Climate Change: Insurance Cost and Availability

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.

In states like Louisiana, hurricanes such as Laura and Ida have severely impacted the insurance market, reminiscent of the aftermath of Hurricane Katrina. Flood insurance, overseen by FEMA, is facing significant challenges, with premiums expected to double for many policyholders under FEMA's new rating system.

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.

Insurance Cost and Availability

Climate change is profoundly impacting homeowners' and flood insurance costs and availability in several ways:

  1. Increased Frequency and Severity of Natural Disasters: Climate change is leading to more frequent and severe weather events such as hurricanes, floods, wildfires, and storms. These events result in higher insurance payouts due to increased property damage, leading insurance companies to raise premiums to cover their costs.
  2. Rising Sea Levels: As sea levels rise due to climate change, coastal areas become more prone to flooding and storm surges. This increased risk of flood damage prompts insurance companies to adjust their pricing models, often resulting in higher premiums for properties in flood-prone zones.
  3. Changing Risk Assessment: Insurers are reassessing risk models to account for the changing climate conditions. Areas once considered low-risk may now be reclassified as high-risk due to increased vulnerability to weather-related events. As a result, homeowners in these areas may face higher insurance premiums or even difficulty obtaining coverage.
  4. Reduced Availability of Coverage: In regions heavily impacted by climate change-induced disasters, insurance companies may reduce or withdraw coverage altogether. This can leave homeowners in high-risk areas struggling to find affordable insurance options, particularly for flood insurance.
  5. Government Intervention: Government-backed flood insurance programs, such as the National Flood Insurance Program (NFIP) in the United States, face financial strain due to increased claims resulting from climate-related disasters. This may lead to reforms in insurance programs, such as adjustments to premium rates or eligibility criteria, impacting homeowners' access to affordable coverage.

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.

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