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After years of experiencing gentle inflationary increases in insurance premiums, many homeowners are now getting an unwelcome surprise as they open their latest bills. In the UK, the median cost of home insurance policies rose 36 per cent over 2023, according to Go Compare. In America, some states have experienced 40 to 60 per cent increases since January last year. The lack of affordable property insurance has even driven some to move home. In Australia, there are concerns that many homeowners will ride their luck without cover, after premiums rose by the most in two decades.
A perfect storm of rising costs for insurers’ building and contents policies is behind the surge. First, general claim values have increased as property prices have soared in recent years. Higher building material costs and skill shortages have added to rebuild and repair charges.
Second, climate change has also increased the frequency and severity of extreme weather, which has led to more claims covering everything from fallen roof tiles to rebuilding entire sections of homes. Last year there was a record-breaking number of natural catastrophes causing at least $1bn in insurance losses globally. The pandemic also encouraged more to buy homes in idyllic, but high risk, areas, including coastal regions. Third, a repricing of climate risks has led to a sharp rise in the cost of property catastrophe reinsurance — or insurance for insurance companies.
Premiums have surged as insurers try to repair balance sheets, manage costs, and reappraise climate risks. Some have stopped offering policies altogether. In wildfire-prone California, large insurers, including State Farm, have paused new applications. The state regulates home insurance premiums to protect homeowners, but in some cases that has made business unviable. Several companies have also left Florida, which has frequent episodes of flooding and hurricanes; many households are now covered only by the state-backed insurer of last resort.
Millions of homeowners worldwide are now, however, paying a de facto carbon price, according to industry experts. Home affordability is already a problem in many countries. In the most affected areas, housing demand and prices risk falling sharply. Some places could become ghost towns. And, if more insurers retrench from high-risk areas, burdens on the state will rise further.
As insurance companies recover from recent losses, and inflation falls, there should be scope for more competitive pricing. But firms may be tempted to keep prices higher for longer than they need to be. Regulators should keep a close watch on practices in insurance and reinsurance markets. Ultimately, insurers must get better at understanding and modelling climate risk. Those that can ascertain risk variations between homes in proximity, for instance, could offer more accurate and competitive pricing.
Transparency is essential too. Many customers lack the details to assess whether the risks to their property beyond what insurers tell them. Insurers could also be clearer on why costs are rising. Improved access to information, both on how to improve building resilience and local surveys of flood, wildfire, and other climate risks would help ease information asymmetries.
Yet ensuring fairer and more accurate pricing can only go so far. The only sure-fire way to keep a lid on insurance costs in risky areas is for governments to put more effort into climate mitigation strategies and support for retrofitting, including for flooding, subsidence, storm damage, and heat stress. Regulation can also ensure new properties are built to more resilient standards, and in less risky areas.
Without swifter and deeper action on the effects of climate change at a national and global level, governments will have to underwrite more of the risks themselves, or citizens will have to pay higher premiums. Neither outcome is sustainable.
