Climate Change and Insurance Costs

Climate change is causing insurance premiums to rise, as insurers face increasing costs from natural disasters. Many homeowners are underinsured, and state-backed insurers of last resort are struggling to keep up. The real estate market is struggling to adapt, and accurately pricing climate risk is crucial.

A record 28 weather disasters in the US last year did $1 billion or more in damage, according to the National Oceanic and Atmospheric Administration (NOAA). This year is on pace to at least match that record, with 15 such events so far — a tally that doesn’t yet include Hurricane Beryl, which might have caused $30 billion in damage. Globally, the toll from natural disasters has topped $120 billion so far this year, the reinsurer Munich Re estimated this week. Only $62 billion of that was covered by insurance, a figure 70% higher than the long-term average. Most of this damage happened in the US, and much of it was borne by homeowners.

Insurers have been raising premiums in response to these catastrophes and to cover the rising costs of rebuilding and buying their own insurance through companies like Munich Re. Homeowners insurance premiums rose 11% on average in the US in 2023, according to S&P Global Market Intelligence. They’ve risen by more than a third in just the past five years. In states on the front lines of climate change, including California, Florida and Texas, increases have been even higher.

But insurance premiums still aren’t high enough, mainly because almost nobody wants them to be. Homeowners aren’t fans of paying exorbitant insurance rates, and they tend to punish politicians who let them rise too much. Higher premiums also hurt property values, threatening tax revenue. The result is market manipulation like California’s Proposition 103, which sharply limits how much insurers can raise premiums. And even if insurers could increase rates willy-nilly, they might think twice about chasing off customers — especially when laws and regulations are designed to discourage homeowners from suing insurers for uncovered damage.