Getting homeowners insurance used to be a fairly straightforward process. You’d shop around with two or three companies, compare rates and pick the best deal.
However, more frequent and severe weather events driven by climate change are hitting insurers’ margins hard as homeowner claims and the damage replacement costs spike. As a result, some insurers have paused writing new policies in some states or have opted to pull out from high-risk areas entirely.
Hurricane Helene is the latest example of the growing threat more severe storms pose. The Category 4 storm slammed into Florida’s Big Bend region last week, killing more than 130 people as of this writing and causing widespread wind and flooding damage across the Southeast.
Property damage estimates from Helene range from $15 billion to $26 billion, according to Moody’s Analytics. Meanwhile, AccuWeather pegged its initial damage estimate staggeringly higher at $145 billion to $160 billion. While the monetary losses from Helene will take time to tally, it might go down as one of the costliest storms in U.S. history.
To salvage their profits and stay in business, home insurance companies are passing these rising costs on to consumers through higher premiums or by leaving certain high-risk markets altogether. The average annual homeowners insurance rate jumped to $2,377 in 2023, up nearly 20% from $1,984 in 2021, according to recent data from Insurify, an online insurance marketplace. The company projects a 6% increase in rates in 2024, driving rates up to $2,522 by the end of the year.
This is creating a home insurance crisis that’s further hampering housing affordability and leaving a growing number of homeowners scrambling for coverage options. They’re often turning to last-resort state insurance programs to fill the void.
Experts worry these solutions won’t be enough to meet the mounting damages and losses from weather events that researchers predict will continue to grow in intensity and devastation for years to come.
“Insurance companies, where they used to be a very low profit, very stable line of business, are not that way anymore,” says Chuck Nyce, a professor of risk management and insurance at Florida State University’s College of Business. “It’s much more volatile; it takes a lot longer to settle claims, and (insurers) want a higher rate of return on their investment into these risky probabilities.”
On average, Florida homeowners shelled out $10,996 for homeowners insurance premiums in 2023, Insurify found. That’s expected to jump 7% this year to $11,759. Louisiana isn’t far behind, with homeowners there paying an average of $6,354 annually—a projected hike of 23% (or $7,809) expected this year, Insurify forecasts.
Homebuyers financing a home purchase are typically required to buy home insurance coverage to be approved for a mortgage. And homebuyers, particularly those searching in areas prone to severe weather events, are learning firsthand how much harder it is to find affordable coverage—or any at all in some areas.
“It used to be that when you go to buy a house, the first thing you would look at is what’s the school system? What are the taxes?” Nyce says. “The next to last thing before you close was, oh, I have to get homeowners insurance. It’s one of the first things you need to look at now; it’s a component of the cost of homeownership that (buyers) need to seriously consider.”
Rise in billion-dollar disasters, legal system abuse behind rate hikes
Global insured losses from natural catastrophes reached $20 billion in the first quarter of 2024, down from $33 billion in insured losses in the first quarter of 2023, according to reinsurance company Gallagher Re’s National Catastrophe and Climate Report.
And this was well before Hurricane Helene tore through the Southeast.
From 2017 to 2023, the U.S. saw 137 separate billion-dollar disasters that killed 5,500 people and cost more than $1 trillion in damages, according to recent data from the National Oceanic and Atmospheric Administration (NOAA). In 2023 alone, 28 weather and climate disasters caused $92.9 billion in damages—the most ever for billion-dollar disasters in a calendar year, the NOAA noted.
With more of these higher-cost weather disasters in the mix, insurers have seen a meteoric dollar increase in claim amounts. Two factors are primarily to blame: an increase in building replacement costs and more people moving into harm’s way, says Mark Friedlander, corporate communications director with the Insurance Information Institute (III), a leading provider of education and research on insurance and risk.
According to III’s economic analysis, cumulative home insurance replacement costs soared 55% in the three years between 2020 and 2022, Friedlander notes. During that time, the consumer price index (CPI), which the Federal Reserve uses as a benchmark metric of inflation, rose 15%, he says.
Labor shortages and supply chain disruption, especially during the first two years of the pandemic, also contributed to higher replacement costs, Friedlander points out. After retreating a bit in 2023, replacement costs are spiking again, particularly in Florida. That’s due in part to an unprecedented rise in legal system abuse, Friedlander says.
