Home insurance premiums to rise 21% in 2023, partly due to climate change

Consumers preparing to renew their homeowners insurance policy may be in for some unexpected sticker shock.

Between May 2022 and May 2023, home insurance prices increased by an average of 21% at renewal time, according to Policygenius.

An increase in catastrophic severe weather contributed to that jump, experts say, and the rate of price growth is not expected to slow. As insurers face higher costs, they pass it on to consumers in the form of higher premiums.

But insurers don’t share data on premiums and individual homeowner risks, so it’s hard to estimate how climate risk is factored into policy prices.

“The levels of risk and the types of risks that a property can be exposed to are changing massively,” said Carlos Martín, director of the Remodeling Futures Program at Harvard University’s Joint Center for Housing Studies.

“And right now there’s a lot of confusion, not only among homeowners, but also among insurers about how they should be actuarially pricing this,” he said.

Although home insurance premiums increased significantly in price last year, it is not a new phenomenon. At that point, between 2012 and 2021, the average premium rose from $1,034 to $1,411, according to the Insurance Information Institute.

Some of the annual increases over that time have been larger than others, according to Kenneth Klein, a professor at Western California School of Law, adding that climate change creates the potential for economic “fat losses” because storm damage doesn’t causes t to be distributed evenly across all insured properties or evenly over time.

“For many insurance companies in the Gulf Coast region, if they survived Katrina financially, the following year was one of their most profitable years,” he said. “Because their premiums were adjusted for Katrina, but there was no Katrina event. So that’s the challenge of climate change insurance.”

More from Personal Finance:
Defining a buyer’s market ‘a bit tricky’, says expert: 4 signs to watch for
Building the middle class may be a ‘defining goal’ under Harris’ presidency
Student loan payments are on hold for millions. Here’s what you need to know

Understanding how premiums will continue to rise due to severe weather is difficult to gauge, according to Martín.

“The data is pretty sparse,” Martin said. “Insurance companies don’t share what they charge individual homeowners with the world, and there’s not a lot of reporting.”

Scott Shapiro, KPMG’s U.S. insurance industry leader, said the industry collects this weather-related loss data to inform premiums, but the detailed data is not publicly accessible.

“This data is critical for rate generation and filing,” Shapiro said. “A key challenge is the increasing exposure to weather-related risks and the uncertainty of whether historical losses accurately predict future losses.”

The cost of home insurance can be on the rise, but for some in flood or fire-prone areas, homeowners may have few options.

In May 2023, for example, State Farm stopped accepting new applications for policies in California. Allstate announced in November 2022 that it would discontinue policies for new homes, condos and commercial operations in the state.

Insurance companies “are not in the business of giving you money just because you need it, and they’re not in the business of doing the right thing just because they feel it’s the right thing,” Klein said. “They are businesses trying within a set of laws and regulations to make a profit.”

Fewer and more expensive insurance options can prove to be a major barrier to homeownership, experts say, since most mortgages require insurance.

of Florida legislature created Citizens Property Insurance in 2002 as an option for Florida residents who could not find home insurance on the private market. California’s FAIR plan was established as a statute in the state’s insurance code to provide fire cover it is not available in the traditional market, although it is not a government or public service.

While government plans can serve as a last resort, they don’t always provide the same quality of coverage that a private insurer can.

“Sometimes they’re not built on the same actuarial principles as a private insurance company would,” Klein said. “And consequently, it’s problematic. It’s often not good coverage.”

Those feeling the pain of rising premiums the most are existing homeowners, Martín said.

“They feel it, because they see what they’re paying when they first bought the house and now they’re seeing what they’re paying,” he said. “And it’s growing.”