A growing number of US citizens are facing difficulties in affording insurance on their homes, a problem that is only expected to worsen because insurers and lawmakers are said to have underestimated the impact of climate change, a new report from First Street Foundation says.
According to the report, 39 million properties are at high risk of flooding, wildfires, and hurricane winds, which have yet to be reflected in the insurance premiums they pay,
Among those that are at risk, 12 million properties are said to have significant flood risk outside of the public facing FEMA flood zones.
At the same time, 23.9 million properties are within areas with a high likelihood of destructive 3 second wind gusts, and 4.4 million properties are concentrated in zip codes where wildfire risk is said to be so great that an average of at least 10 structures are expected to burn down every year.
First Street Foundation also highlighted how all of these properties are in addition to the 6.76 million properties that have such great risk that no insurance company will provide them coverage.
Moreover, understanding the physical risk to properties has become considerably important as property owners continue to grapple with rising insurance costs, and insurance firms face increasing costs associated with climate exposure and larger economic trends.
The impact that climate change has across the insurance sector is clearly seen in the 5-year average costs of wildfire events bulging from roughly $1 billion annually through around 2016 to over $17 billion in 2021.
These increases are directly attributable to the fact that growth in structures destroyed by wildfires (+215%) is steadily outpacing the additional area burned (+48%) over that same time period.
As a result, this means that wildfires are not only just occurring more frequently, costing more, and growing larger, but they are disproportionately happening in areas where people and structures are directly in harm’s way.
It is very clear that adequate insurance coverage is the key function in protecting these communities, but the rapidly increasing risk are driving insurers out of these markets.
Dr. Jeremy Porter, Head of Climate Implications Research at the First Street Foundation, commented: “This work highlights the degree to which the changing climate is directly impacting the larger economy through shifts in the insurance market and home devaluation.
“The cost of climate exposure is not simply the damage from the floods, wind, and wildfire; it also makes its way into many other connected parts of the economy, and we are seeing that now in the insurance industry and real-estate market.”
Moving forward, the report also highlights the increased reliance of homeowners on “insurers of last resort” across a number of high-risk states.
A key example is in Florida, where one such agency – Citizens Insurance Agency – has become the largest insurer in the state. From 2016 to today, Citizens’ policies in force in the state have grown from under 500 thousand to about 1.3 million today (+168%) and average premiums across the state have increased from roughly $2,000 to $3,300 annually (+65%).
However, in Louisiana, 2023 started with an average increase of 63% on all premiums through the Citizens’ insurance program across that state, with some of the largest increases occurring in the heavily populated New Orleans area.
Meanwhile, in California, as property exposure to wildfire has become more common, insurer-initiated policy non-renewals have grown in the most at-risk areas by nearly 800%.
Matthew Eby, Founder and Chief Executive Officer of First Street Foundation, added: “The over reliance of property owners on state run insurers of last resort is a big flashing sign that standard practices in the insurance market cannot keep up with our current climate reality. We are rapidly moving to a place where the cost of insurance will make the most at-risk homes effectively uninsurable.”
