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The homeowners insurance landscape has become both increasingly expensive and unstable in the US. Since 2018, the average homeowners insurance cost has increased over 19%.1 In certain areas, such as California and Florida, large national insurance companies have withdrawn entirely—phasing out homeowners insurance to existing customers and no longer accepting applications from new ones. These changes are due to rising construction costs, climate change, and increased reinsurance premiums. The implications of a volatile and expensive insurance market are far-reaching—all homeowners, insurance holders, and consumers will potentially be affected by this developing insurance crisis. As a Financial Professional (FP), it is important to understand how changes in insurance markets can affect your clients both specifically (for homeowners, property holders, or residents of increasingly uninsurable markets) and more broadly (market effects, housing supply and demand, etc.).
While states that have seen insurance companies withdraw are limited—currently, just California and Florida—more areas could join the list, particularly locations where there are increased weather-related risks and where regulations reduce pricing flexibility for the premiums insurance companies can charge. In terms of risk management, other states that could soon see impacts on coverage cost and availability include Arkansas, Louisiana, Nebraska, Kansas, Iowa, Oklahoma, Kentucky, and Tennessee. With California and Florida, these changes would affect 28% of the US population.2 As inflation, the rate of natural disasters, and reinsurance premiums (the premiums insurance companies pay for insurance from another insurance company to mitigate part of the risk from a major claims event aka an infinite loop of insurance)3 all increase, national insurance companies are starting to reassess where they make their homeowners insurance policies available4—focusing on areas where they can make a positive return on investment (ROI).
As insurance becomes more difficult to obtain, premiums will increase dramatically. While overall homeowners insurance premiums across the country are only up approximately 3% in 2023 so far5, rates in areas where large national insurers have withdrawn have seen increases in the double-digits.6 Since May 2021, 90% of policyholders have seen their annual premiums on homeowners insurance increase.7 These increases are expected to continue with inflation, but they are unlikely to diminish even when inflation drops because weather-related risks (e.g., storms, wildfires, droughts, and heatwaves)8 continue to rise.
Even with the existence of insurers of last resort, homeowners and the market are not adequately protected. Many of these insurers are not charging high enough premiums to cover their risk. If a large natural disaster (e.g., a hurricane in Florida) occurs, the insurer of last resort for that area may see their reserves completely wiped out. In these situations, the insurer can impose emergency assessments—and not just on their own customers, but on every insurance customer across every insured product (i.e., automobiles).9
Source: National Oceanic and Atmospheric Administration (NOAA).
Notes: (1) Count is combined across natural disasters: drought, flood, freeze, severe storm, tropical cyclone, wildfire, and winter storm. (2) Costs are in 2023 dollars (CPI-adjusted for inflation). (3) The dotted green line shows the average linear trend over time. (4) During 2022, there were 18 separate billion-dollar natural disaster events. The total cost of these events was over $165 billion.
With increasing premiums, we are already seeing an increased rate of delinquency in mortgage payments. Many lenders are now also considering rising insurance costs in their determination of how much an applicant can borrow—especially in areas like California and Florida.10 This means that, as homeowners insurance rates increase, more prospective buyers will be priced out of the market because they either can’t afford a home, or they won’t qualify for a mortgage. This reduces the demand for homes but does not affect supply (though other factors surely do). As demand decreases and overall supply remains relatively stable or increases, this will put downward pressure on home values for all homeowners.
As the cost of homeowners insurance increases and available coverage decreases across the nation, 12% of American homeowners have opted to go without property insurance; and 50% of those individuals have annual incomes below $40,000 (usually older homeowners and retirees).11 Many of the homeowners choosing not to insure their property have done so in the face of non-renewal by their insurer. These homeowners often state that they don’t think the insurer of last resort is worth the cost—while its premiums are 20% lower than those of private insurers, it offers significantly less expansive coverage, making the insurance more expensive. Some wealthier homeowners have also cited the fact that they have the funds and liquidity to rebuild on their own or move if their house is destroyed.12
However, few people can afford to have their homes uninsured—especially as the costs of rebuilding and repairing have increased substantially with inflation. This also holds for the nearly 67% of homeowners who are underinsured13—they are likely underestimating the financial cost of being underinsured should their homes require replacement or repair. Ultimately, with increased costs (both for homeowners insurance and construction/repairs) and increased exposure to natural disasters, more Americans are assuming large financial risks when buying or investing in residential property. Further, as more people are uninsured and underinsured, it will take longer for local economies to bounce back after a natural disaster—this affects more than just the uninsured homeowners.
