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What does climate change mean for homeowners insurance?

EcologyInsurance

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Kara Anderson

updated Nov 15, 2024

UK Copywriter at Greenly

Homeowners have already seen insurance costs rise with inflation in recent years, but climate change could drive these costs even higher. As extreme weather events become more frequent and severe, insurers are re-evaluating risks and adjusting their policies. This could lead to soaring premiums and, in some cases, homes becoming uninsurable.

👉 In this article, we’ll look at how climate change is reshaping homeowners insurance and what homeowners can do to protect their properties and manage insurance costs.

Understanding homeowners insurance

Homeowners insurance is designed to provide financial protection for your home and personal property in the event of damage or loss. It is a critical safety net that helps cover the costs associated with repairing or rebuilding your home after events such as fires, storms, or theft. Additionally, homeowners insurance can offer liability protection if someone is injured on your property, protecting you from potential legal and medical expenses.

Typically, homeowners insurance policies cover several key areas:

Structural damage - This includes damage to the physical structure of your home caused by incidents such as fire, storms, hail, or vandalism. If your home is damaged or destroyed by a covered incident, your insurance policy will help pay for the repair or reconstruction costs. This might include not just the main structure but also other buildings on the property like garages or sheds.
Personal property - This part of the policy covers your personal belongings, such as furniture, electronics, clothing, and other items within your home. If these items are stolen or damaged by a covered event, your policy can help replace or repair them. Coverage is often based on the replacement cost of the items rather than their depreciated value, ensuring you can replace your belongings with new ones.
Liability - Liability coverage protects you if someone is injured on your property or if you accidentally cause damage to someone else's property. This can include legal defense costs and any court-ordered payments. For example, if a visitor slips and falls in your home, liability coverage can help pay for their medical expenses and any legal fees if they decide to sue.
Additional Living expenses - If your home is rendered uninhabitable due to a covered event, your home insurance can cover the cost of temporary living arrangements. This includes expenses such as hotel bills, restaurant meals, and other living costs incurred while your home is being repaired or rebuilt.

Understanding these coverage areas is crucial for homeowners to ensure they have adequate protection. With climate change leading to more frequent and severe weather events, having comprehensive homeowners insurance is more important than ever. However, as risks increase, so do premiums and deductibles, posing new challenges for homeowners seeking to protect their investments.

How is climate change impacting homeowner insurance?

Climate change is causing an increase in both the frequency and intensity of natural disasters. Events such as wildfires, floods, hurricanes, and severe storms are becoming increasingly common. Wildfires in Europe and Canada for example have intensified in recent years, destroying homes and even entire communities. Hurricanes are also growing more powerful and destructive, causing unprecedented damage across coastal regions. Flooding, too, has become a common occurrence, made worse by rising sea levels and increased rainfall.

As natural disasters become more severe, the cost of claims has also surged. Homeowners affected by these events are filing for more extensive repairs and replacements, leading to higher payouts by insurers. The devastating wildfires in California for example led to billions of dollars in claims. Similarly, hurricane damage in states like Florida and Louisiana has resulted in substantial insurance losses. This increase in the cost of claims forces insurers to raise premiums and deductibles to manage the financial risk, making it more expensive for homeowners to obtain adequate coverage.

💡 According to Swiss Re, the world’s largest reinsurer, property damage costs from natural disasters such as wildfires, floods, and hurricanes in the U.S. could rise by over 60% by 2040 due to climate change. Swiss Re also predicts that, globally, homeowners insurance premiums could increase by an average of 5.3% annually, largely driven by the impacts of climate change.

Geographic shifts in risk zones

Climate change is also causing geographic shifts in risk zones, altering how insurers calculate premiums. Areas that were once considered low-risk are now facing higher probabilities of natural disasters. For example, regions previously considered low-risk for flooding are now experiencing flood events as a result of changing weather patterns and rising sea levels. This is causing insurers to update their risk assessments and premium calculations. As a result, homeowners in newly designated high-risk areas are seeing significant increases in their insurance costs. Additionally, insurers may withdraw from certain markets altogether, leaving homeowners in those regions struggling to find affordable coverage for their homes.

“ Climate change is impacting the home insurance industry. The increased frequency of natural disasters, rising costs of claims, and geographic shifts in risk zones are all contributing to a more challenging insurance landscape. ”

How is the insurance industry responding?

Withdrawal from high-risk areas

In response to the escalating risks posed by climate change, many insurers are withdrawing completely from high-risk areas. Regions that are frequently affected by wildfires, hurricanes, and floods are becoming too costly for insurers to cover. For example, in Florida, several insurers have pulled out of the market after facing substantial losses from repeated hurricanes. This withdrawal leaves homeowners in these areas struggling to find affordable coverage or any coverage at all.

