Even before the recent California wildfires, which as of the time of this writing have destroyed over 12,000 structures including homes, businesses, and public buildings, the insurance world has been plagued by challenges. Frustrations abound among consumers, who are upset about rising costs or, in some cases, the refusal of insurance companies to cover certain properties or geographic areas altogether. Insurance companies are frustrated with regulations (especially in places like California) that limit their free-market abilities to adequately price risk.
Why and when did property insurance get so complicated? And what is the future of the industry? Per numerous reader suggestions to dive into the topic in more detail (thank you!), these are the questions at hand in this week’s edition of The Sunday Morning Post.
The Data
Homeowners insurance has increased in cost substantially over the last 20+ years. In 2001, the average annual homeowners insurance premium nationwide was just $536/year. Today, it is nearly quadrupled that at $2,181/year. This figure varies greatly by state, with Hawaii being the least expensive (thanks to its stable and mild climate) and Oklahoma being the most expensive (due to its location in the heart of Tornado Alley).
The rate of increase over the past few years has been particularly pronounced. According to industry data, premiums rose 33.8% from 2018 to 2023, and were likely up another 6-10% in 2024, which will be verified once data has been fully compiled for the year. Interestingly, property insurance is not included in the Consumer Price Index (CPI) categories. It should be. When calculating inflation, ignoring a key category of spending that affects so many Americans—and one that has increased so dramatically—paints an incomplete picture of the financial burdens people face.
The focus in this week’s article is on the insurance market for personal residences, but much of this is relevant for rental properties, too. Insurance costs have also increased substantially in the rental market.
Why the Increases?
Several factors have contributed to rising premiums, including:
Rising Home Values: Homes are more valuable today, both due to market appreciation and because modern homes tend to be larger and built with higher-quality, costlier materials. More valuable homes mean higher insurance costs.
Inflation in Repairs: Inflation isn’t just hitting grocery stores and utility bills—it’s also driving up the cost of home repairs. Materials, parts, and labor are all more expensive, which directly impacts insurance premiums.
Climate Change: The warming oceans and atmosphere have led to larger, more frequent storms. The impacts—from stronger hurricanes and more intense tornado outbreaks to rising sea levels and devastating wildfires—are both deadly and expensive. With more claims and those claims becoming costlier, insurers are raising premiums to cover the increased risk.
Author’s note: I wrote about rising auto insurance premiums in October. You can read that article, which has some overlapping themes, here.
How the Industry is Responding
Insurers are adapting to these challenges by raising premiums and, in some cases, withdrawing from high-risk areas altogether. For instance, Farmers, AIG, and AAA, among others, have either exited the Florida market completely or restricted coverage to what they perceive as lower-risk zip codes.
In California, companies like State Farm, Farmers, and Allstate have pulled out or have stopped renewing policies in certain areas. State Farm canceled hundreds of policies in the Pacific Palisades neighborhood just months before the recent wildfires, presciently citing wildfire risk and other high-risk factors.
There is tremendous anger around this, and it’s not hard to understand why. But are the insurance companies entirely to blame here? The letter that State Farm General Insurance CEO Denise Hardin sent to the State of California Commissioner of Insurance in March 2024 to notify them about the company’s plans to cancel policies and not renewing others, which you can read here, sheds light on the larger issues at play:
As we discussed, State Farm Group’s (SFG) capital position has severely deteriorated, and we are increasingly concerned about its financial well-being. SFG’s policyholder surplus was $2.2 billion and $1.3 billion at year-end 2022 and 2023 respectively, in contrast to $4.1 billion at year-end 2016. Although there haven’t been significant wildfire losses for several years, windstorm catastrophes in early 2023 and increasing trends in non-catastrophe water losses and liability claims (especially commercial lines and personal umbrella policies), without the additional premium needed to support those cost increases, have generated large underwriting losses. SFG has managed its policy growth by limiting writing in high-risk areas for many years, and more recently by ending all new policy sales. However, SFG’s risk exposure grew tremendously in the last few years, with construction cost inflation being a major driver. Taken together, these trends have resulted in surplus of less than 50 cents for every dollar of risk (as measured by net written premium) we face today, which makes SFG’s financial strength less than a quarter of what it was at year-end 2016.
This paints a grim picture. State Farm isn’t just citing wildfire risks, which include depleted water supply to fight those fires, but also a broader set of financial challenges exacerbated by rising costs and regulatory constraints.
California’s regulations, for instance, limit insurers’ ability to raise rates without state approval, making it harder for companies to stay solvent in high-risk markets. These rules are meant to be a mechanism for consumer protection and to prevent price gouging, but they are actually resulting in an insurance marketplace with fewer options for consumers.
The main regulations in California, specifically, were born out of Proposition 103, which was approved by voters in November 1988. Prop 103 not only requires insurance providers to obtain approval from the State for premium increases, but also restricts the use of predictive models of future risk. Instead, it requires insurance companies to price policies based on historical models, essentially looking backward instead of ahead. As storms and fires have only become more frequent and intense in the past decades, insurance companies argue they cannot possibly price risk correctly with a backward-looking model.