As an FP, you may be faced with clients who are being adversely affected by these changes in the homeowners insurance market. Some clients may be holding on to properties that no longer make financial sense or that conflict with their long-term financial goals. Other clients may be considering going uninsured or underinsured, while others may be facing increased annual insurance costs, which can also have significant ramifications for their financial plans. For these reasons, it is important to understand the motivating factors—both cognitive and emotional—behind these behaviors.
Some clients may be unwilling to sell their current properties or move, even though that would make the most financial sense. For example, clients living in or investing in areas with high climate-related risks may be able to save money and/or avoid large financial losses by moving or selling. Especially clients who are retired, on the verge of retirement, or who can work remotely. So why might these clients be averse to selling even when it is the most optimal financial decision?
These clients may be experiencing the endowment effect. Put simply, this is when owners (sellers) value an item more than non-owners (buyers) because they own it. Thus, owners value the item (in this case a house or property) more because of their emotional attachment to that item. This means the loss of the item (selling the property and/or moving) feels significantly worse than holding onto it. This is loss aversion in action—on average, most individuals will feel the pain of a loss twice as much as the pleasure of a gain. In this context, a seller may feel their home is worth twice as much as a buyer does. This makes it difficult for a loss-averse seller to find an offer acceptable. It also means the costs of moving and/or selling (e.g., changing locations, potentially downsizing, having to get reestablished in a new area) loom much larger than the benefits (e.g., monetary savings, reduced financial stress and worry, potentially upsizing).
To help with the endowment effect, you can try reframing the decision so that inaction (not selling, moving, or investing) results in loss. For example, add up the cost of increasing homeowners insurance premiums over the length of their expected lifetime (assuming a 3% increase in premiums over time) and present that as a large financial loss. You can also focus on the disadvantages of staying in a location with high climate-related risk: they could lose sentimental items that can’t be replaced, they could lose everything in the home and some of that will not be covered by insurance, they could have to spend significant amounts of money doing renovations to get or keep homeowners insurance, they could see an increased cost of living in their area to compensate for increased homeownership costs, and they could end up spending way more to make the same move in the future (as more people move out of high-risk areas and drive up home prices in safer areas).
Another reason you might see clients unwilling to sell, move, or decline to invest in an area with higher weather risk, is because of a facet of self-control bias called present bias. While the outcome is the same as the endowment effect, the reason for the outcome is very different. Present bias occurs because future costs are diminished relative to present benefits (i.e., going to the gym can entail the benefit of sleeping in now vs. the cost of detrimental health effects later). This is not done with intention—the present is just emotionally more compelling than the future—and thus, self-control is required to overcome the desire to be overly myopic. Choosing to sell, move, or not invest in an area with high risk exposure requires clients to think about the long-term effects financially. This ultimately results in a comparison of the benefit of living in a coastal or beautiful area now and the cost of losing the home, being unable to sell the property, or being financially jeopardized by the costs of insurance/replacement/repair. This consideration usually results in the present benefits winning.
