Affordability At Risk: Climate-Driven Housing Crisis Impacting Buyers

The economic costs of climate change have been rising rapidly as increasing temperatures and frequent natural disasters shake up civilization. While the current housing crisis was engineered by the rising interest rates, recurring natural disasters have been impacting the cost of home insurance across the country. 

This isn't surprising, as the total insured losses amounted to over $130 billion globally in 2022, according to management consulting firm Aon. Approximately $50 billion to $55 billion of the loss was incurred because of Hurricane Ian, the second-costliest natural disaster for insurance companies. 

Rising Insurance Costs Deter Homebuyers 

Buyers can qualify for a mortgage without getting homeowners insurance, but unless they make a down payment of 20% of the home’s market value, they are required to purchase insurance. 

Meanwhile, insurance premiums have been getting more expensive. Between May 2021 and May 2022, 90% of homeowners witnessed an increase in their quoted annual premium compared to the preceding year, according to Policygenius. Data from Bankrate shows that between 2022 and mid-2023, average home insurance for houses with a market value of $250,000 has risen by 20% or $1,428 annually. 

The Florida housing market is on the extreme end, with average home insurance premiums tripling over the past five years from nearly $2,000 in 2019 to over $6,000 in 2023, according to the Insurance Information Institute. 

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Rising premium expenses are not the only costs homeowners must bear. Insurance companies are reducing coverage and underwriting higher deductibles to ramp up their profit margins, especially in areas prone to natural catastrophes. 

"Homeowners won't be able to get coverage, or they will have to pay more, or they will have less reliable coverage," said Rich Sorkin, chief executive of climate risk analytics company Jupiter Intelligence.

Since 2022, 31 states have seen double-digit rate hikes, according to an S&P Global Market Intelligence analysis. Arizona, Texas, North Carolina, Oregon, Illinois and Utah have recorded rate increases ranging from 20% to 30%. In states like California, certain insurance providers are discontinuing the sale of new policies because of these developments.

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The annual average cost of homeowners insurance across the United States is $2,777, according to Insurance.com. Oklahoma is the most expensive state for home insurance, with an average annual cost of $5,317. In contrast, Hawaii is the most affordable state, with average rates as low as $582 per year. 

Going Without Insurance 

The rising costs are causing homeowners to "go bare," choosing not to purchase or renew home insurance policies. A 2023 survey conducted by the Insurance Information Institute and Munich Re Group found that 12% of U.S. homeowners don't buy homeowners insurance. About half of this group has annual household incomes of less than $40,000.

"It is a risky proposition to go without home insurance, and you need to fully understand the financial consequences if you lose your home," said Noah Damsky, a Los Angeles-based financial adviser.

Not purchasing insurance can further increase costs for homeowners with a mortgage. Lenders will place homeowners insurance on properties with a mortage lien. Lender-imposed homeowner insurance policies are typically more expensive than standard policies. 

Climate Risk And Insurance 

A U.S. Treasury report released in June focused on the increasing risk of climate change and its impact on home insurance. While regulators are working on improving the current insurance rates, there isn't a quick fix, as natural catastrophe risks remain rampant. 

"Unfortunately for homeowners, there's no quick fix other than protecting their properties or moving," Jupiter Intelligence's Sorkin said. 

In most states, insurance companies are subject to regulated pricing, which means they are not permitted to charge consumers arbitrary rates, said George Hosfield, senior director and general manager of home insurance solutions at LexisNexis Risk Solutions. 

Insurers can withdraw from a market if it becomes economically unviable, a strategy that some have chosen to implement. Many insurance companies have been pulling out of disaster-prone regions over the past few years to mitigate their losses. For example, Farmers Insurance, Bankers Insurance Group and AIG subsidiary Lexington Insurance Co. have withdrawn from Florida, one of the states most vulnerable to natural disasters. 

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