Insurance Premiums for Residential

Can we afford to insure the homes we live in?

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Natural disasters pose a significant risk to homeowners worldwide. The increasing frequency and intensity of these events, possibly driven by climate change, has profound implications for homeowners, the insurance industry, developers, and governments. Insurance premiums, once minimal, have become huge outlays for at-risk areas and some markets are now effectively uninsurable.

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A Global Problem

This is a global trend with property losses from disaster forecast to increase by more than 60% by 2040. Insurance premiums globally are up 5.3% in the last full year measured.

United States

The US, of the key developed markets, has probably seen the greatest impact on insurance due to some large natural disasters in recent memory such as Hurricane(s) Katrina and Sandy as well as fires encroaching on suburban California. According to Bloomberg insurance premiums in the US rose 21% between May 2022 to May 2023 impacting 94% of US homeowners. Insurers have pulled back from riskier markets in California and Florida with some forecasts saying over 40 million US properties are at risk of one or more natural disasters.

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Australia

In Australia, climate change is pushing insurance stress to new extremes. The average home insurance premium in Australia is $1534, while those living in parts of Northern Queensland and Northern WA are now paying double that, with annual home insurance premiums averaging more than $3000.

In addition to this, one in 25 Australian properties will be effectively uninsurable by 2030 due to rising risks of extreme weather and climate change according to the Australian Climate Council.

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United Kingdom

In the UK, extreme weather events like floods, storms, and heatwaves are causing subsidence cases to triple at major insurers. This has led to a surge in weather-related claims and an increase in home insurance premiums. The Association of British Insurers (ABI) expects to pay out £219m for subsidence claims made last year, the highest bill since 2006.

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Impact

With the cost of insurance increasing and certain areas now effectively uninsurable you would presume that these areas would be experiencing outflow of residents and difficulty in selling home. Paradoxically, this does not appear to be the case.

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In the US, those areas most affected by natural disasters are seeing in-flows of residents according to Redfin. The lure of better weather, cheaper land and properties and a society more geared up for remote working has accelerated this trend but at some point, insurance issues will lead to a price correction or the need for government intervention.

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Similarly, in Australia, the cost of homes in capital cities has seen a flow of families to Queensland and WA in areas at higher risk of bush fires and/or flooding.

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What is to be done?

Preparation is key. When the large earthquake recently hit Taiwan commentators were positively surprised by how well the buildings and infrastructure coped. This reflected the decades long investment in retrofitting buildings and infrastructure and a robust legal framework to challenge shoddy construction.

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There will always be natural disasters, but more efforts could be made to increase building standards in at-risk areas or provide government assistance to upgrade older properties. Construction techniques and materials can help reduce the risk and affect of the natural disasters.

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Conclusions

The impact of natural disasters on home insurance is a growing concern globally. As we see an acceleration in the frequency and intensity of these events insurance premiums will keep on rising and more homes become uninsurable. Policymakers, insurers, governments, and homeowners must work together to mitigate these risks and ensure the affordability and availability of home insurance in the face of a changing climate. Technology has to be part of the solution to help reduce or mitigate the risk too.

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