It's time to add climate costs to your household budget

Inflation is abating, and many economists think prices for most things will settle back into normal ranges within a year or so. But America’s 86 million homeowners face a new form of sticker shock likely to get worse, not better: rising insurance costs largely caused by climate change.

Americans who live in well-known hurricane, tornado, flood, or wildfire zones have long borne the risks of natural disasters. But severe weather risk — and the associated cost — is now spreading to parts of the country that have never had to deal with them before.

“We used to have billion-dollar hurricanes,” said Bob Bunting, CEO of the Climate Adaptation Center and a former lead forecaster for the federal government. “Now we have billion-dollar thunderstorms. There are increased disruptions everywhere, and the general nature of insurance is it’s getting more expensive."

He added, "There is nowhere to hide from this.”

Insurers catching up with outsized losses of the last few years are raising premiums across the country by the maximum amount insurance regulators will allow. If insurers can’t price policies profitably, they reduce or withdraw coverage. Those unwelcome surprises are showing up in people's mailboxes now.

Still coming: falling property values driven by rising premiums and higher ownership costs. In insurance lingo, rising risks that require costlier insurance are “disamenities” that lower property values, the opposite of amenities such as a patio, fireplace, or kitchen island that raise values.

The average cost of insuring a home is $2,230 per year, according to Bankrate. Government data shows that premiums rose by a modest 1.9% per year, on average, from 2014 through 2022. In 2023, however, homeowners insurance premiums jumped by 4.4%. The latest data shows the cost of home insurance rose by 7.9% for the 12-month period ending in May.

There are no climate deniers in the insurance business because the reality of climate change and the data that explains it go straight to the bottom line. For the 10-year period from 1980 through 1989, there were 33 disasters incurring $1 billion or more in the United States, causing a total of $217 billion in damage. From 2014 through 2023, there were 173 billion-dollar disasters, causing more than $1.2 trillion in damage. Those numbers are adjusted for inflation, so that’s an apples-to-apples comparison.

Other factors affect insurance costs, but that fivefold increase in weather disasters is clearly driving the higher bills homeowners are getting. “The No. 1 trend has been the increased number of severe weather events,” said David Blades, associate director at AM Best, a ratings agency focused on the insurance industry. “Even in states like Michigan, Idaho, Iowa, we are seeing a lot more frequency of weather events. Every single area seems to be getting hit.”

This trend seems likely to intensify. There have already been 11 billion-dollar storms in 2024, compared with a record high of 28 for all of last year. This year’s freakish weather includes record-setting rainfall in Southern California, wind that blew out skyscraper windows in Houston, and unprecedented tornadoes in Pittsburgh. Parts of the Atlantic Ocean are at the warmest levels on record, which could fuel an epic hurricane season this year if other conditions align.

Since big insurers rely on huge pools of customers across many states, they’ve traditionally offset payouts for Gulf Coast hurricanes and Tornado Alley twisters with premiums from less risky areas. But that formula doesn’t work anymore.

Data from AM Best shows that during the last five years, insurers have lost money on homeowners insurance, on average, in 17 states. For the five years from 2014 through 2019, insurers lost money in just seven states. When insurers can’t make a profit in a given area, that’s a sure sign they will raise premiums, reduce coverage, or bail out of the market completely. And when insurers leave, that leaves less competition and even higher prices, as Floridians and Californians have learned during the last few years.

The worst state for home insurance losses during the last five years has been Louisiana, not surprising given its low-lying coastal exposure. But the second worst was Iowa, followed by Hawaii, Minnesota, South Dakota, Arkansas, Oregon, Montana, Kentucky, and Colorado. Seven of the 10 worst states for insurer losses during the last five years are neither coastal states nor traditional disaster hotspots.

Hailstorms have pushed up homeowners insurance costs in the Upper Midwest, with rates in Wisconsin up by as much as 35% during the last year. Nick Arnoldy, a broker who owns Marshfield Insurance in Marshfield, Wis., explains to his own customers that insurance pooling means everybody ends up paying something for increasingly costly disasters in more and more places.

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“I frequently get asked, why does a storm in Florida impact my Wisconsin policy?” Arnoldy told Yahoo Finance. He tells people that insurance companies typically buy reinsurance to cover their own risks, and reinsurance rates are up by 50% to 100%. Costlier building materials and a shortage of contractors are other factors. “This is the perfect storm, pun intended,” Arnoldy said. “I’ve been in the business 21 years, and I’ve been told by many seasoned agents that this hard market is the worst in 50 years, maybe in a century.”

