By Daniel Brouse
March 22, 2024
A significant factor contributing to both increased costs and decreased availability of homeowners insurance is climate change. The surge in insurance costs is primarily driven by the unprecedented number of climate-related disasters. States like California, Louisiana, and Florida now heavily rely on government aid to manage the financial burdens associated with residential property insurance.
In 2023, the United States faced 28 separate weather and climate disasters, each costing at least 1 billion dollars, marking it as the year with the highest number of billion-dollar disasters on record. Single extreme weather events are also becoming more costly. Hurricane Ida alone caused an estimated $75 billion in damages, making it the costliest disaster of 2021. Insurers paid out a staggering $99 billion in claims related to natural disasters in 2022, leading to a substantial 21 percent increase in premiums from May 2022 to May 2023.
The rising premiums aren't just a matter of cost; it's also becoming increasingly difficult to find coverage, especially in disaster-prone areas. Major insurers are reconsidering where they underwrite policies, with some, like State Farm General Insurance Company, halting the acceptance of new applications for property insurance due to rapidly growing catastrophe exposure.
Government officials have acknowledged the link between the availability of homeowners insurance and climate change. Ohio Senator Sherrod Brown and US Treasury Secretary Janet Yellen have both highlighted the decline in insurance affordability and availability due to more frequent and severe natural disasters.
Even regions traditionally less prone to disasters are experiencing insurance challenges. The reinsurance market, influenced by events worldwide, impacts rates offered by insurers, subsequently increasing costs for homeowners. FEMA is actively seeking recommendations to modify flood risk assessment procedures to better reflect the evolving climate challenges. Their efforts aim to equip communities with better tools to handle the increasing risks associated with climate change.
The impact of climate change on insurance rates and coverage illustrates the growing and unsustainable costs of climate-related disasters. In high-vulnerability areas like coastal properties and states such as Florida, Louisiana, Mississippi, Georgia, Oklahoma, Texas, Arizona, Arkansas, Alabama, New Mexico, Nevada, Colorado, California, and Washington, the convergence of rising insurance premiums, frequent natural disasters, and declining property values creates a compounding crisis. For example, in Florida, Louisiana, and California, taxpayers already subsidize homeowner insurance premiums due to the inability of private insurers to bear the mounting risks alone. In Florida, the state-owned insurer, Citizens Property Insurance Corporation, has become the largest insurer, a testament to the scale of market withdrawal by private companies.
As climate-related disasters -- such as hurricanes, wildfires, and floods -- increase in both frequency and intensity, the economic strain on both taxpayers and insurance systems is becoming unsustainable. Florida's reliance on taxpayer-backed insurance, for instance, exposes state finances to significant risk, particularly after events like Hurricane Ian in 2022, which caused catastrophic losses. Taxpayer-funded bailouts of insurance systems and rising deficits could divert resources from other critical areas, further exacerbating economic instability.
The real estate market in high-risk areas is already experiencing significant challenges. As insurance becomes increasingly difficult to obtain or afford, property values are declining, leaving homeowners facing the growing risk of being unable to sell or refinance. While liquidating properties in these areas may help mitigate individual financial risks, widespread devaluation could have far-reaching economic consequences, potentially leading to localized housing market collapses.
In 2024, our model projected that 25% of U.S. real estate would become uninsurable within the next decade. By 2025, insurers had already canceled at least 10% of policies in the most vulnerable zip codes. "We are marching towards an uninsurable future," warned David Jones, former insurance commissioner of California. "The climate crisis is driving an insurance crisis. This is the first comprehensive government report (Analyses of U.S. Homeowners Insurance Markets, 2018-2022: Climate-Related Risks and Other Factors) showing that in areas experiencing more severe weather events due to climate change, we are seeing greater insurance unavailability, rising premiums, and escalating insurance losses."
Insurance costs across sectors -- including crop insurance, property insurance, real estate policies, and transportation coverage -- are projected to rise annually as risk assessments become more climate-focused. In agriculture, extreme weather events such as droughts and floods are already inflating premiums for crop insurance, threatening the viability of farms. Similarly, transportation insurers face rising costs due to infrastructure damage from climate-related disasters, such as washed-out roads and disrupted supply chains.
To address these challenges, systemic reforms are necessary. This includes redesigning insurance models to incorporate climate resilience, investing in mitigation measures like improved infrastructure and flood defenses, and implementing policies that discourage development in high-risk zones. Without such changes, the cycle of rising costs and escalating risks will continue to burden individuals, businesses, and governments.
Climate change is profoundly impacting homeowners' and flood insurance costs and availability in several ways:
Overall, climate change is exacerbating the risks and costs associated with homeowners' and flood insurance, posing significant challenges for individuals and communities vulnerable to its effects.
* Our climate model uses chaos theory in an attempt to adequately account for humans and forecasts a global average temperature increase of 9 degrees Celsius above pre-industrial levels. Everybody has the responsibility not to pollute. There are plenty of things you can do to help save the planet. Stop using fossil fuels. Consume less. Love more. Here is a list of additional actions you can take.