Love this house. It was our dream house
from the beginning, even thought it was over our
heads, but we just worked really hard and made it
become our own. And I love it. I have my
horses here. I have a 100 pound
tortoise that I saved. So yeah, I just love it.
It couldn't be more perfect for us. But Allstate, who insured
Darlene's house for 18 years, recently sent her
a non-renewal notice. You can't just say after
18 years of being okay, all of us today, you're
not okay. And that's it. Home insurance companies
are saying homes like Darlene's are too risky
to insure. The nation's largest
homeowners insurance company, State Farm, has
decided they won't accept new applications for
property in California. Household names like State
Farm, Allstate are pulling out of these markets.
They know the risk is just too high to be actuarily
sound for their business. There are companies saying
there are too many buildings being destroyed
by catastrophes, inflation is making it too
expensive to rebuild, and they can't protect their
investments any longer. Losses are increasing
related to climate risk. As that risk increases,
so does the cost of insuring those assets
that people have on hand. But without homeowners
insurance, many homeowners can find themselves in
big financial trouble. I've been trying to find
another insurance. I had one company step up
and said they'd do it for $12,000 a year. I go from $2,000 to
$12,000. Yeah, we would have to
move. There's no way. But selling the home might
not even be possible. The moment that an
individual gets a non-renewal letter from
the private insurance market, they essentially
lose 12% of their property value. It's not just California. Louisiana and Florida are
contending with similar issues due to flood risk. Why are so many American
houses becoming uninsurable, and what
will it mean for the economy when so many
homes lose some of their value? Darlene bought her
house for $420,000 at the behest of one of her best
friends. My girlfriend that I've
known for close to 40 years. She's the one that
brought me to this. She lives two doors down
and she said, 'you have to buy this house.' So I had
really no choice, but it was the best thing we
ever did. It's just a three
bedroom, two bath, and it's only probably 1,700
square feet. It's just perfect. I'm an
outside person anyway. So what's the most
perfect is the outside. I have a huge pasture for
the horses and the backyard had an artist
come and she painted all my animals on my back
fence. So when I go sit in my
little girl area where we have a little glass of
wine, all my animals, even the ones I've lost, are
all painted on the side of the barn. It's just
beautiful. Darlene and her husband
still owe about $360,000 on their mortgage. Most
mortgage lenders require home insurance as a
prerequisite for the loan, and 58% of Americans hold
mortgages on their homes. You are allowed to live in
your home without insurance. That would be
called self-insurance. It depends on your
financial situation, whether or not that is a
good or risky choice. Insurance acts as a risk
transfer tool. So in order to make sure
that that investment that the bank is making with
you, should something happen, a catastrophe of
natural catastrophe or man made catastrophe, if it
happens, the insurance allows the home to
recover. The insurance business
model works like this. Companies assess the risk
of damage happening to a home and collect a
premium accordingly. By insuring properties
with varying levels of risk, they are able to
spread the liability for the riskiest assets among
the whole group. They reserve some funds
to pay out claims and invest others. They typically make their
profits via safely held investments. The insurance rate is a
reflection of the risk. Insurance rates are the
effect of the risk, not the cause. So the
insurance company, in order to operate its
business as it should in a profitable manner, needs
to do what it can to get those insurance rates to
better reflect the risk. Though insurers are saying
climate change, inflation and the regulatory
environment have created a situation where it's
difficult to operate a profitable business in
some locations across the country. Private insurance
companies are withdrawing insurance in high risk
areas due to climate risk, and people are seeing
their premiums increase in the public market. Every state has seen an
increase, but 12 states have seen their average
premiums more than double. The insurance is regulated
at the state level. Some researchers refer to
aspects of the regulation as premium suppression,
which may result in climate risk not being
fully priced into the market. For example, look
at Prop 103. Proposition 103, in the
state of California was something that was passed
all the way back in the '80s. In California, due
to the regulatory policies, essentially
don't allow climate to be included in the
calculation of insurance premiums, but they also
set a limit on what the increase can be year over
year. So the current limit is
about 7%. Anything is 7% or higher. Has to go in front of the
insurance commissioner. It has to be approved in
front of the board. That can take a long
time. If they can't charge the adequate rate for the
insurance, it just simply doesn't make sense to do
business there. Which leaves people like
Darlene with non-renewal notices and the remainder
of their mortgage debt in their hands. Individual
homeowners have a few options if traditional
homeowners insurance becomes unavailable. If you receive a
non-renewal notice, there are always options to
have more insurance. Depending on where you
live, you can go into residual markets. Excess markets these
markets will have a higher cost to the insurance. The rates are not at
regulatory approved like the standard market would
be. However, it is an option. I've been trying to find
another insurance. No one will even step up
to the plate. I had one company step up
and said they'd do it for $12,000 a year. I go from $2,000 to
$12,000. Yeah, we would have to
move. There's no way. We're
retired. Some states also have
government-assisted insurance options as
well. A social welfare program,
if you will. 32 states and Washington,
D.C. have created insurers of
last resort. The state fair program in
California that is the state-run insurer of last
resort for properties that have extreme wildfire
risk, cannot get insurance in the private insurance
market. Darlene's insurance agent
told her that the fair plan would be very
expensive in her case. The guy that was my guy
for 18 years said that he won't even recommend or
quote with a fair plan because he says unfair
plan. $12,000 is not really a
fair plan in my estimation either, because he was
quoting even the deductibles, even on the
$12,000 a year, the deductibles were like 15
grand. If this happens, I'm
