American homeowners living in vulnerable regions are facing a new reality when it comes to home insurance. Climate change is causing more frequent and severe weather events, leading to greater risks and potentially higher damage claims. As a result, property insurance is disappearing from the most dangerous areas in the country, while premiums in other regions have become so expensive that some homeowners are choosing to go without coverage altogether.
According to Benjamin Keys, an economist and professor at the University of Pennsylvania’s Wharton School, the insurance market has been significantly impacted by the increased frequency and severity of disasters over the past decade. Events such as wildfires in California and major hurricanes have wiped out insurers‘ profits, forcing them to reassess their risk exposure.
The number of catastrophic disasters in the United States has been on the rise, with a total of 19 billion-dollar events already occurring this year. These disasters include tropical cyclones, severe storms, wildfires, and winter storms, causing nearly $50 billion in damage. Hurricanes like Beryl and Debby have left a trail of destruction across the country, with damages reaching up to $32 billion and $12.3 billion, respectively.
One of the driving factors behind the increase in disasters is climate change, which is driving the frequency and severity of extreme weather events. Additionally, more Americans are living in high-risk areas, further exposing themselves to disaster risk. This concentration of risk in vulnerable regions is putting pressure on insurance companies to pass on costs to consumers, especially in less regulated states.
As a result, insurance premiums have skyrocketed in some parts of the country, with Florida homeowners paying an average annual premium of $10,996 in 2023—the highest in the nation. The cost of reinsurance, which provides coverage for insurers, has also doubled in recent years, further increasing costs for insurance companies and consumers.
The rising costs of materials, labor, and legal expenses have also contributed to the surge in insurance premiums. Insurers are struggling to keep up with the growing demand for coverage in high-risk areas, leading to a potential tipping point in the home insurance sector. States like Florida have already reached this tipping point, with the state-backed insurer of last resort, Citizens, becoming the largest insurer in the state.
While some states have yet to reach a tipping point, others are already facing challenges in providing affordable coverage to homeowners. Insurers and regulators will need to work together to reform the sector and address the core issue of reducing carbon emissions to mitigate the impact of climate change. By adapting to the new climate reality and promoting innovation, the home insurance sector can better protect homeowners and communities from the growing risks posed by extreme weather events.