“We see coastal states, particularly Texas and Florida, continue to be the two fastest-growing states in the country,” Friedlander says. With that growth, he adds, there’s a rise in “billboard attorneys” who encourage homeowners to enlist their services to file fraudulent insurance claims. Insurers then have to fight those lawsuits in court, which adds up.
“We’re seeing a much greater instance of litigated claims, where instead of the traditional way of trying to resolve a claim through a normal procedure, the billboard attorneys are encouraging consumers to call them first and sue versus trying to settle a claim,” Friedlander says. “Of course, lawsuits lead to more expensive claims because the expenses incurred by the insurance companies, whether it’s a legitimate or illegitimate claim (…) it’s going to raise costs significantly because of all those expenses related to defending the lawsuit.”
At the same time, though, a recent investigation by CBS News found that some insurance companies have been altering damage estimates to avoid paying claims, with one former adjustor (now an attorney) telling the outlet that companies won’t pay up until a lawsuit is filed.
In 2022, Florida Governor Ron DeSantis signed a property insurance bill to help deter fraudulent claim lawsuits and lower insurers’ costs. Such reforms may help curb system abuse in the short term, but homeowners won’t feel much relief in their wallets as researchers predict more intense storms, pushing home insurance claims and rates ever higher.
More insurers cut losses by limiting coverage, pulling out from high-risk states
California. Colorado. Oklahoma. Louisiana. Washington. Major insurers such as American National, Allstate and State Farm have made headlines by declining to write new policies or pulling out of higher-risk areas known for severe and frequent weather events.
Homeowners now face a tangible gap in affordable, accessible insurance coverage, forcing them to turn to state-sponsored insurance programs to pick up the slack.
These programs were meant to be a last-resort insurance option. Instead, they’re now overwhelmed by new policyholders being dropped by traditional carriers and no other choices. The California FAIR Plan is a prime example, with administrators recently announcing an action plan to reform the program and help stabilize the state’s embattled insurance market.
But homeowners insurance is just one wrinkle to consider in the overall housing affordability equation.
“We are seeing more and more condominiums and townhome complexes with no wind and hail coverage or no roof coverage at all,” says Carrie Gusmus, a loan officer with Aslan Home Lending in Denver, Colorado.
Colorado is another state where homeowners are seeing dramatic, double-digit insurance rate hikes. From 2018 to 2023, Colorado was one of three states with the biggest cumulative rate increase, recording a 57.9% jump, just behind Texas at 59.9%, according to S&P Global Market Intelligence. In contrast, the national average premium rate increase for homeowners insurance was 11.3% in 2023, S&P reported.
As insurers hike rates to account for higher claim costs, homeowners and future homebuyers are taking the financial hit, Gusmus says.
The issue is even more problematic for condo buyers. Faced with higher building coverage premiums, some condo associations are dropping or limiting their master coverage to avoid levying special assessments or raising fees on association members. But if a condo community doesn’t have adequate coverage, a prospective buyer won’t be approved for an agency mortgage from Fannie Mae or Freddie Mac, explains Gusmus.
“We’re seeing insurers pull out. We’re seeing associations have to take drastic measures to get the rest of their property covered,” Gusmus says. “But if you have a property that is a total loss, even in that situation, and you did not have the roof insured, who is going to put the roof back on?”
She continues, “We’re seeing more and more where we get condo docs and we get the master insurance policy, and we can’t do an agency loan.”
Gusmus says this will impact cash-strapped first-time homebuyers the most. They’ll either be sidelined due to affordability or get a non-qualified (non-QM) mortgage if they can’t qualify for traditional financing. Non-QM loans typically have higher interest rates than conventional financing, further straining buyer affordability, Gusmus points out.
Homeowners forgoing, skimping on insurance, signaling ‘disturbing’ new trend
As insurance costs and claims climb, an unintended consequence has emerged: more homeowners are skipping out on buying a policy entirely.
The numbers are sobering: One in 13 homeowners in the U.S. are uninsured, which translates to 7.3% of all American homeowners living in 6.1 million homes, according to an analysis of 2021 U.S. Census data from the Consumer Federation of America.
The Federation found that lower-income homeowners making less than $50,000 a year are two times as likely (15%) as the general population to be uninsured. Homeowners of color are more at risk, with an estimated 22%, 14% and 11% of Native American, Hispanic and Black homeowners, respectively, who are without homeowners insurance, according to the analysis.
