This article is republished from The Conversation, an independent and nonprofit source of news, analysis and commentary from academic experts. Andrew J. Hoffman is Professor of Management & Organizations, Environment & Sustainability, and Sustainable Enterprise, University of Michigan.
Millions of Americans have been watching with growing alarm as their homeowners insurance premiums rise and their coverage shrinks. Nationwide, between 2017 and 2023, and they across much of the country.
To add insult to injury, those rates go even higher if you make a claim 鈥� .
Why is this happening?
There are a few reasons, but a common thread: , and insurers are responding to rising damage claims. The losses are exacerbated by more frequent extreme weather disasters , rising construction costs and homeowners experiencing damage that was once more rare.
Hurricane Ian, supercharged by warm water in the Gulf of Mexico, hit Florida as a Category 4 hurricane in October 2022 and caused an estimated $112.9 billion in damage. Parts of the U.S. have been seeing , , , and heat waves that . In Houston, what used to be a 100-year disaster, such as Hurricane Harvey in 2017, is now a , at First Street Foundation suggest. In addition, into and at risk from storms and wildfires.
, few insurance companies had a comprehensive strategy for addressing climate risk as a core business issue. Today, insurance companies have no choice but to factor climate change into their policy models.
Rising damage costs, higher premiums
There鈥檚 a saying that to get someone to pay attention to climate change, put a price on it. Rising insurance costs are doing just that.
Increasing lead , and that means insurance companies have had to make higher payouts. In turn, they have been raising their prices and changing their coverage in order to remain solvent. That raises the costs for homeowners and for everyone else.
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The importance of insurance to the economy cannot be understated. You generally cannot get a mortgage or even drive a car, build an office building or enter into contracts without insurance to protect against the inherent risks. Because insurance is so tightly woven into economies, state agencies review insurance companies鈥� proposals to increase premiums or reduce coverage.
The insurance companies are not making political statements with the increases. They are looking at the numbers, calculating risk and pricing it accordingly. And the numbers are concerning.
The arithmetic of climate risk
Insurance companies use data from past disasters and complex models to calculate expected future payouts. Then they price their policies to cover those expected costs. In doing so, they have to balance three concerns: keeping rates low enough to remain competitive, setting rates high enough to cover payouts and not running afoul of insurance regulators.
But climate change is disrupting those risk models. As global temperatures rise, from fossil fuel use and other human activities, past is no longer prologue: What happened over the past 10 to 20 years is less predictive of what will happen in the next 10 to 20 years.
The number of in the U.S. each year offers a clear example. The average rose from 3.3 per year in the 1980s to 18.3 per year in the 10-year period ending in 2024, with all years adjusted for inflation.
With that more than fivefold increase in billion-dollar disasters came rising insurance costs in the Southeast because of hurricanes and extreme rainfall, in the West because of wildfires, and in the Midwest because of wind, hail and flood damage.
Hurricanes tend to be the most damaging single events. They caused more than US$692 billion in property damage in the U.S. . But severe hail and windstorms, including tornadoes, are also costly; together, those on the billion-dollar disaster list did more than $246 billion in property damage over the same period.
As insurance companies adjust to the uncertainty, they may run a loss in one segment, such as homeowners insurance, but recoup their losses in other segments, such as auto or commercial insurance. But that cannot be sustained over the long term, and companies can be caught by unexpected events. California鈥檚 unprecedented wildfires in 2017 and 2018 for insurance companies in that state.
To balance their risk, insurance companies often turn to reinsurance companies; in effect, insurance companies that insure insurance companies. But reinsurers have also been to cover their costs. Property reinsurance alone increased by . Insurers are passing those costs to their policyholders.
What this means for your homeowners policy
Not only are homeowners insurance premiums going up, coverage is shrinking. In some cases, insurers are reducing or dropping coverage for items such as metal trim, doors and roof repair, increasing deductibles for risks such as hail and fire damage, or refusing to pay full replacement costs for things such as older roofs.
Some insurances companies are simply withdrawing from markets altogether, canceling existing policies or refusing to write new ones when risks become too uncertain or regulators do not approve their rate increases to cover costs. In recent years, pulled back from California鈥檚 homeowner market, and pulled back from the Florida market, which is seeing some of the highest insurance rates in the country.
In some cases, insurers are restricting coverage. Roof repairs, like these in Fort Myers Beach, Fla., after Hurricane Ian, can be expensive and widespread after windstorms. State-run 鈥渋nsurers of last resort,鈥� which can provide coverage for people who can鈥檛 get coverage from private companies, . Taxpayers in states such as and have been forced to bail out their state insurers. And the National Flood Insurance Program has raised its premiums, leading to sue to stop them.
About have given up on insurance altogether, leaving an estimated , including in high-risk states such as Florida.
No, insurance costs aren鈥檛 done rising
According to NOAA data, 2023 was the 鈥渂y far.鈥� And 2024 . This general warming trend and the rise in extreme weather is until greenhouse gas concentrations in the atmosphere are abated.
In the face of such worrying analyses, U.S. homeowners insurance will continue to get more expensive and cover less. And yet, , chairman of the board of reinsurance giant Swiss Re, believes U.S. insurance is still priced too low to fully cover the risk from climate change.
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Climate change is a major factor in the rising cost of insurance. Join us for a special free webinar with experts Andrew Hoffman of the University of Michigan and Melanie Gall of Arizona State University to discuss the arithmetic behind these rising rates, what climate change has to do with it, and what may be coming in your future insurance bills. Wednesday, October 9, 2024, 11:30 a.m. PT/2:30 p.m. ET.
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, Professor of Management & Organizations, Environment & Sustainability, and Sustainable Enterprise,
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