America is facing a home insurance crisis. Though the recent hurricanes and fires have garnered national attention, issues with home insurance pre-date these disasters.
According to the United States government’s Office of Financial Research (OFR), the home insurance industry has been facing setbacks for several years. OFR reported in December of 2023 that “the U.S. property and casualty (P&C) industry homeowners line has experienced poor financial performance in recent years with five of the last six years reporting underwriting losses.” The poor performance of P&C is partially due to “unexpectedly high inflation, a shift of exposures to higher-risk areas, and rising reinsurance costs.”
Two of the states hit hardest by insurance issues are California and Florida, which have more complex insurance needs. Florida is covered by “a combination of private insurers, a state operated insurer and reinsurer and the Federal government’s flood insurance program,” according to OFR. California, like Florida is covered by private insurers and a state-run program called FAIR.
The OFR reported that home insurance can be hard to come by in California and predicts “unavailability, and rising cost of insurance will impact California real estate’s value, some of which is uninsurable in the private market.” To make matters worse, several major private insurance carriers left the state recently. “It comes down to actuaries that just determine risk,” Erick Frey, Director of Credit Solutions at Notre Dame Federal Credit Union, told Drew Mariani. Fewer private insurance options coincided with increased enrollment in state-run FAIR plans, which are up 41% between September 2023 and September 2024.
It’s not just the Golden State and the Sunshine State seeing rate hikes. Higher costs are spreading around the country. In mid-January, the US Treasury released a report detailing the state of home insurance around the country. In the period between 2018-2022, “Average homeowners insurance premiums per policy increased 8.7 percent faster than the rate of inflation,” according to the report. The report also found that “nonrenewal rates rose in 2022, suggesting many consumers found it more difficult and challenging to purchase insurance.” And for some, it might get worse. Erick Frey thinks the California wildfire costs could “hit almost everybody in the country.”
Currently, home insurance plans are state-run, but Clifford Rossi, PhD, hopes that might someday change. Rossi, professor and executive-in-residence at the Robert H. Smith School of Business, University of Maryland, suggests forming the Federal Natural Hazard Insurance Corporation (FNHIC). According to Rossi, FNHIC would remove the burden of weather-related hazards from private homeowners policies to provide hazard coverage from a government-run national program. Rossi believes FNHIC would result in “cost savings for all stakeholders” and provide “consistent availability of hazard insurance,” thereby ensuring homeowners don’t lose coverage or overburden state-run plans.