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Why it is becoming more difficult and expensive to obtain homeowner’s insurance

The cost of and availability of homeowner’s insurance are both on the rise. There’s no indication that things will improve soon.

The premiums that insurers pay to reinsurance firms in order to mitigate their risk have skyrocketed in recent years, and climate change and escalating rebuilding and repair costs are to blame.

Since major insurers have already essentially abandoned the Florida market, the state’s homeowners face premiums that are nearly four times higher than those in other parts of the country. Part of Florida’s difficulty is the risk of hurricanes; Hurricane Ian last year was the costliest storm in the state’s history.

Natural catastrophes are prompting insurance companies to pull out of the market, and Florida isn’t the only state affected.

Due in part to the increased risk posed to homes by wildfires, two of the major national insurers, State Farm and Allstate, have stopped offering new homeowners policies in California.

Global warming isn’t the sole cause of concern. The insurance industry also cites the rising cost of home replacement due to the rising cost of materials and labor. Insurance rate caps in several jurisdictions, including California, are also being blamed by the businesses.

Due to “wildfires, higher costs for repairing homes, and higher reinsurance premiums,” Allstate stated in a statement last October that it was no longer writing new policies in California because “the cost to insure new home customers in California is far higher than the price they would pay for policies.”

Insurance and housing costs are on the rise.

Reconstruction and replacement expenses, according to the insurance sector, increased by 55% between 2019 and 2022. And after years of losses, reinsurance, the sort of insurance employed by insurers to restrict their risks, has increased by 30% to 40%, as reported by JMP Securities’ insurance industry expert Matthew Carletti.

It has been five years of losses for reinsurers, Carletti remarked. That’s it; they’re done.

Experts agree that the rising frequency of natural catastrophes has a direct impact on insurance prices by prompting insurers to exit certain markets and reinsurers to boost their rates.

“It’s not just inflation that’s a problem for reinsurers; it’s the rising frequency of events,” Carletti said.

According to the Consumer Price Index, the government’s primary inflation gauge, insurance rates have increased by only 1.6% over the past year. However, in regions where insurance is becoming more difficult to come by, rate rises in the double digits are not uncommon.

California’s former insurance commissioner, Dave Jones, has remarked that the decision by Allstate and State Farm to stop writing new policies in the state is “not surprising” in light of the recent spate of climate change-fueled wildfires in the state.

Jones said that the insurance industry’s decision to stop writing new policies was a “rational response” to rising losses and hazards. The insurer cannot afford to take on such a high risk. This has been going on for a considerable amount of time now.

The proliferation of no-insurance zones

Experts have noted a nationwide increase in the number of uninsurable locations due to natural catastrophes such as hurricanes and wildfires. However, this trend is most pronounced in areas like California, Florida, and Louisiana.

Different forces are at work in each of the three states, but all three are experiencing the same results: As a result, an increasing number of people are forced to get insurance from the state-backed insurer of last resort, where premiums are often higher and coverage is more limited. Smaller insurers in areas like Louisiana and Florida have gone bankrupt because larger insurers like Allstate and State Farm have stopped writing new policies.

For instance, a recent study from Louisiana State University found that 17% of homeowners in the state had their insurance coverage terminated in the previous year. More than two-thirds of policyholders, meanwhile, have reported that they have paid more in Louisiana than in any other state for both homeowner’s and flood insurance.

An increasing number of states are considering establishing their own insurance companies to serve as a “insurer of last resort” for residents who cannot obtain coverage from private companies. In contrast, Citizens Property Insurance in Florida has witnessed an increase in policy numbers of around 50% over the past year, to 1.3 million. This represents 16% of the market and is far more than any major insurer writes in the state.

According to Carletti, the trend of large insurance companies leaving key markets, which has already begun in Florida, might soon extend to other states, particularly those with caps on annual price increases.

Florida is a model for other states to follow. Insurers are not obligated to sell policies in every one of the 50 states. Insurance companies will only create plans they believe would generate a profit. JMP Securities’ insurance industry expert Matthew Carletti

Rising potential for wildfires

There have been 1,200 wildfires reported in California this year, which is about half as many as were reported in the first five months of 2022.

Since 2020, when 8,648 fires ravaged the state and caused the destruction of more than 11,000 buildings, the number of wildfires has decreased each year. About 772 buildings were lost in the approximately 7,500 wildfires that occurred in 2022.

Later this year, though, wildfire activity may increase. Fires could start later this year if the grasses and other vegetation that recent rains helped develop dry up and become combustible.

Globally, extreme wildfires may become more frequent in the coming years as temperatures continue to rise. According to the UN Environment Programme’s projections, the frequency of catastrophic wildfires might rise by as much as 14 percent by the year 2030. The prediction suggests that by 2050, the growth will have reached 30%.

After serving as a fire chief in California and Nevada for four decades, Frank Frievalt saw a trend in the devastating megafires that occurred every year.

You used to recall the blazes in your professional past, Frievalt said. You might write it off as a fluke the first year. We believed things couldn’t get any worse after (the 2018 fire in Paradise, California). We simply piled them on top of one another.

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