Climate risk is rising. It calls for a rethinking of home insurance coverage

Climate change is increasing the intensity and severity of natural disasters. It’s resulting in calls to reimagine the costs of homeowners insurance (Image generated by AI in Midjourney)

As the planet warms and extreme weather intensifies, the rising cost of homeowners insurance is stopping real estate deals in their tracks. In just the past two months, two major hurricanes battered Florida, inflicting physical and financial damage that is projected to exceed $100 billion.

Not long ago, homeowners insurance was a minor concern for most homebuyers, real estate agents and mortgage originators. Now, soaring premiums demand more careful review and sticker shock is prompting buyers to walk away from deals, especially in states like Florida and Texas.

According to reporting from The New York Times — which included data from Benjamin Keys, a professor of real estate at the University of Pennsylvania’s Wharton School, and Philip Mulder, a professor at the University of Wisconsin School of Business — the typical American household in 2023 paid about $500 in insurance premiums for every $100,000 of home value, or 0.5%. Their study included data across more than 9,000 ZIP codes.

In California, where more than 7,000 wildfires occurred last year, the typical homeowner in many ZIP codes paid premiums as low as 0.05% of home value, according to the Times. By contrast, in parts of Alabama, Oklahoma, Louisiana and Texas, the average homeowner paid premiums of more than 2% of local home values.

Impacts to mortgage credit

Banks, insurers and regulators have long acknowledged that climate risks could threaten mortgage borrowers’ creditworthiness. Extreme weather can destroy mortgage collateral and disrupt businesses, straining a borrower’s ability to keep up with payments.

For homeowners with conventional loans backed by Fannie Mae and Freddie Mac, insurance at replacement cost is mandatory, but flood insurance is only required in designated flood zones. This creates imbalances as some homeowners are overinsured and pay high premiums, while high-risk areas — especially those facing new climate threats — often lack adequate coverage as insurers pull out.

The Federal Emergency Management Agency (FEMA) uses outdated flood zone maps, meaning that only about 4% of homeowners currently have flood insurance and many properties are left vulnerable.

Places like Florida are projected to be in debt should another disastrous storm hit. Pete Carroll, executive of public policy and industry relations at CoreLogic, said that he’s heard divided opinions from insurers.

“Some insurers say catastrophe risk is part of the business, part of the job. Others say homeowners insurance wasn’t designed around catastrophe risk — it was designed around idiosyncratic storms or trees falling on roofs. It was not a whole inland flooding challenge where the sewage backed up into a whole community of homes,” Carroll told HousingWire.

That’s why some argue that flood insurance and home insurance reform are needed.

“I’m definitely noticing Congress taking a greater interest in reforming the National Flood Insurance Program (NFIP), given that we’re seeing not only repeat disaster supplementals that have to get written for uninsured losses, but also just the usage of NFIP. And it’s running up, bumping up against its cap and its borrowing authority,” Carroll added.

“So much of the system is designed around mopping up after the fact rather than thinking if we just could spend more on mitigation, building more public-private partnerships at the community level …. giving homeowners more options to weatherize and climate-proof their homes, or natural disaster-proof their homes.”

Resources stretched thin

Danny Thompson, vice president and co-owner of San Antonio-based Goosehead Insurance Sexton-Thompson Agency, said that he has felt the burn from the rising costs of premiums. The owner of a ranch in Plano, Texas, that was built only four years ago, Thompson said his premium went from $300 a month to more than $500. Extreme weather such as high winds and hailstorms have stretched Thompson’s wallet.

“Rates have gone up, in some cases 22% to 23%,” Thompson told HousingWire. “The reality is, in some cases, it’s doubled and tripled.”

Thompson noted that this issue began with pandemic-fueled supply chain delays. “When a house burns down, it usually takes six months to rebuild,” he explained. “But during the pandemic, materials took three months, labor was backed up and prices went up.”

As an example, he shared a case in which a condominium that burned down in 2021 took 13 months to rebuild, increasing the insurance payout due to loss of use.

Supply chain issues have stretched insurance carriers thin. As high rates deter buyers, insurers have become choosier about which homes and ZIP codes they’ll cover.

“Insurance carriers are getting more granular in their rating and looking at everything: ages of roofs, proximity to fire lines and fire departments, and they’re rating those differently,” Thompson said.

He recounted a case where a buyer received a quote of $1,300 to $1,500 per year for a home. He eventually chose a different house further from a fire station, which raised the premium to $400 a month. “He couldn’t afford that house and was a week out from closing,” Thompson said.

Thompson describes himself as an optimist and thinks that insurance rates will edge down in the future.

“It’s the new normal. We did get some notice that rates are dropping, but they’ve gone up so much that it doesn’t feel like a drop. But they have to keep rates up to be profitable,” he acknowledged. “If companies leave Texas altogether, it puts more pressure on everyone else to insure risky homes.”

Meanwhile, out West …

The pressure is on in other areas of the country too. Paul Scalone, a San Diego real estate and insurance agent, said he’s witnessed first-time homebuyers take a hard hit.

“I think that demographic is more sensitive to pricing changes than some of the more well-established, high net worth buyers,” Scalone said. “A home’s average cost in San Diego is just over or under a million dollars, give or take. You have interest rates that are almost 7%, so you’re looking at an average payment of $7,000 a month. Then you’re adding your taxes on that purchase price now, your insurance on top of that.”

Scalone has been an agent since 2019 and opened his own insurance company, Dignified. Insurance Services, in March. He said he hasn’t lost any deals to high or unexpected premiums, which he credits to education.

“A lot of the lending professionals that I work with closely, I’ve done a good job of educating them,“ he said. “They’re starting to calculate their estimated insurance payments higher than they were a year or two years ago.

“That being said, if we’re looking at a single-family home back in 2019 — let’s say, 1,500 square feet in San Diego — it’s going to cost you $1,300 a year. Now, fast forward to 2024, almost 2025, that same house is going to cost between $2,100 and $2,500 a year,” Scalone said.