Increased premiums and deductibles

For those insurers that remain in high-risk areas, the costs of providing coverage are rising sharply. To manage the financial risk associated with more frequent and severe natural disasters, insurers are increasing premiums and deductibles. Homeowners in states like Louisiana and Texas for example - which are prone to hurricanes and flooding - have seen their insurance costs soar.

Premiums that once seemed manageable have now become a significant financial burden for many families. Higher deductibles mean that homeowners must pay more out-of-pocket before their insurance coverage kicks in, which brings another layer of financial strain.

Stricter underwriting criteria

Insurers are also implementing stricter underwriting criteria to mitigate their exposure to climate-related risks. This means that it has become more challenging for homeowners in high-risk areas to qualify for coverage. Insurers are conducting more detailed inspections and requiring additional information about a property's vulnerability to natural disasters. For example, homes in wildfire-prone regions may need to meet specific fire-resistant building codes and have defensible space around the property to qualify for insurance. These stricter criteria are designed to reduce the likelihood of large payouts, but they also make it harder for homeowners to secure the insurance they need.

Introduction of exclusions for certain types of damage

Another way insurers are responding to climate change is by introducing exclusions for specific types of damage in their policies. Flooding and wildfire damage, in particular, are often excluded from standard homeowners insurance policies in high-risk areas. Homeowners must purchase separate policies to cover these risks. Even then, the coverage may be limited, and the premiums can be prohibitively expensive.

“ The insurance industry's response to climate change involves a combination of withdrawing from high-risk areas, raising premiums and deductibles, implementing stricter underwriting criteria, and introducing exclusions for certain types of damage. These measures are aimed at managing the increased financial risk posed by climate change but also pose significant challenges for homeowners seeking to protect their properties. ”

How is climate change impacting homeowner insurance in the US?

Wildfires

Thanks to global warming and increasingly intense and frequent heat waves, wildfires are becoming a big concern in the western US, particularly in states like California and Colorado. The growing risk is making it challenging for homeowners to obtain affordable insurance. In California, for example, major insurance companies like State Farm and Allstate have stopped issuing new policies altogether in certain areas. Similarly. The cost of coverage has also skyrocketed, with premiums increasing significantly as insurers attempt to manage their financial risk.

Hurricanes and coastal regions

In the southeastern US, hurricanes pose a growing threat to coastal regions, particularly in states like Florida and Louisiana. Recent hurricanes, such as Hurricane Ian and Hurricane Ida, have caused billions of dollars in damage, leading to substantial increases in insurance premiums. Many insurers have also canceled policies or withdrawn from these high-risk markets entirely. For example, Farmers Insurance pulled out of Florida in 2023, leaving homeowners scrambling for alternative coverage.

Government intervention in the US, such as the National Flood Insurance Program (NFIP), helps fill this gap by offering flood insurance to homeowners who can’t obtain it through private insurers - although the premiums can be quite high. State-specific plans, like Florida's Citizens Property Insurance Corporation, also provide coverage but often come with higher costs and limited coverage options.

Flooding across the country

Global warming is making storms more intense and changing precipitation patterns which means that flooding is a growing concern across the US. Changes in floodplain maps have led to low-risk areas being defined as high-risk, leading to increased insurance costs for many homeowners. Homeowners who previously didn’t require flood insurance are now having to seek insurance coverage, resulting in significant financial costs.

The Federal Emergency Management Agency (FEMA) and private insurers help provide flood coverage. As is the case for flooding damage caused by a hurricane FEMA's NFIP is the primary source of flood insurance for most homeowners, but private insurers are gradually entering the market, offering more options albeit at higher costs.

How will homeowners be impacted by insurance under the Trump administration in 2025?

Several industry experts have revealed that Trump’s re-election will have an impact on insurers across the country – as efforts to control inflation, taxes, and more could impact the insurance industry for years to come.

For instance, Trump’s efforts to boost the United States economy will work to cut back on taxes and claims-related costs for insurance – which in turn, could spike the demand for business insurance. This could make insurance even more expensive for homeowners, too.

Trump’s economic policies to reduce operational and claims-related costs for insurers, while anticipated tax cuts could drive demand for business insurance. This will be beneficial for insurance companies, but the newfound entrepreneurial aura across the country could encourage more people to start businesses – which means that more people will need business insurance to get started.

💡Essentially, the basic rules of supply and demand apply in this case – as the Trump administration will heavily focus on the economy and support insurance companies such as State Farm ability to increase coverage options again in the midst of climate change.

“ “If Trump’s economic policies resemble those of 2016, we may also see lower interest rates, which could reshape insurance carriers’ financial strategies and encourage greater risk-taking.” – Bradley Flowers, founder of Portal Insurance. ”

👉 However, despite the beneficial impact that the Trump administration could have on insurance within the United States – insurance is ultimately an international business, meaning that these tax reductions and reduced operational costs could have little to no effect on big name insurance companies, and even have a negative impact on their supply chain dynamics.

