12% of US homeowners foregoing home insurance, study finds

The unprecedented weather-related disasters roiling the country are also raising havoc with insurers, throwing underwriting formulas and forecasts out the window, boosting the cost of repairs to unprofitable levels. This has caused both insurance companies and their customers to abandon coverage altogether, with a recent survey finding 12% of homeowners in the U.S. don’t buy insurance for their dwellings.

Climate change is frequently cited as cause of the first-ever tropical storms in southern California, unheard of tornado alleys in New England, areas of Florida that haven’t been hit by hurricanes in more than 100 years, average areas burned by wildfires increasing by more than 400% in Hawaii.

New weather-related disasters skew numbers

Inflation, migration trends that put more people in vulnerable areas, and slow response from lawmakers and regulators, have added to what’s called by some a severe crisis in insurance, in which premiums are becoming too expensive for consumers, yet aren’t high enough to cover losses. And the backbone of insurance calculations, accurately predicting risks and forecasting likelihood of disasters, has been knocked off kilter by the sudden uniqueness of weather-related disasters.

What becomes of towns and cities and residential areas when insurance is no longer affordable? Or when companies deem areas are simply too risky to insure?

For some, the current situation is more a matter of economics than Mother Nature, as well as an industry clinging to old ways of doing business.

Inflation cited for insurance rate increases

“Inflation has severely bumped up the severity of home insurance claims,” says George Hosfield, senior director of home insurance for data analytics giant LexisNexis. “So, rates aren’t keeping up with inflation and there’s a mismatch between what companies are allowed to charge and what they need to charge to make a buck.”

LexisNexis data show that on average, nationwide premiums for home insurance are up roughly 21% since 2015, with some states seeing huge increases (Texas up 40%, Colorado 41%, Florida up 57%). The national average for home insurance based on $250,000 in coverage increased this year to $1,428 annually, up 20% from 2022, according to Bankrate.

As a result, more homeowners are deciding against buying insurance, or “going naked,” in industry parlance. A survey this year by the Insurance Information Institute and Munich Re, a reinsurer, found 12% of homeowners in the U.S. don’t buy insurance for their dwellings.

Increasingly, the areas with the most spiraling premiums, or places where companies have determined are uninsurable, are also those that have seen net increases in population.

“People are actually moving into the places where these hurricanes and storms are happening,” said James Handley, director of property pricing and underwriting at LexisNexis “You’d think people in, say California, are moving away from the wildfires but migration patterns show they’re moving away from the coasts and moving to where the wildfires are. As a result, you have more people, filing more claims, that are more expensive and it’s hard for the insurance companies to keep pace.”

The odd new weather patterns, however, cannot be dismissed as major factors in insurance company woes, Handley said.

“Hurricanes are definitely getting worse,” he said. “They’re spending more time over warmer water gaining strength, and they’re heading further north and inland than ever before.”

Handley noted some incidents of weather, such as hail, haven’t changed much, but every hail claim costs twice what it used to because of rising repair costs.

“The trends are getting worse, they’re getting more expensive, and people just so happen to want to live in the most expensive places to insure because they also just so happen to also be the most beautiful areas to live.”

Solutions to the issues, including the impact of weather-related disasters, are difficult to come by, experts say, partly because insurance is regulated by states rather than the federal government, and insurance commissioners in many states are elected and under increasing pressure to keep rates affordable.

“It’s both a government and industry problem,” said Jordan Haedtler a climate financial policy consultant with the Sunshine Project, a network of organizations working to help spur the transition from fossil fuels to clean energy.

“The way to make it palatable with policyholders is to facilitate more of a partnership where public reinsurance programs or these insurers of last resort plans need to be designed with more robust hazard mitigation practices in place, sort of like a National Flood Insurance Program at the state level, but with more modernized mechanisms that we all kind of wish were embedded in the National Flood Insurance Program from the beginning.”

California lawmakers, in an attempt to woo fire insurers back to the state, are touting a proposed deal to allow insurance companies to charge policyholders a fee to cover the riskiest properties. The plan would also allow insurers to use predictive analytics in their rate models that incorporate expected increases in natural and weather-related disasters, something that hasn’t previously been allowed.

But the plan is already being criticized as a bailout for insurers.

“There doesn’t appear to be any guarantee that insurers who have left the state will come back and most glaringly, it doesn’t have any of the hazard mitigation practices that you’d want to encourage as part of any deal that had provisions favorable to the industry.”

Haedtler says without consensus and working partnerships, the trend of rising premiums, homeowners deciding to go without insurance, and companies withdrawing from risky markets will get worse.

“I don’t think there’s a lack of awareness,” he said. “But there’s an inability to contemplate how we can remap our government institutions and both the federal and state level to prepare or ready ourselves for the climate crisis.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.

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