The impact of climate change on home insurance costs in California and across the U.S. is being reshaped.

• Higher insurance rates are a consequence of worsening extreme weather for homeowners outside of California.
• Due to the increasing weather-related risks, home insurance rates have experienced a significant increase.
• The cost of your home insurance will be determined by various factors, including your location, experts advise.

Before this year's massive wildfires in the Los Angeles area, insurance premiums were already on the rise.

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Homeowners insurance costs in California have risen due to the increased frequency and severity of natural disasters, and this trend is expected to intensify.

"Patrick Douville, vice president of global insurance and pension ratings at Morningstar, stated that insurance regulators should adopt risk-based pricing in the short term. This would result in higher premiums, which may exacerbate affordability issues and negatively impact property values, ultimately leaving some homeowners without insurance."

The Department of Insurance in California recently passed regulations that allow for rate increases in exchange for increased coverage in areas prone to wildfires. Some insurance companies in the state increased rates by as much as 34% in 2024, according to the San Francisco Chronicle.

Filing a fire claim can increase insurance premiums by an average of 29%, and two claims can increase premiums by 60%, according to a 2024 analysis by Insure.com.

Premiums are likely to increase as insurers aim to cover their expenses, predicts Janet Ruiz, a director at the Insurance Information Institute and the organization's California representative.

"To cover the claims, we must receive sufficient premiums," she stated.

For homeowners outside of California, rising extreme weather conditions will result in increased insurance rates.

How disasters affect can costs in other states

No increase in insurance premiums for the rest of the nation, according to Ruiz.

"Insurance premiums for homeowners and businesses in one state are not determined by losses or catastrophes in other states," she stated.

Ruiz stated that each state has an insurance department that regulates rates in that region, ensuring protections against rate increases.

Although insurance rates are heavily regulated at the state level, insurers increase rates in less-regulated states to compensate for their inability to adjust rates in highly regulated states, resulting in a disconnect between insurance rates and risk, as stated in a 2021 paper by economists from Harvard Business School, Columbia Business School, and the Federal Reserve Board.

The authors wrote that the current regulatory system's sustainability is being questioned by their findings, particularly if natural disasters become more frequent or severe.

NerdWallet's mortgage and real estate expert, Holden Lewis, stated that many insurance companies have a presence in multiple states or across the entire nation.

Lewis stated that they would compensate for their losses somehow.

Michael Barrett, co-principal at Barrett Insurance Agency in St Johnsbury Vermont, where state insurance regulations are more relaxed, has received numerous inquiries from clients regarding the possibility of their premiums increasing in the aftermath of the wildfires. According to Barrett, the accurate response is that it is possible that their premiums may rise.

Barrett stated that an increase in natural disasters will have a future impact on insurance from an insurance perspective.

Vermont is not immune from its own extreme weather lately.

"Barrett stated that we experienced severe flooding due to heavy rains, which is a cause for concern as insurance reliance increases through these events."

Extreme weather is a problem nationwide

The occurrences in California serve as a warning of what may happen in other regions across the country, in part because of growing environmental anxieties.

The National Oceanic and Atmospheric Administration discovered that last year, there were 27 different natural disasters, each costing $1 billion, ranging from wildfires to winter storms.

A Realtor.com report states that nearly half of all homes in the U.S. are at risk of severe or extreme damage from environmental threats.

Annual premiums are heading higher

Between 2018 and 2023, the average home insurance rate increased by 33.8%, with a 11.3% increase occurring in 2023 alone, according to S&P Global Market Intelligence.

The National Bureau of Economic Research published a working paper revealing a 33% increase in average premiums from 2020 to 2023, with climate-exposed households facing an additional $700 in annual premiums by 2053.

According to Bankrate, the average annual cost of home insurance in the US is $2,181, which amounts to approximately $182 per month for a policy with a $300,000 dwelling limit.

Experts say that the amount each homeowner pays is determined by various factors, including the home, city, state, and proximity to areas prone to natural disasters such as floods, earthquakes, and wildfires.

The rising costs of repairing or rebuilding, as well as the impact of extreme weather, have caused costs to increase across the board.

Rising repair costs also play a role

The cost of rebuilding has increased significantly due to the pandemic and continues to rise.

"If you're not adding frills, that same home that could have been rebuilt for $166 per square foot now costs at least $300," Barrett stated.

"According to NerdWallet's Lewis, when individuals renew their insurance policies, they often renew the same maximum payout without considering it."

Due to the increased cost of repairing damaged homes, homeowners may be more likely to be underinsured, putting them at risk of significant financial losses.

Homeowners are likely underinsured

An insurance agent or local contractor should be consulted by homeowners to obtain a current estimate of the cost to rebuild their home if it is destroyed by a fire or other natural disaster, as advised by Lewis.

"You want to be insured for that amount," he explained.

You also want to have the right kinds of coverage.

A recent study by the Consumer Financial Protection Bureau revealed that many homeowners may not have enough insurance coverage against flood damage, as homeowners and renters insurance policies typically do not cover flood damage. To protect against this risk, a separate flood insurance policy is necessary.

The mortgage market's flood risk exposure is more widespread and diverse than previously believed, according to the consumer watchdog.

Homeowners living near inland streams and rivers were less likely to have flood insurance or other financial resources to recover from a flood and are therefore most at risk of catastrophic loss, according to a report based on a sample of mortgage applications from 2018-2022.

"Ruiz advised people to pay attention to their insurance renewal notices and consult with a contractor about the average cost per square foot to rebuild. Most individuals require more insurance coverage, he emphasized."