Insurance Matters: What Are Homeowners to Do?

Climate change has accelerated the frequency and intensity of natural disasters. Insurers were on the hook for $108 billion in damages from catastrophes in 2023, down from $125 billion in 2022 but above the 10-year average of $89 billion. The long-term trend of increased catastrophes from climate change will show up in rising insurance rates. The “new normal” of recurrent and severe weather events represents an unpleasant reality for both insurers and homeowners. Climate-change-driven catastrophes will continue to plague the U.S. in 2024 and beyond, and will have an outsized effect on insurance rates and availability. While there are signs of some relief in many areas of the country, those acknowledging a new reality will have an edge on controlling risk and obtaining rate relief.

Will Catastrophic Weather Be the New Normal?

The numbers are concerning: Worldwide losses from natural catastrophes amounted to $280 billion during 2023. That figure doesn’t help U.S. homeowners, particularly those located in catastrophe-prone locations, who are facing sharp rate increases or struggling to find insurers willing to issue a policy. Globally, there were 143 insured natural disasters in 2023, the most ever. That included 30 disasters with losses between $1 billion and $5 billion, compared with an average of 17 such catastrophes of similar proportions in the 10 previous years. The U.S. had a record number 28 disasters totalling $1 billion or more of damage. While the wildfires in Hawaii and hurricanes generated the most headlines, convective storms, flooding and hailstorms resulted in enormous damage. Climate change has been identified as the culprit for more frequent and destructive storms and wildfires. Severe convective storms accounted for $64 billion in losses in 2023 – and 85% (approximately $54 billion) of those losses were in the United States. In fact, insured losses from severe convective storms have risen an average of 8% each year since 2008. These disasters have contributed to skyrocketing premiums for homeowners. Between the start of 2023 and 2024, average premiums for homeowners rose 23%. The number of people moving to flood-prone counties or areas with high wildfire risks nearly doubled in the wake of the pandemic. And a number of major insurers have fled the states of California, Florida, and Louisiana, making it increasingly challenging for homeowners to find property coverage.

The Light After the Storm

Although catastrophes will strike North America at a higher rate and with greater intensity in the future, 2023 was less catastrophic than previous years. Property insurers had strong results, which are reflected in the property insurance market’s improvements in rates and availability. With new insurers entering the marketplace, homeowners in non-CAT zones will likely see more moderate rate increases and greater availability of coverage options. Insurance for properties with exposure to catastrophic perils, however, is likely to remain elevated. Rates will depend on factors including a property’s placement in a catastrophe zone, the type of construction involved, the year in which it was built, and myriad other factors. Underwriters will continue to pay close attention to insureds’ loss experience, valuation methodology and geographic footprint in determining premiums, and they’re more likely than ever before to request risk-mitigation measures – from water sensors and automatic shutoff valves to roof replacement and fire-resistant landscaping. Homeowners that actively try to reduce their property’s exposures will be more likely to reap rate rewards.

Keep Insurance Costs in Check Through Risk Management

While finding adequate insurance for many homes will remain difficult, we expect that market instability will level off throughout the rest of 2024. To improve insurability and reduce risk in the short-term, homeowners should consider the following:

– Be open to shouldering more of the risk. With climate change leading to less insurance availability, homeowners may need to increase their deductibles, add additional policies such as flood coverage or parametric insurance or remove previously insured items from the policy, such as a home’s contents. For CAT-exposed homes in particular, homeowners may have more insurance options if they’re willing to pare down their homeowners’ policies and assume more risk.

– Determine if your property valuations are current. Although many homeowners have taken steps in recent years to obtain accurate property valuations, it’s important to have the right valuation in an era of increased catastrophes. Inflation, along with rising construction costs, have made accurate valuations an essential part of insurance renewals. Know your policies’ full terms and conditions in order to understand limitations and exclusions.

– Build resiliency against disasters.Short of moving a home located in a catastrophe-prone area, it’s impossible to remove all exposure to disasters. However, investing in mitigating measures such as upgrading roofs and plumbing or installing sensors and non-combustible landscaping can reduce the risk of a claim. Underwriters may even require that some of these are implemented before they will issue a policy.

– Consult your advisor before purchasing a new property. It’s essential to understand the risks that a new home or planned construction can bring and whether the property will even be insurable in the standard market. Your broker may be able to point out ways to reduce exposures in a new build or prevent you from purchasing a potentially uninsurable property.

As a whole, throughout Santa Barbara and Montecito, we have seen a little movement with the non-admitted carriers. The non-admitted sector is serving a big role in providing options for our community. It is important to always work with an A-rated non-admitted carrier since they are not backed by the CA insurance-guarantee fund. 

One tip is to strategize on non-admitted quotes. Talk with your broker about large deductibles and what coverages are truly the most important to you and which coverages you are willing to self-insure. For instance, if you have multiple homes, you may not need Loss of Use Coverage. Perhaps you have a large valuables policy, and so could decrease your contents coverage. We need to be very specific when approaching the markets.

The CA Fair Plan is also serving a bigger role than was ever anticipated. The CA Fair Plan is meant to be a last resort. Due to pricing of the non-admitted carriers, some people are turning to the Fair Plan as they feel there is no other viable financial option. It is important to always work with a broker when seeking a Fair Plan quote as these policies need to be fully explained. They write up to $3M in total insurance value, meaning there is only $3M to cover your dwelling, other structures, contents, loss of use, debris removal, fences, driveways, etc. Each item needs to be fully listed as part of the $3M or there is no coverage. The Fair Plan covers perils like fire, smoke and lightning. You then need a companion policy to go with it that covers what the Fair Plan excludes such as water, theft and liability.