As natural disasters become more common, insurance costs and coverage limits could increasingly impact homeowners

Key takeaways

  • Climate change is increasing natural disaster frequency
  • This causes significant losses for insurance companies
  • Some homeowners could find insurance prohibitively expensive
  • Policyholders must adjust to these expenses

With massive storms and wildfires becoming more common in certain parts of the country, climate change is a pressing issue. These events increased risk for people and property, influencing how insurers operate. 

Homeowners in high-risk areas could absorb premium increases or find it nearly impossible to purchase coverage. This will cause policyholder frustration because, depending on their location, they might lack the required coverage.

Developing mitigation strategies will be vital for homeowners as they figure out ways to minimize their risk. Here’s a look at the impact of climate change on insurance for property owners. 

The link between climate change and natural disasters

A natural disaster is any sudden, naturally occurring event that causes significant damage and possibly death. Examples include hurricanes, tornadoes, earthquakes, floods, storms, wildfires, extreme temperatures, and landslides. 

The influence of climate change depends on the particular disaster. According to the United Nations Environment Programme, 90% of all natural disasters are weather-related, with floods, storms, hurricanes, and wildfires the most common.

Flooding is a significant issue throughout the United States, and the most frequently occurring natural disaster. It’s become more prevalent for three reasons. First, higher temperatures increase evaporation and allow denser clouds to form. The result is more rainfall more quickly. Second, higher temperatures make intense storms like hurricanes and flooding more frequent. Finally, higher sea levels, created by melting glacial ice, can lead to coastal flooding. 

About 40% of the American population lives near coastlines, putting a significant number of people at risk. Dense coastal populations mean more property damage and increased claims for insurance companies.

Extreme heat and wildfires accompany rising global temperatures, and drier conditions increase fire risk. Higher temperatures are the result of greenhouse gases, which are trapped in the atmosphere and warm the air. The result is severe heat and snowpacks melting earlier in the year, causing forests to have dry conditions for prolonged periods. 

Once a fire starts in a dry forest, containing it is next to impossible. States experiencing drought conditions, like California, Texas, Idaho, Alaska, Colorado, New Mexico, and Oregon, tend to be hit the hardest by wildfires, creating insurance issues for residents of many of those states.

What’s happening in high-risk areas

Homeowners in high-risk areas face challenges amid the increase in natural disasters. Those living in coastal areas are constantly watching for floods and storms that could quickly damage property and put lives at risk.

The same applies for homeowners in drought-stricken areas. They’re frequently watching for wildfires and encountering smoke, even when there isn’t a wildfire nearby. Wildfires cause up to $10.2 billion in property damage annually, and insurance payouts reach $14.8 billion every year, carrying a significant financial burden.

These major payouts mean insurance companies must change how they handle premiums in high-risk areas. For instance, Fortune reported that residents of Paradise, California, faced insurance premiums in the $10,000 annual range after fire destroyed most of the community in 2018. These rates make the town an unviable place to live for most, which could become more common as climate change worsens. 

How the insurance industry is responding

The situation in Paradise shows that insurance companies won’t take on increased risk for people living in areas prone to natural disasters. As a result, homeowners in 31 states have sustained double-digit premium increases since January 2022, with six states facing increases of 20-30%. 

In some places, insurance companies are no longer writing homeowner policies. Louisiana homeowners living in hurricane-prone regions could struggle to find anyone willing to insure them, while major carriers like State Farm and Allstate aren’t writing new policies in California.

AIG has reduced the coverage it provides along the East Coast, while dozens of insurance providers in Florida have shuttered in recent years. These problems won’t disappear anytime soon, so homeowners must figure out new ways to protect themselves if they can’t find a policy that meets their needs.

Adaptation strategies for homeowners

With insurance rates increasing, homeowners must prepare themselves by figuring out ways to make their homes less vulnerable to floods or wildfires can improve your outcomes. Things like repairing or replacing roofs, installing steel siding, investing in flood barriers, and sealing your doors and windows can reduce natural disasters’ damage.  

If you can’t find a private insurer who will offer you coverage, it’s also worth looking into FAIR Plans. In short, FAIR Plans make home insurance available in areas with high risk exposure. These plans are typically more expensive and offer less coverage than private insurance, but FAIR is worth a shot when you can’t find private insurance. 

In New York, another option is the Coastal Market Assistance Plan. This plan helps homeowners who at least three private insurers have rejected find coverage for windstorms, which could be a significant issue in coastal neighborhoods.

Be prepared for change

Climate change is making insurance more expensive and less attainable for people in high-risk areas, and this issue will only worsen as weather-related disasters become more frequent. Homeowners will have to adjust their expectations and look for ways to keep their properties safe, especially if they live in regions heavily costing insurance companies.

NICRIS Insurance offers home insurance in New York State. We’ll work to find you a plan that meets your needs and protects your property. Contact NICRIS to learn more or receive a free quote.