Is the home insurance market facing a bubble ready to burst?
A significant crisis is brewing in the American home insurance market. Costs are failing to keep pace with the escalating risks of hurricanes, wildfires, and floods.
First Street Foundation reports an alarming 39 million homes across the country that are currently insured at prices that do not accurately reflect the associated risks. Of these, nearly 6.8 million homes rely on state-backed “insurer of last resort” policies.
The report suggests that state regulations, which cap insurance premium increases and subsidize last-resort programs, have concealed the true extent of the problem.
Experts predict that the increasing frequency of disasters and related damages will lead to a major adjustment in the insurance market.
This could potentially cause a surge in rates and bursting what the Foundation terms a “climate insurance bubble“.
Are millions of homes on the brink of being uninsurable?
The heart of the issue lies in the worsening severity of natural disasters exacerbated by climate change, with wildfires serving as a stark example.
Despite significant increases in federal spending, the US continues to experience a steady rise in burned acreage and structures destroyed annually.
In states like California, where insurance prices are heavily regulated, homeowners are often underinsured.
Major insurers, including State Farm and Allstate, are reducing their exposure to high-risk areas. In Florida, Citizens Property Insurance Corp, the state’s insurer of last resort, has become the largest.
Non-renewals are on the rise, potentially leading to a decline in home values and rendering millions of homes essentially uninsurable.
Is the housing market vulnerable?
A recent report by the nonprofit First Street Foundation suggests that a quarter of residential properties in the United States may be overvalued in relation to their climate risk.
As extreme weather events intensify due to climate change, homes in states like California and Florida become more vulnerable to damages from hurricanes, floods, fires, and earthquakes.
The Foundation estimates that the number of homes destroyed by flames annually could double in the next 30 years, reaching nearly 34,000 across the country.
Matthew Eby, the Foundation’s founder, warns of a climate insurance bubble. He states that property values are overvalued by 15 to 30 percent in high-risk markets.
The consequences could be disastrous for the housing market, with potential decreases in property values as the risks materialize.
An exodus of insurers from high-risk areas is already underway, indicating a broader trend that could impact the entire industry.
The nation grapples with the increasing costs of protection through insurance products and the rising climate risks.
Meanwhile, the housing market may be on the verge of a significant correction, with potential implications for homeowners and the broader economy.