Last year, homeowners insurance premiums increased by 21%, with climate change being a contributing factor, according to experts.

• According to Policygenius, last year saw a 21% increase in home insurance premiums.
• It is difficult to determine how insurers are factoring climate risk into the cost of policies, although experts believe that a rise in severe weather is largely responsible for the increase.
• In certain areas, state-sanctioned options have become necessary due to some insurers withdrawing completely.

Some consumers may be taken aback by the higher cost of renewing their homeowners insurance policy.

According to Policygenius, the average increase in home insurance prices at renewal time was 21% between May 2022 and May 2023.

The increase in catastrophic severe weather events has led to a rise in premiums, according to experts, and it is predicted that the rate of price increases will not decrease. Due to the higher costs, insurers are passing on the additional expenses to consumers through more expensive premiums.

It is challenging to determine the extent to which climate risk is incorporated into homeowners' insurance policies since insurers do not disclose individual premiums and risk data.

The types and levels of risks that properties face are rapidly changing, according to Carlos Martín, director of the Remodeling Futures program at the Joint Center for Housing Studies of Harvard University.

There is confusion among both homeowners and insurers regarding how to price this actuarially, he stated.

'Minimal' data available from insurers

Despite a substantial increase in home insurance premiums last year, this is not an unprecedented occurrence. In fact, between 2012 and 2021, the average premium rose from $1,034 to $1,411, as per the Insurance Information Institute.

According to Kenneth Klein, a professor at California Western School of Law, some of the annual increases in climate change-related losses were larger than others, and climate change creates the potential for economic "fat-tailed losses" because storm damage is not evenly distributed across all insured properties or evenly over time.

"If insurance companies in the Gulf Coast area survived economically after Katrina, the following year was their most profitable. However, their premiums were adjusted for Katrina, but there wasn't a Katrina event. This presents the challenge of insuring climate change."

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It is difficult to predict how premiums will increase due to severe weather, according to Martín.

""Insurance companies do not disclose the premiums they charge individual homeowners, and there is limited reporting on this information," Martín stated."

The detailed data on weather-related losses gathered by the insurance industry is not publicly accessible, according to Scott Shapiro, KPMG U.S. insurance sector leader.

"According to Shapiro, this data is essential for determining rates and submitting filings. However, a significant challenge is the growing exposure to weather-related risks and the question of whether past losses accurately predict future losses."

Insurers are pulling back in high-risk areas

For some homeowners in flood or fire-prone areas, the lack of options may drive up the cost of home insurance.

In May 2023, State Farm stopped accepting new applications for California policies, while Allstate paused new home, condo, and commercial policies in the state in November 2022.

Insurance companies "are not in the business of providing financial assistance out of altruism, and they are not in the business of making ethical decisions based on personal feelings," Klein stated. "They are corporations that operate within a legal framework with the goal of generating profits."

Experts suggest that limited and expensive insurance options can hinder homeownership, as most mortgages necessitate insurance.

In 2002, Florida's legislature established Citizens' Property Insurance as an alternative for residents who couldn't find home insurance in the private market. Similarly, California's FAIR plan was created as a statute in the state's insurance code to provide fire coverage that was unavailable in the traditional market, though it is not a state or public agency.

While state-run programs can be a final option, they may not always offer the same level of coverage as a private insurance company.

"According to Klein, it is problematic because government-funded programs are not always built on the same actuarial principles as private insurance companies, resulting in inadequate coverage."

Existing homeowners are the ones feeling the most pain from rising premiums, according to Martín.

""They're feeling it because they see the difference between the initial cost of the house and the current payments, which is increasing," he said."