Disaster Risk Is Making Homes More Difficult To Insure

Life is full of risk. When one wakes up to face the day, it will be full of almost constant risks. Mostly, people navigate those risks without much trouble, accepting them, managing them or avoiding them. But in housing, risk forms a central pillar of production along with supply and demand. Whether a person is buying a house, renting a room to a stranger, or investing millions in a new housing project, there is a great deal of risk. When those risks increase so can price, and so can the cost of insurance. The increased risk caused by natural disasters in the United States is causing insurance for homes to become more expensive and harder to find. This is exposing the whole housing sector to a crisis and a question: can and should federal, state, and local government step in to offset risk if private insurance companies won’t.

Earlier this year the United Treasury Department’s Federal Insurance Office (FIO) released a study called Analyses of U.S. Homeowners Insurance Markets, 2018-2022: Climate-Related Risks and Other Factors. The analysis points out that “Homeowners insurance is important to U.S. consumers, the economy, and the financial system” and that “for many Americans, their home is their largest financial asset.” The National Homebuilders Association reports that “residential investment” including single-family and multifamily construction averages 3% to 5% of the nation’s Gross Domestic Product and “spending on housing services . . . which includes gross rents and utilities paid by renters, as well as owners’ imputed rents and utility payments” making up 12-13% of GDP.

According to the report, “homes are increasingly vulnerable to natural catastrophes” with natural disasters doubling from 1960 to 2010, most recently causing $145 billion in losses with $80 billion of that insured. People living in areas prone to disasters had 83 percent more loses than lower risk areas.

“The cost of insurance for consumers was much greater in areas with higher expected losses to buildings from climate-related perils than in areas with lower expected losses.” “82 percent more than the average for the bottom 20 percent of ZIP Codes.” in higher rates of policy cancellation for nonpayment.” And insurers had to pay out more in claims in those areas, $24,000 on average compared to $19,000 in lower risk areas. And insurance companies cancelled or didn’t renew more policies in those areas. Although we’ve seen many fires across the country, hurricanes caused the most damage and loses.

But it is important to remember what insurance is. The online economics resource Investopedia defines insurance as “purchased to provide financial protection or reimbursement against losses resulting from accidents, injury, or property damage. An insurance company pools clients’ risks to make payments more affordable for the insured.”

Obvious, of course. But for a company getting into the business of providing coverage for loses, the business proposition is that chances are better that people will pay premiums – the regular charge for coverage – and suffer no loss. It’s easy to blame insurance companies for pulling back. But what choice do they have? To stay in business, they either raise rates on everyone to cover losses, or they have to avoid areas where there is a greater likelihood of losses. If insurance companies become insolvent, more people are exposed to risk.

Should government step in to offset the increased risk? Dennis Shea and Emma Waters the Bipartisan Policy Center think so. They authored an opinion in Newsweek arguing for more involvement by the federal government.

They argue that Congress can create incentive for prevention, “fortifying homes against wind, hail, flooding, and wildfires” which would lower costs and reduce risks to property owners, housing providers and homeowners as well as insurance companies.

They argue for better data and sharing of that data. “Timely, accurate information can help property owners make more informed decisions on where to move, how to build, and what coverage to check.” They also suggest, “the federal government must strengthen support for affordable housing providers, who are uniquely unable to pass higher costs on to residents.”

I don’t that’s even close to enough risk protection. However, California has the Fair Access to Insurance Requirements (FAIR) Plan, essential becoming an insurance provider to property owners in the state. Data on their website shows their exposure growing too. The state is in no better position than a private company; eventually, if claims become too large, they can go bankrupt too. And keep in mind what happened in 2008 when millions of government backed loans went bad and the country almost went into a depression.

The answer lies in transitioning away from the mortgage as I suggested in March. The federal government can create a market in debt for mortgages or it can provide insurance in areas where people already live and work but face big impacts from natural disasters, but it can’t do both. The Leviathan, as Hobbes called government, can absorb a tremendous load of risk, but even it can break and sink. And if we were to save a sector, I certainly would not support bailing out big, non-profit, Low Income Housing Tax Credit (LIHTC) providers. I’d let them sink, go out of business and turn over their assets and residents over to private entities which could manage them more efficiently. The one thing I do agree with Shea and Waters about is that indeed, “rising property insurance costs are no longer a regional problem—they’re a national concern.”