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What’s Behind the Homeowners’ Affordability Crisis – From Insurance Rates to Climate Change


Securing homeowners’ insurance was once a straightforward task. However, as climate change intensifies, causing more frequent and severe weather events, insurers are raising premiums or withdrawing entirely from the most affected regions. This trend is impacting the affordability and availability of home and fire insurance.

The crisis in the homeowners’ insurance market has far-reaching implications, affecting housing and mortgage markets as well as local economies. It also highlights the alarming increase in the number and severity of weather and climate disasters in the United States, which reached record levels in frequency and cost last year.

An Ethnic Media Services panel delved into this issue, discussing its impact on people’s lives and exploring potential solutions involving the insurance industry, government, and ordinary citizens.

In a recent study conducted by the Insurance Research Council (IRC), significant insights into homeowners’ insurance affordability were revealed, highlighting growing concerns across various states.

“We are a division of the Institutes, founded back in 1977,” explained Vickie Kilgore, Assistant Vice President of the IRC. “We are not a lobbying group, but we address public policy issues.”

Kilgore shared findings from their latest study on homeowners’ insurance affordability, which uses an affordability index measuring the share of household income spent on homeowners’ insurance.

“We don’t look at insurance prices as you might find on comparative rating sites. We think it’s more accurate to look at what homeowners spend and compare that to their financial means,” Kilgore noted.

The study utilized data from the National Association of Insurance Commissioners (NAIC), comparing homeowners’ insurance premiums with median household income. “This gives us a measure, which we call the affordability index,” Kilgore stated. “It looks at the share of a household’s income that goes toward paying for homeowners’ insurance.”

The findings were striking. From 2001 to 2021, the affordability index increased from 1.27% to 1.99%, indicating that homeowners’ insurance has become less affordable over time. “We predict that number will go above 2% when we get updated data,” Kilgore added.

The study also revealed significant disparities in affordability across states. “In 2021, Utah was the most affordable state, with homeowners spending less than 1% of their income on insurance,” Kilgore said. “In contrast, in Florida, the least affordable state, the expenditure share was more than 4%.”

The IRC identified eight key factors driving these variations, with natural hazards, particularly weather-related risks, topping the list. “We gathered data from the Federal Emergency Management Agency to look at weather risks like hurricanes, hail, and windstorms,” Kilgore explained.

Other factors included claim frequency, claim severity, and measures related to claims settlement. Florida’s high litigation expenses and significant weather hazard risks were highlighted as major contributors to its low affordability ranking.

Kilgore concluded, “We hope that changes made in states like Florida will improve affordability on the expense and litigation fronts, though natural hazard risks remain a challenge. Understanding these cost factors is crucial for addressing and improving homeowners’ insurance affordability.”

Amid growing concerns over climate change, financial experts are raising alarms about the increasing risk of a financial crisis akin to the one experienced in 2008. Jordan Haedtler, Climate Financial Strategist with the Sunrise Project and Climate Cabinet, highlighted the urgent challenges posed by climate risks during a recent panel discussion.

“The rising costs of extreme weather events have rendered insurance less available and less affordable. We are seeing large insurance companies withdraw from climate-vulnerable regions entirely, sharply raise premium rates, and underpay damages from climate disasters,” Haedtler explained. The New York Times starkly put it: “The climate crisis is becoming a financial crisis,” reflecting the sentiments of many federal financial regulators.

Shortly after President Joe Biden took office, the Financial Stability Oversight Council (FSOC), a body created after the 2008 financial crash, identified climate change as an emerging threat to financial stability. Haedtler elaborated, “The regulators who sit on the FSOC have warned that insurance can be a major channel for spreading risk throughout the financial system, much like the mortgage-backed securities that sparked the financial crisis in 2007-2008.”

A recent report from the Federal Insurance Office outlined gaps in insurance regulation, revealing problems that prevent state regulators from ensuring insurance companies have sufficient resources to pay out claims related to climate disasters. Haedtler noted, “In many cases, we don’t even have reliable data about how much worse this problem is becoming. But we do have some estimates.”

For instance, the Consumer Federation of America recently estimated that 6.1 million homeowners in the United States lack insurance, a number likely to grow sharply as the climate crisis intensifies. Haedtler emphasized, “Insurers spike rates, withdraw from markets, or refuse to renew policies in climate-vulnerable communities from Florida and California to states like Iowa and Minnesota.”

This issue impacts housing affordability. “Since insurance is required by nearly all mortgage issuers, as it gets less available, this will exacerbate the housing affordability crisis in the United States,” Haedtler warned. Treasury Secretary Janet Yellen has named this the “protection gap,” highlighting the growing number of underinsured or uninsured homeowners, businesses, and renters facing rebuilding expenses they cannot afford.

The consequences are dire. “Households and businesses will have no choice but to walk away from mortgages or other loans, spreading the costs from climate disasters into the banking sector and throughout the economy,” Haedtler explained. This scenario mirrors the subprime mortgage market issues leading up to the 2008 financial crisis.

In a recent Senate Budget Committee hearing, witnesses drew parallels between current insurance market conditions in Florida and the subprime mortgage markets of the past. Haedtler pointed out that credit rating agencies are potentially overstating the financial health of small insurers in Florida, posing significant risks.

Haedtler concluded with two critical points: “This is not just a problem on the coasts. Wind and hail storm events in states like Iowa and Minnesota have caused dramatic costs. Additionally, landlords often pass insurance costs to renters, making housing less affordable.” Federal Reserve Chair Jay Powell confirmed that rising insurance prices are driving up housing costs, contributing to inflation remaining above target levels.

“This is a problem that affects all of us and has enormous implications,” Haedtler emphasized, urging immediate attention to address the financial risks posed by climate change.

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