Prepare for Potential Loss of Domestic Insurance Coverage
If you're a homeowner, whether you live in a house, a condo, or a trailer, you've probably noticed a significant surge in your property insurance costs since early 2023. To put it mildly, the increase is substantial. As depicted in the Bureau of Labor Statistics graph below, the rise in homeowner's insurance premiums has been substantial since the start of 2023.
The surge isn't a gradual slope, but rather a sudden spike that you wouldn't want to tackle if it were a hill and you hadn't been training. From January 2023 to November 2024, the increase has been almost 18%, and it's likely to continue climbing.
The issue is climate change. Over the past few decades, the frequency and severity of natural disasters such as tornadoes, hurricanes, flooding, and wildfires have increased. Insurance companies have been warning for years that the total cost of damages covered has been growing unsustainably.
In mid-December, the U.S. Senate Budget Committee disclosed some startling public data and a report that shed light on the scale of the climate change-induced crisis in homeowners' insurance. This is the first time that an investigation into insurance non-renewals at a national level has been conducted across all 50 states and Washington D.C.
The report, covering the years 2018 to 2023, reveals how climate change impacts a household's ability to secure insurance. Without it, obtaining a mortgage is next to impossible as lenders don't want to invest in a property that could be destroyed without any means of recovering its value.
Areas most at risk from climate change are also those with the highest non-renewal rates and the fastest growth in non-renewal rates. As expected, states like Florida, California, and Louisiana are on the list. However, the problem is far more widespread, with areas including Southern New England, parts of Montana, coastal regions of New Jersey, New Mexico, the Carolinas, Oklahoma, and Hawaii also experiencing high non-renewal rates. To everyone's surprise, Texas, despite the high-profile damage it has suffered from storms, does not rank among the top ten in non-renewal rates.
The link to climate change is undeniable. "Across the United States, there is a clear positive correlation between rising non-renewal rates and rising premiums," the committee wrote. While this does not necessarily imply causation, the relationship suggests that a causal effect is highly likely. When insurance companies have to pay out more for damages, they eventually need to recover these costs to continue offering insurance, making climate change a significant cost-of-living issue.
There is a secondary impact as well. When insurance becomes unavailable, mortgage loans also become scarce. Property valuations are based on supply and demand. The vast majority of buyers will require a mortgage. If they are unavailable, demand for properties is limited to cash buyers, which is a small percentage of the market. When demand is low, property values fall. Consequently, when demand is low, property values fall. The report warns of a "collapse in property values with the potential to trigger a full-scale financial crisis similar to what occurred in 2008."
The proposed solution to prevent a major property value collapse is to transition to renewable energy more quickly and reduce carbon emissions. However, while this may seem logical, it is hardly efficient or practical.
Other solutions will be necessary, such as people relocating from high-risk areas. Alternatively, the federal government or states could establish high-risk insurance pools. However, this would likely be an expensive option and could potentially allow people to stay in areas that have become too hazardous.
The U.S. Senate Budget Committee's report revealed that the increase in non-renewals of household insurance, particularly in states like Florida, California, and Louisiana, is linked to climate change. This surge in non-renewals is also affecting property and casualty insurance premiums, leading to a substantial increase in costs for homeowners.
