DISASTER-INSURANCE CRISISAmericans Face an Insurability Crisis as Climate Change Worsens Disasters – a Look at How Insurance Companies Set Rates and Coverage
When home insurance averages $2,377 a year nationally, and $11,000 per year in Florida, this is a blow to many people. If affordability and relevance of insurance continue to degrade, real estate prices will start to decline in exposed locations. This will be the most tangible sign that climate change is driving an insurability crisis that disrupts wider financial stability.
Home insurance rates are rising in the United States, not only in Florida, which saw tens of billions of dollars in losses from hurricanes Helene and Milton, but across the country.
According to S&P Global Market Intelligence, homeowners insurance increased an average of 11.3% nationwide in 2023, with some states, including Texas, Arizona and Utah, seeing nearly double that increase. Some analysts predict an average increase of about 6% in 2024.
These increases are driven by a potent mix of rising insurance payouts coupled with rising costs of construction as people build increasingly expensive homes and other assets in harm’s way.
When home insurance averages $2,377 a year nationally, and $11,000 per year in Florida, this is a blow to many people. Despite these rising rates, Jacques de Vaucleroy, chairman of the board of reinsurance giant Swiss Re, believes U.S. insurance is still priced too low to fully cover the risks.
It isn’t just that premiums are changing. Insurers now often reduce coverage limits, cap payouts, increase deductibles and impose new conditions or even exclusions on some common perils, such as protection for wind, hail or water damage. Some require certain preventive measures or apply risk-based pricing – charging more for homes in flood plains, wildfire-prone zones, or coastal areas at risk of hurricanes.
Homeowners watching their prices rise faster than inflation might think something sinister is at play. Insurance companies are facing rapidly evolving risks, however, and trying to price their policies low enough to remain competitive but high enough to cover future payouts and remain solvent in a stormier climate. This is not an easy task. In 2021 and 2022, seven property insurers filed for bankruptcy in Florida alone. In 2023, insurers lost money on homeowners coverage in 18 states.
But these changes are raising alarm bells. Some industry insiders worry that insurance may be losing its relevance and value – real or perceived – for policyholders as coverage shrinks, premiums rise and exclusions increase.
How Insurers Assess Risk
Insurance companies use complex models to estimate the likelihood of current risks based on past events. They aggregate historical data – such as event frequency, scale, losses and contributing factors – to calculate price and coverage.
However, the increase in disasters makes the past an unreliable measure. What was once considered a 100-year event may now be better understood as a 30- or 50-year event in some locations.
