Some insurance companies are withdrawing coverage from fire and flood prone areas, leaving homeowners with limited affordable options. This trend may even affect the property value of American homes, experts say.
The nation’s largest homeowner’s insurance company, State Farm, stopped accepting new applications for California real estate policies in May. Allstate announced in November 2022 that it would “discontinue new homeowners, insurance and commercial insurance in California to protect current customers,” The Associated Press reported in June.
That trend will likely continue across the insurance industry, said Jeremy Porter, head of climate impact research at the First Street Foundation, a nonprofit research organization that compiles comprehensive data on climate risks.
“They know the risk is too high to be actuarially safe for their business,” he said.
In its announcement, State Farm said too many buildings are being destroyed by climate disasters, inflation is making it too expensive to rebuild and it can no longer protect its investments.
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The problem isn’t just in California, where wildfires dominate. Homeowners in Louisiana and Florida are also struggling with a lack of access to insurance due to the risk of flooding.
“Losses are increasingly related to climate risk,” said Sean Kevelighan, president and CEO of the Insurance Information Institute, an insurance industry association. “As that risk increases, so does the cost of insuring the assets that people have in their hands.”
Although there was no increase major disasters In 2023, he said, the industry still expects to lose $50 billion just from “severe convective issues” such as flash flooding and the effects of heavier daily storms.
What happens when a homeowner can’t insure
Darlene Tucker and Tom Pinter
Without insurance, many homeowners can find themselves in big financial trouble.
Darlene Tucker, 66, and Tom Pinter, 68, are longtime homeowners in Sonora, California. The couple bought their ‘dream home’ 18 years ago and are enjoying retirement from their respective manufacturing jobs.
Tucker also cares for her horses and a rescued 100-pound tortoise on the property, and runs a dog day care center to make ends meet. He said Pinter also works as a delivery driver to help out.
Darlene Tucker and Tom Pinter’s home in Sonora, California.
The couple received a non-renewal notice from Allstate in November. Tucker told CNBC that she is working with her agent at Allstate to find another insurer.
“I had pitched a company and said they’d do it for $12,000 a year,” she said — that’s about six times her previous annual Allstate premium of about $2,000.
He said there was no way pair of they could afford this new policy and should probably move.
Dogs play at the home of Darlene Tucker and Tom Pinder in Sonora, California.
But Tucker and Pinter may find that selling their home also comes with a big cost.
Porter said research by the First Street Foundation in California concluded that “by the time a person receives a non-renewal letter from the private insurance market, they essentially lose 12% of their property value.”
Insurance costs “should be a wake-up call” for homebuyers
Experts say California’s insurance landscape is particularly difficult because, in addition to fire risk, the state has a law This adds additional approval steps, including board approval and review by the insurance commissioner, if an insurance company wants to increase its insurance rate by more than 7 percent. This has been true since the 1980s.
Kevelighan, of the Insurance Information Institute, said the law, called Proposition 103, creates a regulatory environment in California that limits the industry from adequately including climate risk in its projections and is one of the reasons the industry is being forced to the state withdraws coverage.
“Risk management doesn’t come into play until it’s really late when it comes to an individual purchase of personal property,” Kevelighan said. “That comes into play when your mortgage provider needs you to go get it.”
“And that’s the first time a consumer starts thinking about where they live and what the risks might be,” he said. “The cost reflects that risk. That should be a wake-up call to tell them they’re living in a dangerous place and then ask themselves: How could I reduce that risk? Or should I consider living somewhere else?”
“Give me something to work on”
With just days left until Tucker and Pinter’s Allstate policy expires on Feb. 15, the couple is still looking for more options. Tucker told CNBC that a recent offer they received was triple what they were originally paying, with a $10,000 discount.
From the whole situation, she said she feels disappointed.
Darlene Tucker and Tom Pinter
“We’re doing everything we can,” Tucker said. “You know, we worked hard, we retired. We take good care of our house. I’m never late on my bills. I paid it [policy] for 18 years… And you just don’t give me a choice. That’s the part that bothered me the most, I think. Give me a list. Give me something to work on. Raise [the price] if necessary, of course. But don’t just give me no choice. This is not right.”
Tucker’s insurance agent from Allstate told CNBC that “most insurance companies do not currently write policies in high fire areas” and confirmed that the company was trying to help her find other options.
An Allstate spokesman said the company is “working with the California Department of Insurance to improve the availability of insurance in the state. We will be able to offer home insurance policies to more Californians by using advanced fire modeling and reinsurance.”
State Farm did not respond to CNBC’s requests for comment.
Watch it video to learn more about why some American homeowners are losing their property insurance and what changes the insurance industry would like to see to help offset some of the growing risks.
Clarification: This story has been updated to clarify when Allstate announced it will stop accepting applications for new insurance policies in California.