Climate Change Takes a Toll on Homeowners: Rising Insurance Premiums Hit Hard
As the world grapples with the challenges of climate change, homeowners in the United States are facing a harsh reality: rising insurance premiums. According to recent research, areas most exposed to climate-related disasters like wildfires and hurricanes are seeing a significant spike in insurance costs, with some homes not selling due to unaffordable premiums. In fact, insurance now eats up more than one-fifth of the average homeowner’s total housing payments, including mortgage costs and property taxes, in some parts of the country.
In Orleans Parish, Louisiana, the situation is even more dire, with insurance costs accounting for nearly 30 percent of total housing payments. This is having a ripple effect on the broader real estate market, with homes in areas prone to natural disasters selling for an average of $43,900 less than they would have otherwise. The rapid repricing of climate risk is responsible for about 20 percent of home insurance premium increases since 2017, according to researchers Benjamin Keys and Philip Mulder.
What’s Driving Up Insurance Prices?
The answer lies in the reinsurance market, which has experienced a “climate epiphany” since 2017. Reinsurance companies, which provide coverage to home insurance companies against catastrophic losses, have roughly doubled their rates. This, in turn, has led to higher premiums for homeowners. Rebuilding costs, population shifts, and inflation are also contributing factors, with rebuilding costs accounting for about 35 percent of the recent changes.
For many homeowners, insurance has become a major consideration when buying or selling a home. In some areas, monthly insurance costs are now higher than home loan payments. The research suggests that buyers are factoring rising insurance costs into the prices they’re willing to pay for homes, resulting in lower sale prices. As Dr. Keys and Dr. Mulder note, “The rapid repricing of climate risk is having a significant impact on the housing market, particularly in areas most vulnerable to natural disasters.”
Expert Insights and Data-Driven Analysis
According to data from the National Bureau of Economic Research, insurance rates have risen by an average of 58 percent since 2018, outpacing inflation by a substantial margin. However, this growth has been highly uneven across the United States, with places most vulnerable to climate-related disasters seeing some of the largest premium increases. As the researchers point out, “Local policies and regulations have helped keep prices lower in high-risk places, like parts of California, while other factors like a homeowner’s credit score can also affect premiums.”
The study’s findings are based on an analysis of annual homeowners’ insurance costs, which were calculated by separating mortgage and tax payments from loan-level escrow data obtained from CoreLogic, a property and risk analytics firm. The home insurance share of total home payments is based on mean values, including insurance, property tax, and mortgage principal and interest costs. As the researchers note, “Our analysis provides a comprehensive understanding of the impact of climate change on the housing market and highlights the need for policymakers to take action to mitigate these effects.”
Image Source: www.nytimes.com
