Some U.S. Homes Are Uninsurable Due to Climate Change | Oct 2023

October 2023 | Volume 15, Issue 3

Read the full article on CBS.com here

The Uninsurable Risk

According to the article, millions of American homeowners like Mary Morse find themselves stuck in a financial bind, facing mounting risks from wildfires and floods linked to climate change while their home insurance rates rocket upwards. Increasingly, the crowning blow comes when insurers withdraw coverage, leaving individuals and even entire communities vulnerable.

"I got a letter from my insurance company that said, "We're not going to serve your area anymore," Morse, 75, said about her Pine Cove, California home. even sent (the insurance agent) a picture of my fire hydrant. It didn't help."

The growing risk of wildfire means that some parts of California are becoming "essentially 'uninsurable'," according to a new analysis from the First Street Foundation, a non-profit that studies climate risks. The research has alarming implications for homeowners across the U.S., with even residents of inland states such as Kentucky, South Dakota and West Virginia facing sharply higher insurance costs because of increased damage from extreme weather that experts attribute in part to climate change.

About 35.6 million properties — one-quarter of all U.S. real estate — face increasing insurance prices and reduced coverage due to high climate risks, the analysis found. The rise in insurance costs is not merely a hit to homeowners' budgets, however — the higher costs also devalue their properties, First Street said. 

“Absolutely Crippling”

"You're talking about getting a letter in the mail that says somewhere between 60 percent, and as high as mid-80 percent, increases for policies," First Street CEO Matthew Eby said. "That is crippling. Absolutely crippling. And so those homes are not, from an investment scenario, something that you would invest in."

Morse said she put her house on the market for a year, but it didn't sell — a failure she ascribes to the recent rise in mortgage rates as well as her insurer withdrawing from her region. 

"The interest rates went up at the same time as the fire insurance went away. And I think a combination of that made it really difficult for people to purchase houses," she said. 

Pine Cove, located in Riverside County, California, just over 100 miles southeast of Los Angeles, ranks as one of the 10 worst zip codes for insurance non-renewals in the U.S, according to First Street. The firm also found that Riverside County is most at risk of losing homes and other properties due to wildfires each year.

Insurers of Last Resort

Morse ended up getting insurance through her state's "insurer of last resort," the California FAIR plan. But at a cost of almost $2,000 a year, she's paying twice as much for coverage that isn't as extensive as her previous policy, and she said she's worried the rate is likely going to increase. 

"I'm 75 years old and I'm still working so that I can afford my mortgage," she said. "If this continues to increase the way it's been increasing, I'm going to have a problem."

Several major insurers have stopped renewing policies in climate-hit states, with Allstate and State Farm recently announcing they were dropping some coverage in California and AAA opting not to renew some policies in Florida. 

When that happens, state-run "insurers of last resort" programs provide some coverage for homeowners, although First Street noted that the premium is often "multiple times" the cost of their lost policy and provides less coverage. 

For its part, the insurance industry says that the frequency and severity of claims are on the rise, making insurers more cautious in deciding where to offer coverage. "[T]his increasing cost of claims will be passed on to consumers in the form of higher insurance premiums," the National Association of Insurance Commissioners told CBS News in response to First Street's findings. 

Despite such challenges, millions of Americans continue to move to regions prone to extreme weather and natural disasters. 

"Humans are not that rational. So there's a lot of people that just want to live in Florida because it's beautiful and it's by the ocean and it has the sunshine," Eby said. "And so, as long as that's happening, then this risk bubble, the insurance bubble that we see, is going to continue to grow."

How Big A Hit?

An insurance company deciding not to renew coverage against risks like fires and flooding can instantly devalue a property. 

First Street found that a Florida homeowner who is dropped by an insurer could see the property's value decline 19 percent to 40 percent. That's because the homeowner would need to obtain coverage from the state's insurer of last resort, Citizens Insurance Agency. Citizens' higher insurance rates would lower the value of the home, First Street noted. 

Some homeowners in regions with a higher risk of climate disasters are taking things a step further by foregoing disaster insurance altogether. 

Take Jack Anderson of Key West, Florida. Anderson said he dropped windstorm and flood coverage when prices got "crazy." He estimated that his home would require $7,000 a year to insure through Citizens. As a result, he and his wife decided to drop the disaster coverage, although he noted they have homeowners insurance, "just so nobody thinks we're truly insane."

Anderson said his 115-year-old home has been through a lot of storms. 

"Like the investors say, past performance is no guarantee of future returns," he told the media. But, he added, "We don't know what's going to happen here as these storms get worse and worse, but it just feels like it makes more sense for us" to set the money aside themselves in case they need to make repairs from a storm.

Living In an Insurance Bubble

The insurance industry is raising rates, demanding higher deductibles or even withdrawing coverage in regions hard-hit by climate change, such as Florida and Louisiana, which are prone to flooding, and California because of its wildfire risk. 

But other regions across the U.S. may now also exist in an "insurance bubble," meaning that homes may be overvalued as insurance is underpricing the climate change-related risk in those regions, First Street said. 

Already, 6.8 million properties have been hit by higher insurance rates, canceled policies and lower valuations due to the higher cost of ownership, and an additional 35.6 million homeowners could experience similar issues in the coming years, First Street noted.

"At the end of the day, we've been building in the wrong areas, with the wrong building codes, and we've been suppressing rates and telling people it's OK for decades," Eby said. "And all of that is coming to a head right now because insurance is at the very tipping point of the cost of all of those decisions we've made in the past."

Discussion Questions

1. Define “insurable risk.”

An insurable risk is one that the insurer is willing to underwrite (cover) in return for the payment of premiums by the insured. Insurable risks include a wide range of potential losses, including damage to commercial or residential property resulting from a fire or a flood.

2. As referenced in the article, 75-year-old Mary Morse received a letter from her insurance company indicating that it would not insure her house (or the area) anymore. Is it legal for an insurance company to refuse to insure property or entire areas? Is it ethical? Explain your response.

It is legal for an insurance company to refuse to insure property. Insurance coverage is governed by the common law of contracts, and a contract is an enforceable agreement that requires an offer made by the offeror, acceptance of the offer by the offeree, and an exchange of consideration. If the insurer refuses to renew an existing contract, the contract ceases to exist upon the expiration of its initial term.

Whether it is ethical for an insurance company to refuse to insure property is an opinion question, and student responses may vary. Insurance companies will argue that to maintain profitability and to ensure their continued existence, they must constantly assess risk and make contract issuance and renewal subject to those assessments. Some insurance company stakeholders, including customers and the community at large, might argue that insurance companies owe a higher obligation to guarantee that all who seek (and need) insurance have the opportunity to acquire it at affordable premiums.

3. What role, if any, should the state and/or federal government play in serving as an “insurer of last resort” for properties that are uninsurable through private companies? Explain your response.

This is an opinion question, so student responses may vary. Obviously, if swaths of the United States are uninsured due to the refusal of insurance companies to meet market needs, there is a market failure. Whether the state and/or federal government should address that market failure is subject to debate.