Some insurance companies are pulling back coverage from fire- and flood-prone areas, leaving homeowners with limited affordable options. This trend may even affect the property value of American homes, experts say.
The nation’s largest homeowner’s insurance company, State Farm, stopped accepting new applications for policies on property in California in May. Allstate announced in November 2022 that it would “pause new homeowners, condo and commercial insurance policies in California to protect current customers,” the Associated Press reported in June.
This trend will likely continue across the insurance industry, said Jeremy Porter, head of climate implications research at First Street Foundation, a nonprofit research organization that compiles comprehensive climate risk data.
“They know the risk is just too high to be actuarially sound for their business,” he said.
In its announcement, State Farm said too many buildings are being destroyed by climate catastrophes, inflation is making it too expensive to rebuild, and it can’t protect its investments any longer.
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The problem is not just in California, where wildfires are prevalent. Louisiana and Florida homeowners are also contending with a lack of access to insurance, due to flood risk.
“Losses are increasingly related to climate risk,” said Sean Kevelighan, president and CEO of the Insurance Information Institute, an insurance industry association. “As that risk increases, so does the cost of insuring those assets that people have on hand.”
Even though there wasn’t an increase in major disasters in 2023, he said, the industry is still expecting to see $50 billion in losses just because of “severe convective issues” such as flash flooding and the implications of heavier everyday storms.
state has a law that adds extra approval measures, including board approval and review by the insurance commissioner, if an insurance company wants to raise the rate of insurance by more than 7%. That’s been in effect since the 1980s.
Kevelighan, of the Insurance Information Institute, said that law, called Proposition 103, creates a regulatory environment in California that restricts the industry from adequately including climate risk in its forecasting and is one of the reasons the industry is being forced to pull back coverage in the state.
“Risk management does not come into play until it’s entirely too late when it comes to individual personal property purchasing,” Kevelighan said. “It comes into play when the mortgage provider needs you to go get it.”
“And that’s the first time when a consumer even begins to think about where they’re living and what the risks might be,” he said. “The cost reflects that risk. That should be an alarm to tell them that they’re living in a risky place and then ask themselves: How could I reduce that risk? Or do I need to think about living somewhere else?”
video to learn more about why some American homeowners are losing their property insurance and the changes the insurance industry would like to see to be able to offset some of the mounting risks.
Clarification: This story has been updated to clarify when Allstate announced it would pause accepting applications for new insurance policies in California.