October 15, 2019
How Climate Change Is Increasing Rates
More climate change-related claims means higher insurance costs and insurers becoming stricter about who even gets coverage.
A growing number of policymakers, advocates and experts predict that extreme weather may lead to higher costs for home and flood insurance.
Home insurance companies charge higher premiums to cover property associated with higher risks. Added insurance costs could lead to lower home prices.
“As insurance rates rise commensurate with increasing risk related to weather hazards, and property taxes rise to cover the costs of climate mitigation and adaptation, real estate values for properties in vulnerable areas will fall,” predicts Donna Childs, author of the book “Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses.”
“The insurance premiums and property taxes for these properties become higher,” Childs said.
Daren Blomquist, senior vice president at ATTOM Data Solutions, observes that natural disaster risks have affected home prices. Blomquist notes that home price appreciation in cities with the highest flood risk was half that for the U.S. housing market overall during the past decade. It’s been one-third that for cities with the highest hurricane surge risk.
“The broader market has also outperformed appreciation in cities with the highest wildfire risk during the last decade, although the gap is much narrower,” Blomquist said.
Climate change top insurer issue
Many insurance experts consider climate change as one of the most pressing issues. That concern may lead to higher insurance costs for homeowners.
The riskier the property, the more an insurer charges. The result — more climate change-related claims means:
- Higher insurance costs
- Insurers becoming stricter about who even gets coverage
“It could limit coverage availability in vulnerable areas that have not taken appropriate mitigation/adaptation measures,” warns Childs, founder and CEO of Prisere, a software developer providing technical assistance and training for climate and disaster resilience.
Todd Teta, chief product officer at ATTOM Data Solutions, was recently affected personally when an insurer rejected him for a homeowners policy in California. The reason: wildfire risk.
Teta said the community suffered a small fire three years earlier, but no structures were destroyed. However, the insurer was still concerned about potential risk.
“Insurance companies are outright rejecting entire ZIP codes because of wildfire risk, even in areas they previously wrote policies in,” Teta laments.
Wildfires more common
One likely byproduct of climate change is more forest fires. The Center for Climate and Energy Solutions said research shows that climate change, particularly earlier snow melt, leads to hot, dry conditions and more fires in the summer. The U.S. Department of Forest Service forecast that an average annual one-degree Celsius increase would increase the median burned area by as much as 600% in some forests.
There were 58,083 wildfires in the U.S. in 2018 and 71,499 wildfires in 2017, according to the National Interagency Fire Center. Roughly 8.8 million acres burned in 2018, compared with 10 million in 2017.
The Insurance Information Institute (III) estimates that insured losses from the 2018 Butte County “Camp Fire” will ultimately reach between $8.5 billion and $10.5 billion.
Home insurance typically covers wildfire damage. However, if your area is prone to forest fires that spread to homes, your insurer may exclude covering that damage. Look through the exclusion section in your home insurance policy, so you know if wildfire damage is excluded from your coverage.
About 90% of natural disasters in the U.S. are tied to flooding, according to the Federal Emergency Management Agency (FEMA). There is a lack of consensus on whether climate change is leading to more flooding. The Natural Resources Defense Council (NRDC) recently said that it’s tricky to connect the effects to flooding.
However, the Intergovernmental Panel on Climate Change noted in its special report on extremes that it’s becoming clearer that climate change “has detectably influenced several of the water-related variables that contribute to floods, such as rainfall and snow melt.”
Flooding complicates things when it comes to insurance. Home insurance doesn’t usually cover flood damage. Instead, you need a separate insurance policy for flooding that comes from outside your home.
FEMA’s National Flood Insurance Program (NFIP) administers flood insurance. Federal flood insurance is available “where the local government has adopted adequate floodplain management regulations under the NFIP — and many communities participate in the program.”
Avoiding coastal areas and flood zones won’t necessarily protect you from flooding. III indicates that 20% of flood claims come from areas with low to moderate flood risk.
“Recovering from just one inch of water inside your building can cost about $27,000,” Janet Ruiz of the III explains.
Insurers are bracing themselves for more flooding claims in the coming years. More flooding claims will result in higher rates and can even affect home purchase prices. Those who own homes in higher-risk areas are seeing their values increase at a lower rate than the national average.
Here’s how flooding claims have increased in recent years.
Despite the increase in claims and average flood claim amounts, flood insurance policies are purchased less frequently today than they were a decade ago. In 2009, insurance companies sold 5.7 million flood insurance policies. In 2017, the number dipped to slightly more than 5 million.
Tornadoes, hurricanes and climate change
The Center for Climate and Energy Solutions says some areas, such as the North Atlantic, have seen more hurricanes over the past three decades. Scientists predict Category 4 and 5 hurricanes will increase in the coming years, though the overall number of hurricanes may decrease.
“Although scientists are uncertain whether climate change will lead to an increase in the number of hurricanes, warmer ocean temperatures and higher sea levels are expected to intensify their impacts,” according to the Center for Climate and Energy Solutions.
States prone to hurricanes feature hurricane deductibles. If your home gets damaged in a hurricane, you’ll have to pay a hurricane deductible after filing a claim. These deductibles are different from regular home insurance deductibles.
Depending on an area’s risk, hurricane deductibles are based on a percentage of a home’s insured value. It’s usually between 2% and 5%, but Florida allows insurers to charge up to 10%.
Whether your home policy covers you for hurricane damage depends on the fine print. You may need to get a windstorm rider to cover hurricane damage, such as lost siding, shingles or shattered windows.
Combating climate change and rate hikes
Childs said taking preventive actions can lower risks. “For example, when I purchased my home, the land on the western side slopes downward at a 30-degree angle, and the basement windows are flush with the ground, with the result that water would come downhill, creating the risk of water intrusion into the basement,” Childs said.
See also: Parametric Solution for Wildfire Risk
Childs trenched this area and inserted a serrated pipe that connects to the sewer system. She also made a significant energy retrofit that reduced her utility bills by 40% and protects against the risk of extreme heat.
Childs said home buyers should factor in climate risks when purchasing a home, including figuring out whether to buy flood insurance, even if you’re not in a high-risk area.
When buying a home:
- Shop around for insurance and know what you’re buying. If you need additional coverage, ask the insurer about riders and other coverage.
- Take precautions to protect your home. If you’re building a new home, talk to the builder about the materials being used. If you live along the coast, check on storm shutters. Explore fire-suppression systems. All of these additions could lead to lower rates and even home insurance discounts.
You can’t completely safeguard against climate change-related weather damage. But it’s wise to take precautions and know how you’re covered to minimize later problems.
You can find the original article published here on Insure.com.