A growing number of American citizens are having difficulty affording insurance on their homes, a problem that is expected to worsen because insurance companies and lawmakers are said to have underestimated the impact of climate change, a new report from the First Street Foundation says.
According to the report, 39 million properties are at high risk of floods, wildfires and hurricane winds, which is not yet reflected in the insurance premiums they pay.
Of those at risk, 12 million properties are said to be at significant flood risk outside public areas fronting Federal Emergency Management Agency (FEMA) flood zones.
Meanwhile, 23.9 million properties are in areas with a high probability of damaging 3-second wind gusts, and 4.4 million properties are concentrated in postcodes where the risk of wildfires is said to be so high that at least 10 buildings on average are expected to exist. To burn every year
First Street also highlighted how all of these properties, plus 6.76 million properties, are so risky that no insurance company will cover them.
Furthermore, understanding the physical risks to which properties are exposed has become increasingly important as property owners continue to face rising insurance costs, and insurers face increasing costs associated with exposure to climate and larger economic trends.
The impact of climate change on the insurance sector is clearly visible in the average costs of wildfire events over 5 years, which have risen from approximately $1 billion per year until approximately 2016 to more than $17 billion in 2021.
These increases are directly attributable to the fact that growth in structures destroyed by wildfires (+215%) consistently outpaces additional area burned (+48%) over the same time period.
As a result, this means that wildfires are not only occurring more frequently, costing more, and increasing in size, but they are occurring disproportionately in areas where people and buildings are directly at risk.
It is very clear that adequate insurance coverage is a key function in protecting these communities, but rapidly increasing risks are pushing insurance companies out of these markets.
Dr Jeremy Porter, Head of Climate Impact Research at First Street Foundation, commented: “This work highlights how a changing climate will directly impact the larger economy through shifts in the insurance market and declines in home values.
The cost of exposure to climate change is not simply limited to damage from floods, winds and wildfires; It is also making its way into many other related parts of the economy, and we are seeing it now in the insurance industry and the real estate market.
Going forward, the report also highlights homeowners’ increasing reliance on “insurers of last resort” in a number of high-risk states.
A prime example of this is Florida, where one of these agencies – the Citizens Insurance Agency – has become the largest insurance company in the state. From 2016 to today, Citizens policies in force in the state have grown from less than 500,000 to about 1.3 million today (+168%) and average premiums across the state have increased from about $2,000 to $3,300 per year (+65% ).
However, in Louisiana, 2023 began with an average increase of 63% on all premiums through Citizens Insurance across that state, with some of the largest increases occurring in the densely populated New Orleans area.
Meanwhile, in California, where property exposure to wildfires has become more common, policy non-renewals initiated by insurers in areas most at risk have increased by nearly 800%.
Matthew Eby, founder and CEO of the First Street Foundation, added: “Landlords’ over-reliance on state-run insurers as a 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 cost Insurance will make the most vulnerable homes effectively uninsurable.
“Infuriatingly humble alcohol fanatic. Unapologetic beer practitioner. Analyst.”