the landscape evolves, it becomes evident that insurers’ decisions are guided by economic rationale rather than an obligation to extend coverage across all states.

Wildfires are a growing risk

In the year 2023, the occurrence of wildfires in California has demonstrated a decrease in comparison to the corresponding period of the previous year. As of now, there have been 1,200 reported wildfires, marking approximately fifty percent of the total recorded during the initial five months of 2022.

Furthermore, a discernible downward trend in wildfire incidents has manifested over the past two years, following the peak wildfire activity witnessed in 2020. During this record-breaking year, a staggering 8,648 wildfires led to the destruction of over 11,000 structures within the state. Subsequently, in 2022, the number of wildfires diminished to around 7,500, resulting in the destruction of a comparatively modest 772 structures.

However, the potential for an upsurge in wildfires remains a distinct possibility later in the current year. Recent substantial precipitation has contributed to the proliferation of grasses and other vegetation, which could subsequently dry out, serving as combustible material for future fires.

Looking at the broader picture, the escalating global temperatures pose an elevated risk of heightened wildfire incidents in the years ahead. A comprehensive analysis conducted by the UN Environment Programme forecasts an increase of up to 14% in extreme wildfire occurrences by the year 2030. This figure is anticipated to surge to 30% by 2050, highlighting the projected trajectory of this escalating concern.

As Frank Frievalt concludes his extensive four-decade-long tenure as a fire chief in both California and Nevada, the recurrent megafires that ravage the region have begun to blur together in his memory. Frievalt reflects on the evolving perspective towards these catastrophic events, noting the transition from distinctive career-defining fires to a growing continuum of increasingly severe incidents. The progression from individual instances to collective conflagrations, exemplified by events such as the 2018 Paradise, California fire, serves as a testament to the escalating intensity of the wildfire landscape. Source: https://www.cnn.com/2023/06/19/business/homeowners-insurance-more-expensive-climate/index.html