Destructive wildfires raging through Los Angeles have exposed the impact of climate change on the US homeowners' insurance market, with homeowners facing the difficult choice of either paying exorbitant insurance prices or risk losing it all.
The recent LA wildfires will be among the costliest in California's history. One preliminary estimate from AccuWeather said total losses could reach up to $275 billion. Multiple reports estimate total insured losses to range from $20 billion to $40 billion.
Rising insurance claims are one economic consequence of climate change, which is making extreme weather events more common. In California, wildfires are becoming hotter and more intense, according to the Environmental Protection Agency.
Meredith Fowlie, a professor at the University of California, Berkeley, said the rising costs of climate change will lead to increases in cost of living in high-risk areas.
"The inconvenient truth is that as climate risks escalate, the cost of insuring those risks are going up," she said.
As extreme weather events become more frequent, insurance claims are rising by thousands of dollars contributing to an affordability cycle as consumers also grapple with increased home values, rising mortgage rates and inflationary pressures.
Consumers and insurers squeezed
In the US, buyers must obtain homeowners insurance before they can take out a loan to purchase a home. But rising premiums and a lack of affordability are making this more difficult.
Ms Fowlie said the recent rise in premiums could be a course correction from when rates were too low. Still, that puts homeowners in a difficult position: lower premiums and less protection, or higher premiums and an affordability crisis.
“The challenge is how can we strike a balance,” she said.
Home insurance premiums in the US vary by state, with each regulating the market differently. Premiums can also vary within states, and areas deemed higher risk can face higher rates.
The average annual premium in California is $1,429, below the national average, but it can cost up to $10,000 or more in higher-income and high-risk areas, according to IZC Insurance Agency.
In response to higher risk exposure, insurance companies State Farm and Allstate requested to raise their California rates by an average of 30 and 34 per cent, respectively, last year.
California homeowners are not alone in seeing this trend. Rates in the condo insurance market in Hawaii, considered a high-risk state after 2023's wildfires, have soared as much as 1,000 per cent, the governor's office said.
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In Oklahoma, annual premiums cost $4,643 in February, $2,386 higher than the national average, according to Bankrate. Jim Rauch, a professor at the University of Oklahoma, anticipates a further increase this year. “People are concerned right now,” he said.
Mr Rauch said insurers also have to pay interest on their debt, cover their reserve funds, remain profitable while also spending more on claims than they are receiving from premiums. “All those things are going to lead to premiums are going to go up in Oklahoma,” he said.
Some companies have chosen to cut back business in Oklahoma, including Farmers Insurance, which cancelled more than 1,000 policy renewals last year amid increasing fires in the state. “They just didn't want to cover that risk any more,” Mr Rauch said.
Farmers Insurance did not respond to The National's request for comment.
University of Oklahoma
Even before this year's fires broke out in California, some insurance companies had discontinued coverage or paused new applications. That included State Farm, California's largest carrier.
A State Farm spokesperson told The National its California policy changes in 2023 and 2024 were made in response to construction costs/inflation, increased catastrophe exposure and a challenging reinsurance market (where carriers buy insurance for themselves).
Some insurers in the south-eastern states of Louisiana and Florida have also withdrawn coverage, while premiums increased in Maine, North Carolina, Texas and others prone to fire or floods. That poses a significant challenge for future homebuyers.
“If you fast forward 10 or 15 years, there are going to be regions of the country where you can't get a mortgage,” Federal Reserve Chair Jerome Powell told the Senate Banking Committee last week.
No silver bullet
There is no quick fix for the home insurance market where providers are raising premiums to remain solvent and profitable, while those increases are hurting consumers already dragged down by inflationary burdens.
“I think we all want a silver bullet … and I just don't see one,” Ms Fowlie said. “Instead, it's going to be this balancing of: we want insurance to be affordable, we also want it to be available, and we want to keep firms solvent.”
California has what is known as the FAIR Plan, the state's home insurer of last resort. More than 4,400 homeowners affected by the recent fires have filed claims with it, FAIR said.
Hawaii lawmakers began their new legislative session last month by pledging to stabilise the state's property insurance after carriers raised rates because of climate-related events including wildfires that ravaged Maui. More than 10,000 claims were filed, according to the Hawaii Insurance Division.
Meanwhile, Oklahoma introduced tax credits for homeowners who fortify their properties with weather-resistant materials.
“Hopefully our weather patterns will subside a bit … but if they don't, it is going to be more and more difficult for people to qualify for mortgages,” Mr Rauch said.