like, well, what's the point of that? In the case of California,
just for example, the average cost of a state
fair plan premium is about $3,200. Quite honestly, government
does not do insurance well, and even more so it
extends the burden to the taxpayer, or it puts it
back on the insurers who are operating in the
individual states. Darlene's insurance agent
said that any wildfire protection tactics that
she tries to do won't impact the insurers
decision not to renew her coverage. On paper, they said, I'm
in a fire area and we have a wooden fence that's
connected to the house that has been connected
to the house forever, and they said, that's a, you
know, so they they did note some things like
that. So that's why I called
and said, well, if I just we'll just change the
fence out. You know, I just paid
like $7,000 to have trees trimmed. If they need to
be trimmed more, I could do that. I mean, what can
I do? And he absolutely said
there's nothing I can do. Meanwhile, climate change
keeps getting worse. When I first moved up here
18 years ago, we certainly didn't have fires that we
had. We didn't have any fires
this last summer. It was wonderful. But I
mean, the smoke came in pretty bad there for two
to three years, I guess, and that was like
upsetting me. Since 2009, there has been
a 270% increase in the cost of wildfires and a
335% increase in the number of structures
destroyed by wildfires. And for every additional
building destroyed, there is an associated 1.9
additional non-renewal notices issued from an
insurance company. Florida is a state where
the largest insurance company in the entire
state now is the state-run Citizens Insurance
Agency. So today, the the most at risk properties
are on that insurer of last resort, and it's
become the largest insurer of the state, which is
crazy to think about. All of the risks that
exist in the state is on one single insurance
company's role. And if there were to be
some issue with that, now the state has to step in. Communities may need to
rethink how they use insurance to account for
climate risk. If you look at some other
states who are beginning to look at ways that they
can take a more collective and communal approach to
risk management, you're seeing very different
circumstances. I think the state of
Alabama is a very good example of a state where
the government and policymakers have
embraced the understanding of what is causing this
increased risk? How can we help better
manage that risk? And they're allowing
consumers to take grants up to $40,000 for a
government grant to make yourselves more
resilient. And we really need to think about the
behaviors in terms of where we're developing,
how we're living, so that as a community, we can
make it more resilient. But in the meantime, all
of this is going to have big implications for the
U.S. real estate market and
therefore the U.S. economy. The insurance mechanism is
the first to really price in climate. How would I even sell my
house if I can't get insurance? How is the
next person gonna, you know, they're not going
to want, they can't buy a house if they can't get
insurance. Well, I guess unless they're coming in
cash. The insurance sector was
2.6% of U.S. GDP in 2022. Housing in general
accounts for around 15% to 18% of the U.S. GDP. As the insurance
market starts to price in climate risk, a good
portion of the U.S. economy will be impacted. So you need insurance to
have economic growth. So hopefully we're
beginning to see the policy making community
in the state of California understand that some
changes need to take place. Insurers need to
be able to charge for risks like inflation, for
risks like increased climate with a
population, an economy the size of California, the
insurance industry wants to be there. You know, as
much as the customers are frustrated about their
costs of insurance, insurers are frustrated
that they can't do business there anymore. So what we would argue is
if we can get the regulation in a better
place, that better reflects the risk in that
state, insurers will be back and wanting to do
business there. Communities need accurate
data to understand where the risk exists,
understand what they're most vulnerable, not
necessarily populations, but assets are in the
community. What the most vulnerable parts of their
areas are, where they can efficiently allocate
resources to protect and suppress the risks that
exist in those areas. What the insurance
industry would also like to see is more emphasis
on physical infrastructure resilience, because if we
understand that climate risk is increasing and
we're living in places that have increased
climate risk, we've got to find ways to live in a
more resilient manner, and the government can help
incentivize that. The tax system, for
example, is a great incentivization tool. But also we've seen of
late some investments taking place. Insurance companies say
they have been trying to adequately price in
climate risk for years. The insurance companies
absolutely have their own underlying models and
maps that give them the ability to understand
which areas are most at risk versus which areas
are less at risk. When we produced our
model, we correlated it with the data that comes
out of the fair plan, that comes out of the citizen
plan in Florida and Louisiana. And what we
ended up finding were really high correlations
between our extreme wildfire risk, wind risk
and flood risk, and the either the non-renewals
or the increases in premiums on those plans
across those states. Insurance experts say
rethinking how we account for climate risk is also
key to keeping communities safe. Risk management does not
come into play until it's entirely too late when it
comes to individual personal property
purchasing. It comes into play when the mortgage
provider needs you to go get it, and that's the
first time when a consumer even begins to think
about where they're living and what risks might be. The cost reflects that
risk. That should be an alarm
to tell them that they're living in a risky place
and then ask themselves, how could I reduce that
risk? Or do I need to think
about living somewhere else? Like many Americans,
Darlene said when she purchased the house,
fire— No, it wasn't even a
thought. That's true. But now she's struggling. Even though she feels she
did everything right. We're doing the right
thing. We're doing everything we
can. We retire. You know, we worked hard,
we retired, we got our, we take good care of our
house. I'm never late on my bills. I've paid that
for 18 years. I've never, you know, we
never missed making everything right and
paying everything. And you just give me no
choice? That's the part that bugged me the most,
I think, is give me a list. Give me something
to work with. Raise it if you need to,
you know, the price reasonably. But don't
just give me no choice. That's not right.
