CBO explores ways to solve homeowners insurance issues

There's more to rising homeowners insurance costs than meets the eye, and understanding why may help identify better ways to manage the expense, according to a new Congressional Budget Office report.

Illustrating that point were two statistics that seemed at odds with one another. Last year the number of natural disasters that cost $1 billion dollars or more hit a record-setting count of 28. Yet the total related expenses of $92.9 billion were down markedly from $178.7 billion a year earlier.

Shifts in the mix of the disaster types that can cause expenses vary widely each year, and total dollar amounts spent on disasters since 2013 are trending cumulatively higher than the preceding decade, which helps to explain this discrepancy, statistics from various sources analyzed show.

"Hurricanes are the costliest type of billion-dollar disaster, even if they account for relatively few of the year's billion-dollar disasters. By contrast, billion-dollar severe storms occur most frequently and cause less annual damage," the CBO wrote in its report.

An unpredictable expense for the housing system
Widely varying disaster costs that are increasing overall in the long term can help explain why they're tough for regulated insurers to budget for, and why coverage providers, in turn, pass those costs on to their clients in the broader housing market in unpredictable ways.

It's a challenge with ripple effects for both the public and private sectors, so finding ways to address it may involve either or both, the report suggests.

"As risks and costs increase, premiums will increase as well, which may make insurance less affordable for homeowners. If state regulators do not allow higher premiums, insurers may exit high-risk areas, reducing the availability of insurance," the CBO wrote.

The report is timely given reports this week by Bloomberg and local publications like the San Francisco Chronicle showing that Allstate is raising its homeowners insurance rates in California by 34% to account for wildfires, marking the largest jump in three years by a major insurer.

Weighing potential public and private responses
In keeping with its analysis of the risks' causes and metrics, the CBO report also looks at what alternative strategies help the housing market better manage it, in particular for low-income households who struggle most with insurance costs.

The report contemplates additional insurance flexibility in terms of risks covered that would reduce costs, but in keeping with the concern government-related mortgage investors have had in considering changes to their requirements, the CBO notes that this could have a downside.

"Other types of insurance would offer those households more affordable but less complete protection," the CBO noted.

These insurance types include parametric coverage, which pays out when metrics like wind speed or rainfall reach certain levels.

"Policyholders could use the payments for any purposes, but they might not fully cover the actual losses incurred," the CBO noted.

Other options the report considers include lowering prices for homeowner insurance through bulk purchases by community groups or local governments. It also suggests there could be an expanded federal role in the market beyond flood coverage.

The report posits that the federal government could be a reinsurer for broader natural disaster losses, charging premiums to coverage providers and paying out claims in instances where losses rise beyond certain levels. Alternatively, it could expand its direct flood insurance to cover broader risks.

There's been debate around reforms to the federal flood insurance program. However, given that the private sector has been covering more of the risk in this area and that other types of disasters typically have lower costs associated with them, this particular type of expansion may be feasible.

How likely this would be may depend on the outcome of the federal election.

The conservative Heritage Foundation recently suggested that the federal flood program be disbanded in its Project 2025 report, which Democrats have suggested could reflect the Trump campaign's views. However, the Trump campaign has disclaimed any ties to that report.

Pricing, something which has been a lever in recent flood insurance reform, would be a key determinant in how spending on expanded federal role would be viewed, the CBO study suggests.

"If the government underpriced risk in either approach, the program could be costly to the government and discourage innovation," the report noted.