Rising disaster coverage costs could be coming to a head for housing

One of the most tangible indicators of climate change's impact on mortgaged homes are the public and private price tags for insured risks associated with natural disasters.

Homeowner claims-related losses have outweighed premiums for private insurers in four out of the past five years, according to Fitch Ratings. And the National Flood Insurance Program, which was coming up for reauthorization at the time of this writing, also has struggled financially.

While some studies suggest housing has weathered the impact of climate change fairly well, several recent developments show the strain on insurers is growing in ways that could change that in the future; particularly — but not solely — in areas prone to high-profile disaster risks.

"It's not just the fires and it's not even just the coastal storms; it's that things are breaking that people never thought were going to," said Ben Cohen, CEO of Quoll, a climate data provider specializing in homeowner impacts.

Flashpoint regions could see changes in their housing forecasts
It can be tough to distinguish the impact of climate change on housing finance from macroeconomic factors and other drivers, which may be why multiple recent studies show home prices holding up well in areas where events like floods and wildfires are prominent risks. 

However, with the incidence of natural disaster risk growing and insurers finding it tougher to manage within rates regulated at the state level, some experts expect that could change.

Insured losses from natural catastrophes in the United States have jumped significantly from a little above $20 trillion in 2019 to closer to $90 billion in 2021, according to a Fitch analysis of data from Munich Re NatCatService, Aon and ISO Property Claims Service.

Net written premiums for homeowners insurance policies have climbed each year over the last five years from $82.3 billion in 2017 to $103.4 billion last year, but that hasn't been enough to prevent home insurers' losses from outpacing premiums, Fitch researchers found when analyzing aggregate property/casualty industry data from Standard & Poor's Global Market Intelligence. The combined ratio used to generally measure the extent to which losses exceed premiums has come in a little above 100% every year since 2017, and the one year it didn't (2019), the ratio was 99%.

At the same time, financial concerns from insurers regarding regions with more prominent storm and wildfire risks have caused multiple instances of withdrawn or insufficient coverage, premium increases or difficulty meeting counterparty requirements.

That's a problem for mortgage companies, who generally require borrowers to protect collateral with coverage from strong providers, and must force-place flood insurance if a property in a designated high-risk zone lacks it. 

The NFIP, which has recently added a risk-based component to its pricing that has raised premiums for some borrowers, covers some aspects of storm damage but not others. Both the NFIP and private companies have exposure to the same reinsurance market.

"As far as mortgage and housing market activity, things like rising interest rates are probably a lot more consequential than homeowners insurance; but when you do have [a] market like Florida where there may not be availability of coverage you need, that could cause bigger problems," said Managing Director Jim Auden, head of Fitch's U.S. P&C insurance group.

Storm and flood-prone Florida is one of multiple states that have experienced instances of insurance market disruption tied at least in part to the cost of natural disasters. It has been contending with financial difficulties at insurers that led to a cut in stability ratings essential to doing business with key government-related secondary market buyers of loans, he noted.

California has had heavy exposure to wildfires and insurance rate restrictions that recently contributed to Geico's recent decision to close its offices in the state. Also, Texas recently warned some coverage was falling short of the amount needed to rebuild or replace homes; and Oregon has rescinded a tax-lot wildfire risk map it issued after consumers complained it led insurers to raise renewal rates or drop coverage.

The growing frequency of these kinds of developments, particularly at a time when the housing market is cooling, could increase awareness of climate risks and have an impact on home prices in way that it hasn't thus far.

"I believe the combination of public policy changes and companies making a decision to not provide wildfire or flood insurance would make it more top of mind for buyers and sellers, and perhaps that would then have an impact on migration patterns and home prices," said Danetha Doe, an economist with Clever Real Estate.

A moving target
Potentially, broader awareness of natural disaster risk and more aggressive public policy changes that address it could do more to mitigate rising insurance costs, but given budget constraints these would likely need to be targeted efforts addressing the greatest needs.

A recent disaster assistance bill that has bipartisan backing was aimed at simplifying public relief with the goal of addressing the needs of low-to-moderate income communities. The communities tend to get hit harder because they contend with multiple stressors. States also have been willing to step in with backing when private insurance is shaky from time to time although not consistently. 

And while disasters have had some common themes over time that policymakers can address, their inherently unpredictable nature make them tough to anticipate with legislative measures. New aspects of natural disasters are surprising insurers and government entities with increasing frequency, said Cohen, whose company produces individualized climate-risk assessments for homes.

Flood and storm related risks have remained consistently high in recent years but wildfire risk has been more volatile, Fitch's data shows.

Paradise, California's wildfire damage, for example, brought rare distress to the usually low-risk municipal bond market such that state backing of disaster risks could get less reliable. And while the accuracy of flood zone prediction has improved, the plight of Kentuckians recently affected by heavy rainfall highlighted the fact that that sort of risk is less likely to be included in them, Cohen noted.

"Climate risk is happening everywhere, and it's not only picking up speed, but it's actually catching insurance flat-footed in areas that they didn't think of as having major concerns," said Cohen. "Another good example of that is there are a lot of people who don't realize a really heavy drought can destroy the foundation of your home. I've heard from a number of insurance companies that homes with this problem are popping up in drought areas that are having a systemic breakdown they never considered."