To help with self-control lapses, the best action you can take is to extend the timeline the client is seriously considering and show them cumulative outcomes. For example, focus them on 5-, 10-, or 20-years out and what the cumulative cost across those time periods is—both keeping premiums the same and increasing them by approximately 3% per year. Try to get them out of thinking of the choice in terms of one year or less. If clients say things like, “the annual cost has only increased by $134,” then you know they are considering the financial implications of their decisions too narrowly. As another illustration: an area may have a 1% chance of storm damage in any given year, but over the life of a 30-year mortgage, the chance of significant storm damage to a property in any one of those years is 26% (or 1 in 4).14
This mostly applies to clients considering going uninsured or underinsured. These clients are likely only focused on the costs that are most salient to them (rebuilding or repair). They are not thinking of less obvious costs such as removing what remains of the home15, replacing all the contents, and time. This makes clients feel more confident than they should in their ability to completely cover the cost of repair or replacement should a natural disaster hit where they live. Further, many Americans mistakenly assume that the government will assist if something disastrous does happen, and this is a financially costly mistake to make.16 Finally, some homeowners will assess the risk of going un- or underinsured by the number of times they have had to use their homeowners insurance in the past. If that number is zero (or sufficiently low), they will infer the probability of needing the insurance based on this experience rather than an actuarial consideration of the risk—again, making them overconfident in their beliefs. All this overconfidence leads clients to underestimate the risk of needing to replace or repair their homes. This, in turn, leads to underinsurance and uninsurance (if an option).
To help with an overconfidence bias, the easiest exercise is to go through all the costs with the client. Have them list out and add up the costs of complete replacement, removal of the debris from the damage, the replacement cost for the contents of the house, and the expected timeline for rebuilding. If necessary, you can also show the opportunity cost of spending that money for repair/replacement rather than saving it or investing it elsewhere. To do this exercise, you must collect the relevant information for the client but have the client make the list or go through it in detail. If you don’t, the client will use their overconfidence to remain blissfully ignorant.
Clients who consider going uninsured or purposely underinsured may have a specific account for housing replacement/repair costs. While this is not problematic in isolation, some clients may have rules that are too rigid while others may be underprepared for the costs they will have to bear without (any) enough insurance. Either way, exploring these mental accounting rules with your client can lead to a very illuminating conversation. For those clients who are not saving enough, go through the overconfidence bias exercise described above. For those who have set too much money aside , and who are unwilling to move it for other, perhaps more optimal uses, try to understand the emotional earmarking they are engaging in and what emotions, specifically, are driving those rules.
To help with a mental accounting bias, go through the specific “accounting” rules clients are using in this situation. This will help you understand their motivation and how rigid they are in the categorization of their funds. For clients who are setting aside too much, explain that doing so is not without its costs as well. Show them that they are missing out on potential returns even with extremely low-risk financial products.
The detrimental effects of volatility in the homeowners insurance landscape are far-reaching. Individuals across the country are likely to see increased premiums, declining coverage, and reduced access to the housing market. As an FP, it is important to understand what emotional and cognitive tendencies may be impacting your clients and why.
Atlas Point can help you identify which of your clients are most prone to these blind spots and emotional responses. You can assess clients for several biases, including loss aversion, overconfidence, self-control, endowment, and mental accounting via our signature Financial VirtuesTM survey. You can try our Financial VirtuesTM survey here: Financial Virtues Survey
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[1] Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[2] Munk, Cheryl Winokur. “Climate Risk Guarantees Home Insurance Will Only Get More Expensive.” CNBC, 30 Aug 2023, https://www.cnbc.com/2023/08/30/how-climate-risk-disaster-era-are-changing-the-cost-of-home-insurance.html.
For population by state see: https://www.statsamerica.org/sip/rank_list.aspx?rank_label=pop1&ct=S18.
[3] One of the major reasons premiums are increasing and large national insurers are pulling out of certain areas is because of increases in reinsurance premiums. In the last year alone, reinsurance rates have increased 30-40% on average. This increase in cost gets passed on to consumers in the form of higher premiums on their insurance policies.
See: Isidore, Chris. “Florida’s Homeowner Insurance Rates Are Four Times the National Average. That’s Not Getting Better Anytime Soon.” CNN, 1 Jun 2023, https://www.cnn.com/2023/06/01/business/florida-homeowner-insurance-rates/index.html.
[4] Farmers Insurance has dropped coverage in Florida—it will no longer renew or give out new car, home, or umbrella policies. This has affected almost 100,000 policies in the state. Bankers Insurance and Lexington Insurance have also withdrawn from the state.