How Consumers are Responding
I believe a core issue at play here is that consumers typically think of insurance the same way they think about utilities: a necessary expense that should be reliable, predictable, and available to all. People don’t tend to think that their homeowners insurance policy could be revoked or not renewed, or that there might be faced with the prospect of there not being an insurance company willing to cover their area. But that is exactly what has been happening, especially in high-risk areas.
There are public options for home insurance in both Florida and California. California’s FAIR Plan, for example, aims to fill the gap, but these types of policies come with limitations and often provide less comprehensive coverage at a higher cost than private-market alternatives. They also almost by definition cover a high-risk pool of properties, as typically the only people choosing the public options are people who cannot get coverage in the private market. This represents significant risk to the overall pool and, ultimately to both policyholders and the general taxpayers who might be called upon to cover any shortfalls as claims are realized.
An increasing percentage of homeowners are choosing to go without insurance altogether. A study by the Insurance Information Institute found that 12% of U.S. homeowners did not have insurance in 2023, up from just 5% in 2019. This trend is particularly concerning given the growing frequency and severity of natural disasters.
If a homeowner has a home mortgage through bank or credit union, that financial institution will require them to have insurance. If their policy lapses, the bank or credit union will buy insurance on their borrower’s behalf (this is called “Forced Place” insurance). This type of insurance can be costly and may not provide adequate coverage in the event of a claim, but it still works as a helpful check and balance to make sure mortgage holders are insured. (I can say as a commercial lender, in my nearly ten years of lending, I have had two Forced Place insurance policies actually be used to cover a claim; those borrowers were quite happy the bank had acquired it for them after their own policies had lapsed, I can tell you that).
Today approximately 40% of American homeowners do not have a mortgage on them. This is reflective of older Americans paying off their mortgages over time, and maybe partially from the uptick in cash buyers over the past few years. These homeowners who don’t owe on a mortgage may be the ones who are more commonly forgoing insurance, as there is no bank requiring them to obtain it.
True Costs
There are two additional concerns in this topic. One is that rising homeowners insurance premiums pose a potential pitfall to the housing market. If insurance premiums continue to go up and up, it will contribute to many would-be homebuyers being further priced out of the market. For the home market to find more of an equilibrium amid this rising cost, home prices may need to come down to account for it (or at least the rate of increase will need to slow). I wrote a couple weeks ago about how I see home prices dropping in 2025. I didn’t touch much on the rising cost of insurance in that article, but as a key piece of homeownership and an important input on the cost side, it is relevant here for sure.
Second, if there are regulations in certain areas that are keeping costs artificially low like the ones we are seeing in California as a result of Proposition 103, it makes it so that the true costs and risks of homeownership are not accurately realized; people can continue living in high-risk areas without their exposure to risk being adequately accounted for. People will continue moving to high-risk areas if the true costs of living there are not actually realized, which represents a liability to society (and the taxpayer) as a whole, who might eventually be asked to cover the costs from these risks.
What Comes Next
The property insurance industry is at a crossroads. Risks are growing due to climate change, more expensive properties, and higher cost repairs. Regulations that were meant to protect the consumer are having the opposite effect by pushing providers out of the market, leaving consumers with fewer and less competitive options.
And the thing is, insurance is not a utility. It’s a for-profit business. Whereas utilities are required to cover all users in their designated catchment area equally, businesses choose their customers based on profitability. When this is the case, some people who may need the product (in this case, insurance), are going to be left out and facing some pretty pressing risks.
For consumers, the best course of action is to stay informed, shop around for coverage, and advocate for policies that address the root causes of rising premiums—from climate change to construction costs. It’s a daunting challenge, but one that demands our collective attention.
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Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
One Good Long(ish) Read
Planet Money had an interesting article out this week directly related to this week’s topic. It is the story of an economist who narrowly survived a California wildfire 30 years ago, and is now working to find solutions to the current insurance crisis. There is quite a bit more discussion about Proposition 103 in this article, and perspective from those on the ground. It is an interesting read. You can find it here.
Have a great week, everybody!
Everyone, even Mainers will share in the cost of manor crises like the California fires and the tropical hurricanes because reinsurance which all insurance companies must buy to smooth and protect their own risk is skyrocketing. Insurance isn’t a utility, it is a pooling of funds to help the unfortunate who experience a loss make it through. Those who rebuild in high risk areas must take some responsibility. Companies need not totally cherry pick low risk areas, but they sure need some say in where they will do business.
Another good one Ben.
Can't even get coverage, at all (from anyone except Lloyd's of London, for $5000/yr paid in advance) for a vacant rural western Maine farmhouse.
Nobody wants that piece of business!
They're not necessarily wrong. It's a big risk with no local FD, no local PD, and a fair amount of local break-ins, but it's pretty stark.
For now, I hired a local security company (who is absolutely slammed with business), and am adding lots of cameras and sensors.