Many homeowners don’t even realize that a typical homeowners policy doesn’t cover flood-related damage or losses. Homeowners in flood-prone areas need to buy a separate flood policy, usually through FEMA’s National Flood Insurance Program or a private insurer. However, an estimated 60% of homeowners don’t carry separate flood insurance, while 13% mistakenly think their standard home insurance policy covers it, Insurify found.
“It’s actually a very disturbing trend where most homeowners will be devastated and never recover from a catastrophe if they don’t have insurance,” says Friedlander. “You’re not required to have insurance by any state; there are no state laws that require home insurance. You are required by a mortgage lender.”
Homeowners who don’t secure homeowners insurance end up with “forced place insurance” by their lender, often with bare-bones coverage and costing up to five to 10 times more than a traditional policy, Friedlander explains.
Many retirees from the Northeast, where home prices and borrowing costs are significantly higher, can typically pay cash when relocating to Florida and other coastal meccas in the South, Friedlander notes. However, these retiree buyers are increasingly opting to forgo homeowners insurance to save money since it’s not required for an all-cash deal.
Miami-based Alan Gabay, director of luxury sales, and sales associate Matt Van Wie, who both work with SERHANT., confirm that they’re seeing the same trend among their affluent buyer clients who are scooping up coastal homes.
Some luxury condo buyers in Florida who can afford to pay millions in cash for a unit sometimes skip out on coverage because they have ample financial resources to buy another home, Van Wie says. However, for more cost-conscious buyers, higher insurance rates and new state legislation requiring condo associations to fully fund their cash reserves to keep up with structural maintenance and improvements means they’ll pay steeper upfront costs to buy a home.
Not only is this scaring potential condo buyers away or pushing them inland, it’s also impacting sellers, too, Van Wie points out. Gabay agrees, noting that brokers are having more frank talks with their sellers about setting a realistic asking price from the start and being mindful of the current market dynamics, especially for condos in South Florida.
Otherwise, sellers could see their listings languish on the market longer and require multiple price cuts, he explains.
“People have to realize, if they want to sell, they have to take that factor (home insurance affordability) into consideration,” Gabay says.
How real estate professionals can help clients navigate tricky homeowners insurance snafus
Real estate agents play a critical role in advising and guiding their clients in making an informed offer decision, which includes navigating tricky homeowners insurance issues. When negotiating an offer, real estate agents should help their clients do their homework about the community they’re buying in.
A great place to start is to get access to a condo building or HOA’s financials and take a peek under the hood, Gabay says. This enables a buyer to see if the association is paying its bills, how much it has in cash reserves and if there are any recent liens or judgments. Association financial records will also reveal if there are any major cash outlays or special assessments to watch out for, Gabay says.
Gabay also advises buyers to get copies of the association’s meeting minutes from the last six months. If current residents are encountering problems with the association responding to damage claims, hiking association fees or imposing special assessments, meeting minutes will reflect those concerns, he explains.
On the lending side of things, Gusmus says she’s seeing roughly 15% to 20% of deals in her business being negatively impacted by home insurance obstacles.
“We’re seeing contracts get canceled because borrowers cannot find insurance in some areas, or the insurance is so cost-prohibitive that it causes their debt-to-income ratio to not work,” she says.
To avoid this potential roadblock, Gusmus recommends that buyers and current homeowners who want to refinance shop around with several reputable insurers to compare rates and policies. You may have to expand your search beyond the major carriers, too, she adds.
Loan officers and real estate agents should also remind their clients to pay close attention to the insurance verification deadline in the purchase contract to avoid derailing their mortgage approval at the 11th hour.
“The insurance deadline in the contract is one of the most ignored deadlines that there is,” says Gusmus. “It certainly affects the loan. We end up terminating those (loans) based on the deadlines in the contract, because you cannot get a loan on a property that you can’t insure.”
She also notes that if a buyer misses the insurance deadline and their loan is not approved, it’s possible the buyer could still be on the hook (financially and legally) to follow through with the purchase without a financing contingency in place.
Some buyers are finding ways to make it work with their lenders, though, she says, either through buy-downs, choosing a higher deductible or searching further afield for an affordable home.
But just looking broadly at all the cascading issues created by the insurance crisis—from whole condo associations forgoing wind or hail coverage to first-time homebuyers being pushed out of otherwise affordable areas—Gusmus says that the obstacles are simply overwhelming.
“It’s infuriating, and you feel powerless,” she says.
