Climate Denial Crock of the Week
with Peter Sinclair
New Report: Climate Might Pop Home Insurance Bubble
September 20, 2023
All are flashing red warnings as insurance rates indicate stress at least in part from climate extremes.
Home insurance costs that have soared in much of the US may get even higher.
Tens of millions of properties around the country are insured at prices that haven’t caught up with the danger of hurricanes, wildfires and floods, according to a new report from the First Street Foundation, a nonprofit that works to define and communicate risks posed by climate change.
First Street estimates that 39 million US homes are insured at artificially suppressed prices compared with the risk they actually face. Of those, nearly 6.8 million homes are covered by state-backed “insurer of last resort” policies.
Until now, state regulations that cap increases in insurance premiums and subsidized insurer-of-last-resort programs have hidden the magnitude of the problem, the report’s authors say. But as the number of disasters and the related damages keep rising, they predict, the insurance market will undergo a major adjustment and rates will surge, popping what the nonprofit calls a climate insurance bubble.
“The over-reliance of property owners on the state-run insurers of last resort is a big flashing sign that standard practices in the insurance market cannot keep up with our current climate reality,” said Matthew Eby, First Street’s executive director.
Eby said that when the market correction happens, it will render millions of homes essentially uninsurable and therefore cause their value to drop.
At the core of the problem is an increase in the severity of disasters exacerbated by climate change and the damage they wreak. Take wildfires: Despite huge increases in federal government spending to contain breakouts, the US acreage burned has gone up steadily and the average number of structures destroyed by these blazes each year since 2009 has more than tripled to over 17,000.
Wildfire risk is particularly bad in California, but insurance prices there are heavily regulated. So if a home that had a premium of $2,000 in 2010 saw it go up 7% a year — the most allowed under state law without a public hearing — the owners would have paid about $4,820 by 2022. But that is about $3,000 less than what would be actuarially sound, First Street says.
Home insurers are insuring less and charging more as they try to claw their way back to profitability after losing money in five of the past six years, analysts and insurance agents say.
“We’re seeing moves to put more of the risk back onto the homeowner, tougher underwriting restrictions and big rate increases,” said Lauren Menuey, a managing director at independent agency
The higher-cost, lower-coverage trend extends well beyond Florida, California and other states prone to hurricanes, floods or wildfires, Menuey added. “I don’t think anywhere is safe from this right now,” she said.
The average US homeowner who receives a insurance non-renewal notice automatically loses a double-digit percentage of the home’s value, according to First Street.
While homeowners in California’s wildland urban interface are seeing big increases now, that foreshadows what millions of other property owners elsewhere will soon face, the report says. Since 2021, for example, the Federal Emergency Management Agency, which oversees the National Flood Insurance Program, has been rolling out new rates that are supposed to reflect the real flood price of flood risk that until now has been heavily subsidized.
That has meant increases in prices for most people in the program. And the adjustments can continue at the rate of 18% a year, up to a cap of $12,000.
Using the First Street Foundation’s various climate risk models, it can be estimated how many properties might be affected by changes in the insurance market. Inthe CONUS, there are approximately 12 million properties this year with insurance risk due to flooding, 23.9 million proper- ties this year with insurance wind risk, and about 4.4 million properties today with insurance risk due to wildfire risk.
There are tens of millions of properties across the US that are just starting to see the impact of climate-adjusted insurance pricing on their cost of homeownership and property valuation. As risk continues to increase, the number of properties and communities faced with these pricing corrections will only grow into the future, resulting in a realization of the existing overvaluation due to unpriced climate risk and the deflation of the growing climate bubble in the housing market.
In the most severe cases ,there are approximately 640k mortgages on properties that are already in delinquent status and are at risk of rising insurance costs, increasing the likelihood of default.
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