The same collision of forces is upending the insurance market in places where people used to take affordable coverage for granted. Like disaster-prone Florida and California, Iowa now has a state-run insurer of last resort offering coverage for people who can’t get it through the traditional market. In Wyoming, some premiums have more than doubled during the last few years. Flooding in Kentucky has helped push average premiums in the low-income state to nearly $3,000, well above the national average.

WEST HILLS, CA-February 8, 2024:Walter Rivas, 42, stands in back of his modular home in West Hills that was damaged as a result of a landslide from all the recent rain. Compounding the situation is the fact that he has no renters insurance because no company would insure him and his family due to their precarious location in a flood and wildfire zone.   (Mel Melcon / Los Angeles Times via Getty Images)
Walter Rivas, 42, stands behind his modular home in West Hills that was damaged due to a landslide from all the recent rain. (Mel Melcon / Los Angeles Times via Getty Images) (Mel Melcon via Getty Images)

Insurers adjust slowly to losses and cost overruns for a couple of reasons. One is that every state regulates insurance rates and they often refuse sharp increases in premiums that might be necessary to turn insurer losses into profits. Another is that insurers forecast weather-related losses and the rates they need to charge based on historical models that aren’t keeping up with the pace of global warming and the complex ways warming affects weather.

That means the upward repricing of homeowners insurance may just be getting started.

The climate research group First Street estimates that more than 32 million residential properties in the United States, about 22% of the total, are underinsured for the growing risk they face from floods, winds, or wildfires. If that analysis is correct, the cost of insuring those properties can only go up, which means the cost of owning those homes will also go up. Property values, in turn, will go down as fewer people can afford those properties.

“People are seeing a huge increase in insurance costs because the market is correcting for 50 years of climate debt we’ve built up,” said Jeremy Porter, head of climate implications for First Street. Porter contributed to research published last year in Nature that found that US properties exposed to flood risk alone are overvalued by between $121 billion and $237 billion because they’re underinsured, with the market yet to price the risk properly.

Regions vulnerable to falling property values on account of this phenomenon include Appalachia and northern New England, where prices could fall 10% to 12% as repricing occurs. Municipalities in affected areas could struggle with falling property tax revenue.

Lior Sela owns a home and four rental properties in Myrtle Beach, S.C. None of them is near the beach or in a flood zone, and he has never filed a claim on any of them. Yet the premium on his residence doubled this year, to $3,300, and he expects the same when insurance renews on his rental properties. “I’m dreading the renewal notices,” Sela told Yahoo Finance. “When I ask my broker about the rate hikes, the typical answer is 'everyone is seeing the same thing.'"

Sela passes some of the higher insurance costs on to tenants through modest rent increases. But he also expects property values in Myrtle Beach to decline, leaving higher ownership costs atop lower property values. “It is not sustainable,” he said. “People cannot afford high rent on top of high cost for everything else.”

Homeowners may have little choice but to budget more for the rising risk of weather disasters. A March report from AM Best pointed out that while there were more billion-dollar disasters in 2023 than any prior year, only one hurricane made landfall in the United States — Idalia, in northern Florida, last August. Of $65 billion in insurable property casualty losses in 2023, the majority was caused by what insurers call “secondary perils”— storms, wildfires, and other events typically far less intense than hurricanes.

Insurers are beginning to treat secondary perils as primary perils, which means homeowners far from coastal areas are going to have to start paying for hurricane-like coverage. Where insurers can’t raise rates, they’ll reduce coverage. “This will result in homeowners retaining more risk and paying more for less protection,” S&P Global Ratings noted in a June report.

Homeowners without a mortgage can self-insure by going without coverage and setting aside funds to cover any damage that could occur. Mortgage holders don’t have that option, since lenders typically require insurance coverage. That suggests areas facing higher climate and weather risk could become even wealthier havens than they are now, largely populated by owners who can afford to go without insurance and pony up $1 million or more to rebuild, if necessary.

Localities will adapt and innovate. “If I were a developer in central Florida, I’d be mapping out the highest land not developed more than 10 miles from the coastline,” said Bunting of the Climate Adaptation Center. “Those will become the new oases.”

Insurers, meanwhile, are looking into new types of products that might kick in only when measurable storms hit a certain threshold, such as a Category 4 or 5 hurricane. Homeowners would foot the bill for damage from lesser storms as a way of keeping premiums down.

As the cost of weather-related insurance becomes a bigger part of the overall homeownership bill, some buyers will also likely choose to live where risks and costs are relatively low. As we are learning, however, there are fewer and fewer safe ports in an increasingly stormy world.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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