Garrett Gray laughs when he says that luck About how his house in the Los Angeles Valley was almost uninsurable. “It’s surrounded by brush, and it got a very bad score in CoreLogic,” he says. And he should know: As president of CoreLogic’s global insurance solutions business, he knows how the changing insurance landscape impacts real estate.
The problem of extreme weather costs the country $23 billion annually, and counting (last year there were 23 major weather events that caused at least $1 billion in damage), and it wreaks havoc on homeowners’ insurance in states vulnerable to climate risks. The housing markets in California and Florida are experiencing a real insurance shock.
Recently, homeowners insurance in California has been in disarray, with property insurance companies capping the number of insurance policies they write in the state or simply refusing to write new homeowners insurance policies altogether. Consider State Farm, California’s largest home insurer, which announced last year that it would stop accepting new applications for property insurance due to “historic increases in construction costs outpacing inflation, rapid exposure to catastrophes, and a difficult reinsurance market.” Now, State Form is reportedly raising interest rates by an average of about 20% this year. “These price changes are driven by increased costs and risks,” the company said in a statement. San Francisco Chronicle.
What’s happening in California mirrors trends across the country, said Amy Bach, co-founder and CEO of United Policyholders. Bach said the insurance crunch is as acute in wildfire-prone California as it is in hurricane-prone Florida — although the latter has been at the forefront of the problem. luck. Florida has lost many homeowners as they flee the state. This insurance shock will worsen as the severity and frequency of extreme weather events increases.
“There is a very unfortunate combination of factors and a very uncertain future for the private property insurance ecosystem as we have known it,” Bach said. In their view, insurance executives fear increasingly frequent and costly claims from policyholders coupled with more and more extreme weather events; They worry that it will be very difficult for the residential property insurance business to be profitable. Then there’s the emergence of technology that promises to filter out high-risk properties, Bach said, pointing to CoreLogic’s risk scoring and assessment system. Such tools reduce insurance consumers, reducing individual risks to a single number – which the insurer can then refuse to cover. It was also a tough market for reinsurance, which is essentially insurance for insurance companies.
“The advent of risk scoring, the advent of insurance scoring, drone satellite imagery, and the migration of human-driven underwriting to machine-learning-driven underwriting has really changed the odds,” she said.
In California, there is a FAIR plan for residents who cannot get insurance through a regular insurance company, but it is simple and expensive. Bach said United Policyholders’ 2023 California Homeowners Insurance Survey revealed many sad stories, with people fearful of losing their homes because they can’t afford the FAIR plan, which reportedly receives 1,000 applications every day.
“There is no doubt that people in California will pay more for insurance for the foreseeable future,” Bach said.
Severe weather: bad today, worse tomorrow
Risky weather events are at the heart of the insurance business, and currently, many insurance models are not allowed to take climate change into account, which affects the severity, frequency and often location of major disasters. This has led to more losses for moving companies, and for homeowners, it has resulted in more people being displaced from their homes, Gray said.
It’s a problem for the housing market, which is only now beginning to improve with affordability improving after home prices skyrocketed during the pandemic housing boom and mortgage rates more than doubled. Given the extent of the connection between insurance and real estate, any problem in the insurance market may affect the ability and decision of many Americans to purchase. But there are some regulatory changes to the method that could alleviate insurance problems in the two states. In California, Proposition 103 limited the ability to use climate models to predict risks far into the future, Gray explained. But it could be reconsidered, and change how the state’s insurance market works.
“We think some carriers are moving out of the state because they’re not able to take into account all the things they need to do to price the risk, so we think mitigating 103 will help encourage carriers to come back,” Gray said.
While this may be true, there is other legislation supported by Bach’s nonprofit, which essentially states that if a homeowner mitigates his or her risk by meeting “Safer Wildfire” standards, the insurance company must offer him or her a policy. .
Meanwhile, Gray said state officials in Florida are updating building codes to address the increasing frequency and severity of weather events, wind in particular. He added that this would not have an immediate impact because building codes only apply to new construction buildings or those undergoing major renovations. However, he predicted that “over time, just as with California’s earthquake codes, you will find that buildings are more resilient, which will reduce costs and the severity of claims, which will reduce the cost of insurance.”
Any cost relief is welcome given that Florida homeowners already pay the highest insurance premiums in the country, averaging $6,000 annually as of last summer, versus the U.S. average of $1,700 annually, according to Mark Friedlander, a Florida-based insurance company. Director of Corporate Communications at the Insurance Information Institute.
But climate risks extend beyond California and Florida; Gray pointed to Maui, which historically has had a very low wildfire risk due to how wet it is. However, in August last year, the island was hit by a series of forest fires, the country’s deadliest in more than a century. This shows that weather-related disasters are not only occurring more frequently and more intensely, but are occurring in areas that were not previously perceived as risky. “We have to adjust our models,” Gray said.
However, problems in the insurance market bring more trouble to the housing market. With his home nearly impossible to insure, “I almost backed out of the deal,” he said. Ultimately, Gray made some changes to make his home more insurable, but there will likely be more real estate deals that fail “due to the inability to insure the property,” he said.
That’s true for Malibu and the surrounding valleys, Gray said, adding that the further you get, the more difficult it becomes to secure a property. If people cannot self-insure or set aside money to use in case something happens to their home, which most cannot do, that will likely impact purchasing decisions. More conscientious homebuyers will want to know what weather events generally occur and what type of vegetation surrounds the property to gauge insurability. Hence, it can make some homes more marketable (even though they are more expensive), and others less marketable – meaning sellers may have to compromise.
In the past, the ability to obtain homeowners insurance was taken for granted, but that is no longer the reality we live in, Gray said.
“It’s very scary as a homeowner, your home is generally your biggest asset, right? It’s where your family lives, and it should be your safe space.” “If you can’t secure your safe space, think about the emotional impact of that.”