The recent wildfires in Southern California, coupled with hurricanes in the southeastern United States, are set to impact homeowners insurance rates across the country. Even those living thousands of miles away from these disasters may experience a rise in premiums due to the ripple effects of such events on the insurance industry.
State regulators are increasingly allowing insurance companies to raise premiums to cover the costs incurred from these disasters. Additionally, the rising cost of reinsurance – a form of insurance purchased by insurers to manage their risks from major catastrophic events – is also contributing to higher rates. Experts suggest that large-scale disasters often lead to a cross-subsidy effect, where individuals in unaffected regions indirectly bear part of the financial burden.
Research conducted in 2022 found evidence of this trend, highlighting that states often see rate increases following significant disasters, even if those events occurred elsewhere. For instance, wildfires in California or hurricanes in the Gulf Coast can influence premiums in places like the Midwest.
However, the Insurance Information Institute, a trade group representing the insurance industry, disputes the idea that homeowners in one area are paying for disasters in another. They argue that premium increases reflect a reassessment of risks and costs nationwide, rather than direct cost-sharing across states. They emphasize that individual states regulate insurance rates, and premiums are typically aligned with the risks specific to those regions.
The insurance industry operates under a state-by-state regulatory system, creating a patchwork of rules across the country. This decentralized approach means that states vary significantly in how much they allow insurers to raise rates based on claimed costs. In states with less regulatory oversight, insurers have greater leeway to set higher premiums, leading to potential disparities in pricing.
Consumer advocacy groups argue that stronger regulations could lower insurance costs for customers nationwide. According to critics, the current system enables insurers in some states to charge higher rates, particularly where scrutiny is less stringent.
Shifting costs and risks among states is an inevitable part of the insurance business, particularly for large national insurers. These companies rely on a broad customer base spread across different regions with varying risk levels. In return, policyholders in low-risk areas benefit from the assurance that they will be covered if they face unexpected events, such as tornadoes or hailstorms.
Climate Disasters Becoming More Frequent
The rise in insurance costs is driven by an increasing number of severe weather-related disasters. Over the past few years, five of the seven most expensive storms in US history have occurred since 2017. Wildfires currently burning in Southern California are expected to become the third-costliest disaster in the country’s history, following Hurricane Katrina in 2005 and Hurricane Ian in 2022.
The estimated losses from the Southern California wildfires range between $35 billion and $45 billion. These figures add to the significant financial impact of last year’s Hurricane Helene, which caused insured losses of $6 billion to $11 billion, and Hurricane Milton, which resulted in losses of $13 billion to $22 billion. Together, these disasters contribute to insured losses estimated at $54 billion to $78 billion in just the past few months.
In addition to insured losses, these events often result in tens of billions of dollars in flood damage, much of which remains uninsured or is covered by the National Flood Insurance Program instead of private insurers.
Insurance Rates Rising Faster Than Inflation
The growing frequency and intensity of climate-related disasters are reflected in homeowners insurance rates, which have increased by an average of 8.7% annually from 2018 to 2022. This rise is significantly higher than the overall rate of inflation during the same period.
Homeowners insurance is becoming a key area where Americans are directly feeling the financial impact of climate change. Extreme weather events are occurring more frequently and with greater intensity, affecting individuals regardless of political views or beliefs about climate change.
The financial burden of climate-related disasters underscores the urgency of addressing climate risks and preparing for the increasing frequency of such events. These challenges highlight the interconnectedness of regions across the country, as disasters in one area influence financial realities for homeowners nationwide.
Visit Visionary CIO for the most recent information.