How climate change is reshaping US home insurance costs

Insurance premiums had skyrocketed well before this year’s major wildfires in the Los Angeles area.

Now they are set to rise even higher as LA wildfires could be the most expensive flame in US history, analysts say.

JPMorgan and Wells Fargo estimates that insured losses could cost more than $20 billion.

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For California residents, increased frequency and severity of natural disasters directly affected homeowners’ insurance costs.

“In the short term, insurance regulators need to enable risk-based pricing,” said Patrick Deville, vice president of global insurance and pension assessment at Morningstar. “This means there is a high chance that premiums will increase, and the issue of affordability continues, potentially affecting property values, leaving some homeowners uninsured. ”

California’s Department of Insurance recently passed regulations paving the way for higher rates in exchange for increased coverage in areas that are prone to wildfires. In 2024, some state insurance companies hiked 34%, according to the San Francisco Chronicle.

It’s too early to predict how Southern California fires will directly affect revenues, but filing one fire claim could mean a 29% increase in premiums, with two claims giving premiums of 60 It could increase by %. .com.

According to Janet Lewis, director of the Insurance Systems Association and California representative, insurance companies are almost guaranteed to raise premiums to cover costs.

“We have to accept enough money on insurance premiums to pay the claim,” she said.

But even for homeowners outside California, the extreme weather is exacerbated, which means higher insurance rates are ongoing.

I would also like to know about the rest of the country. Is my insurance premiums increasing? According to Lewis, the short answer is no.

“Homeowners and business owners in one state don’t pay premiums based on losses or catastrophes in another state,” she said.

Each state has a department of insurance that regulates fees in the area, so there are protections to prevent that from happening, Lewis said.

Still, premiums are subject to widespread regulation at the state level, but if insurers are unable to adjust fees in highly regulated states, they will increase the fees in unregulated states to cover them. Between insurance fees and risks, according to a 2021 paper by economists at the Harvard Business School, Columbia Business School and the Federal Reserve Committee.”

“Our findings raise questions about the sustainability of current regulatory systems, especially when natural disasters become more frequent or severe,” the author writes.

“Many insurance companies operate nationwide, or at least in multiple states,” said Holden Lewis, Nerdwallet’s mortgage and real estate expert.

“They’re going to make up for their loss somewhere,” Lewis said.

The wildfires sparked Michael Barrett, co-principal at Barrett insurance agency in St. Johnsbury Vermont, where state insurance regulations are slower, said he made many calls from clients asking if premiums would rise. I did. The real answer is that, you can,” he said.

“From an insurance perspective, an increase in natural disasters will have an impact on future insurance,” Barrett said.

Vermont is unimmunized due to recent extreme weather.

“We were incredibly raining with serious floods,” Barrett said. “It’s very concerning because we see reliance on promoted insurance through these events.”

What happened in California highlights what will happen in other parts of the country due to rising climate concerns.

Last year, 27 different natural disasters, from wildfires to winter storms, cost $1 billion each, the National Oceanic and Atmospheric Administration, found.

According to another Realtor.com report, almost half of all US homes currently run the risk of serious or extreme damage due to environmental threats.

According to S&P Global Market Intelligence, home insurance premiums rose 33.8% between 2018 and 2023, and 11.3% in 2023 alone, as weather-related risks are escalating.

A working paper published by the National Economic Research Bureau shows that average premiums have increased significantly between 2020 and 2023, with households exposed to climate-exposed to an annual premium of $700 by 2053. I knew it was going to face it.

According to Bankrate, the average national cost of home insurance is $2,181 per year, with a $300,000 housing limit or an insurance policy of about $182 per month.

What each homeowner pays depends on proximity to cities, states and areas that are prone to flood, earthquake or wildfires, experts say.

However, in general, all of these factors have increased costs across the board, including the effects of extreme weather and the increased costs of repairs or reconstructions.

Reconstruction costs have risen significantly and continue to increase, especially since the pandemic.

“The same house, which could cost $166 per square foot to rebuild, can easily cost $300. That’s if you’re not doing a lot of frills,” Barrett said. .

“When people renew their insurance policies, they may renew the same maximum payment,” said Lewis of Nerdwallet. “Many homeowners don’t even think about it.”

However, repairs with damaged homes are much more expensive, leaving homeowners uninsured and vulnerable to substantial losses.

Lewis advises homeowners to get an updated estimate on whether the home is costly if it is destroyed by a fire or other natural disaster by asking an insurance agent or a local contractor. Masu.

“You want to get insurance for that amount,” he explained.

You also need the right kind of coverage.

For example, a recent report by the Consumer Financial Protection Agency found that hundreds of thousands of homeowners are likely to be insured against the risk of flooding. Homeowner and tenant insurance does not cover flood damage, so that requires separate flood insurance.

According to consumer watchdog, flood risk exposures in the mortgage market are “a wider and geographically distributed than previously understood.”

Specifically, homeowners near inland streams and rivers are unlikely to acquire flood insurance or other sources of funding to recover from floods, and are “at the highest risk of suffering catastrophic losses.” . This report was based on a sample of mortgage applications from 2018-2022.

“Every year I get update notifications and look at the restructuring amounts and encourage contractors to rebuild the average average cost to one square foot,” Lewis said. “People didn’t pay much attention to their insurance, but it’s important to understand if they’re more or less needed. Most people need more.”

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