In California, Farmers has limited the number of policies it will accept to 7,000 a month; State Farm and Allstate both stopped accepting new home insurance applications. Two smaller insurance companies—AmGUARD Insurance and Falls Lake Insurance—have also exited the state. Liberty Mutual will no longer offer business owner insurance policies in California starting in the fall (2023), and its subsidiary—Safeco—has dropped almost 1,000 policyholders in the Bay Area.
See: Sandhu-Longoria, Amritpal Kaur. “Farmers Insurance Layoffs: CEO Raul Vargas Makes Cuts to ‘Manage Risk.’” USA TODAY, 28 Aug 2023, https://www.usatoday.com/story/money/2023/08/28/farmers-insurance-layoffs-2023/70702616007/.
See also: Kupfer, Matthew. “Over 50K To Lose Coverage as Two Home Insurers Exit California.” The San Francisco Standard, 15 Aug 2023, https://sfstandard.com/2023/08/15/over-50000-to-lose-coverage-as-two-home-insurers-exit/.
See also: Kupfer, Matthew. “Home Insurance Crisis: USAA To Limit Business in California.” The San Francisco Standard, 31 Aug 2023, https://sfstandard.com/2023/08/31/insurance-crisis-another-major-home-insurer-to-limit-business-in-california/.
[5] Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[6] Isidore, Chris, and Ella Nilsen. “Why It’s Becoming Harder and More Expensive to Get Homeowners Insurance.” CNN, 19 Jun 2023, https://www.cnn.com/2023/06/19/business/homeowners-insurance-more-expensive-climate/index.html.
The rates homeowners are paying in Florida are almost four times as high as in other areas of the country. The average annual home insurance cost for residents of Florida is approximately $6,000; in the rest of the country, it’s $1,700. See: Isidore, Chris. “Florida’s Homeowner Insurance Rates Are Four Times the National Average. That’s Not Getting Better Anytime Soon.” CNN, 1 Jun 2023, https://www.cnn.com/2023/06/01/business/florida-homeowner-insurance-rates/index.html
Rates are also likely to increase further as insurance companies withdraw. This is because fewer insurance companies mean less competition, which gives existing companies more pricing power.
[7] Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[8] According to ValuePenguin, there were 119 natural disasters that resulted in $98.9 billion in insured losses in 2022 alone.
See: Black, Michelle Lambright. “Where Homeowners Insurance Rates Are Rising the Fastest in 2023.” ValuePenguin by lendingtree, 8 May 2023, https://www.valuepenguin.com/homeowners-insurance-rates-study.
[9] Isidore, Chris. “Florida’s Homeowner Insurance Rates Are Four Times the National Average. That’s Not Getting Better Anytime Soon.” CNN, 1 Jun 2023, https://www.cnn.com/2023/06/01/business/florida-homeowner-insurance-rates/index.html.
In Florida, the insurer of last resort can impose an emergency assessment as great as 2% of all insurance premiums (i.e., home and car) on residents who are not the insurer’s customers.
[10] Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
[11] Fields, Samantha.“More Americans Are Going without Homeowners Insurance.” Marketplace, 29 Aug. 2023, https://www.marketplace.org/2023/08/29/homeowners-insurance-risk/.
See also: Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
Many mortgage companies require homeowners insurance, so most homeowners choosing not to insure own their property outright.
[12] Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
[13] See: https://www.nationwide.com/lc/resources/home/articles/underinsurance
The average underinsured amount is 22%, but some homeowners are underinsured by as much as 60%.
[14] This example comes from miamidade.gov, using actual chances of a significant flood in the area.
[15] Dagher, Veronica. “Americans Are Dropping Their Home Insurance, Claiming the Odds of Disaster Don’t Justify the Cost.” The Wall Street Journal, 28 Aug 2023, https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.
See also: Fields, Samantha. “More Americans Are Going without Homeowners Insurance.” Marketplace, 29 Aug 2023, https://www.marketplace.org/2023/08/29/homeowners-insurance-risk/.
[16] Fields, Samantha. “More Americans Are Going without Homeowners Insurance.” Marketplace, 29 Aug. 2023, https://www.marketplace.org/2023/08/29/homeowners-insurance-risk/.