Insurance Exodus Sparks Concern: Home Values At Risk In Fire And Flood-Prone Regions

Climate change has worsened the housing affordability crisis in the U.S. with insurance companies boosting the premiums for homes in areas prone to natural disasters. Over the last six years, property and casualty insurance costs have increased by 400%. 

With the looming dangers of natural catastrophes, insurance companies are moving to mitigate their losses after 2022, which was reported as the fifth-costliest year for insurers. 

Hurricane Ian, which struck Florida and Cuba in 2022, resulted in $50 billion to $55 billion in damage. Meanwhile, Hawaii has been grappling with the aftermath of the destructive Maui wildfires last August, with economic losses estimated to range from $4 billion to $6 billion, according to risk assessment firm Moody's.

"Losses are increasingly related to climate risk," said Sean Kevelighan, president and CEO of the Insurance Information Institute. "As that risk increases, so does the cost of insuring those assets that people have on hand."

Allstate And State Farm's Move To Cut Losses

In November 2022, Allstate announced a temporary halt to new homeowners, condo and commercial insurance policies in California as it tries to safeguard the interests of existing policyholders. State Farm, the nation's largest homeowners insurance company, followed suit last May as it ceased accepting new policy applications for properties in California. 

"The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes and higher reinsurance premiums," Allstate said in a press release.

State Farm, on the other hand, cited the escalating frequency of building destruction resulting from climate catastrophes, the soaring costs of reconstruction driven by inflation and the increasing inability to safeguard its investments as reasons for its decision.

According to research conducted by First Street Foundation in California, receiving a nonrenewal letter from the private insurance market results in an immediate 12% reduction in property value for affected individuals.

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Rising Economic Costs For Insurers

Despite the absence of a rise in significant disasters in 2023, experts anticipate the industry to incur losses of $50 billion because of “severe convective issues,” including flash flooding and the repercussions of intensified storms.

California’s insurance market reflects a national trend as companies grapple with increasing rates, limited coverage and withdrawals from disaster-prone regions. The state has 1.2 million houses facing severe wildfire risks, surpassing all other states by a significant margin, according to the Insurance Information Institute.

This phenomenon extends beyond California, with Florida and Louisiana facing challenges in maintaining robust insurance markets post-hurricanes and Colorado witnessing rising premiums because of wildfire threats. An Oregon initiative to map wildfire risk was shelved last year amid concerns about premium spikes.

Colorado, which has been dealing with devastating wildfires over the past several years, has witnessed skyrocketing insurance premiums, prompting some smaller insurance firms to retreat from covering properties. A study initiated by state legislators found that in 2022, 76% of insurers reduced their exposure in Colorado, consolidating the market dominance with the five largest insurance companies.

Louisiana is also facing an ongoing insurance crisis, exacerbated by the onslaught of hurricanes Delta, Laura, Zeta and Ida in 2020 and 2021. As claims surged, several companies providing homeowners policies in the state became insolvent or exited the market, leading to cancellations or refusals to renew existing policies.

Nonetheless, State Farm and Allstate's decision has been rendered "unlawful" by Consumer Watchdog, a nonpartisan advocacy group. 

"Insurance companies can't just stop selling insurance to consumers in order to make more money for themselves," said Harvey Rosenfield, founder of Consumer Watchdog. "They have to open their books and get the (state) insurance commissioner's approval."

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