How is climate change impacting homeowner insurance in the UK?

Increased flooding risk

In the UK, rising sea levels and heavier rainfall due to climate change have significantly increased the risk of flooding. Coastal areas and regions near rivers are particularly vulnerable. For example, parts of Yorkshire and Cumbria have experienced severe floods in recent years, resulting in extensive property damage and higher insurance claims. As is the case in the US, the increased flood risk has led to changes in flood risk assessments and mapping, placing more homes in high-risk zones and driving up insurance premiums.

To address these challenges, the UK government has implemented the Flood Re scheme. This government-backed initiative helps make flood insurance more affordable for homeowners in high-risk areas. Flood Re works by allowing insurers to pass on the flood risk part of a home insurance policy to the government-run scheme for a fixed price. While this scheme has helped maintain insurance availability, premiums for flood-prone properties have still risen.

Subsidence due to heatwaves

Prolonged dry spells in the summer months and heatwaves in the UK have led to a rise in subsidence claims. Subsidence occurs when the ground beneath a building shifts or sinks, causing structural damage. Homes built on clay-rich soils are particularly susceptible, as the soil shrinks and cracks during dry periods. Southern England, in particular, has seen a significant increase in subsidence issues due to hotter and drier summers.

The rising number of subsidence claims has resulted in higher insurance premiums for affected homeowners. Insurers are now more stringent in their assessments, often requiring detailed property surveys before issuing policies.

Storm damage and insurance claims

The UK has also seen an increase in the frequency and severity of storms, leading to a surge in insurance claims for wind and water damage. Storms like Dudley, Eunice, and Franklin have caused significant property damage in recent years. Common types of storm damage covered by homeowners insurance include roof damage, broken windows, and water damage from heavy rainfall.

How can homeowners protect their properties and reduce insurance premiums?

Reducing risk to lower premiums

With the impacts of climate change worsening and more unpredictable and extreme weather events threatening our homes, it can feel like there’s not much we can do and that it’s out of our control. However, there are proactive steps that homeowners can take to manage the rising costs of homeowners insurance and protect their property from climate-related damage:

Home improvements to withstand extreme weather - Investing in structural enhancements can significantly reduce the risk of damage and potentially lower insurance premiums. Installing storm shutters can protect windows from high winds and flying debris during storms. In flood-prone areas, homeowners can install flood barriers to reduce the risk of flood damage. Using fire-resistant materials for roofing and siding can help protect homes in wildfire-prone regions.
Regular maintenance to prevent damage - Ongoing maintenance is crucial for preventing minor issues from escalating into major problems. Homeowners should regularly clear gutters and downspouts to ensure proper drainage and prevent water buildup that can lead to roof damage or basement flooding. Inspecting and repairing roofs, windows, and doors can also help keep homes secure during severe weather events.
Sustainable landscaping - Sustainable landscaping can help protect your home from climate-related damage. Planting native vegetation and creating rain gardens can reduce runoff and prevent soil erosion during heavy rains. Using non-flammable plants and materials around your home can also reduce the risk of wildfire spread.
Create defensible space - In wildfire-prone areas, creating defensible space around your property can help protect it from fires. This involves clearing flammable vegetation and debris within a certain distance of your home, using fire-resistant landscaping, and ensuring that any outbuildings or structures are also protected.

Understanding and reviewing policies

It’s important for homeowners to fully understand their insurance policy and know exactly what it covers. It's also crucial to be aware of the climate-related risks their home might face. This ensures their property is properly protected:

The importance of reading and understanding policy details - Homeowners should carefully read their insurance policies to know exactly what is covered and what is not. This includes understanding the specific perils covered, any exclusions, and the terms and conditions of the policy.
Know what is covered and what isn’t - It’s important to be aware of the limitations and exclusions in your policy. For example, standard homeowners insurance typically does not cover flood or earthquake damage. Homeowners in high-risk areas should consider purchasing additional coverage to fill these gaps.
Consider additional coverage options where necessary - Depending on the risks in your area, you might need to invest in additional insurance policies. For example, flood insurance is essential for homes in flood-prone areas, while earthquake insurance is crucial in regions susceptible to seismic activity. These additional policies can provide comprehensive protection and peace of mind.

Working with insurance providers

Effective communication with insurance providers can help homeowners get the best coverage and rates.

Communicate with insurers about risk mitigation measures taken - Informing your insurer about the steps you’ve taken to mitigate risks, such as home improvements and regular maintenance, can potentially lower your premiums. Insurers may offer discounts for proactive measures that reduce the likelihood of claims.
Shop around for the best coverage and premiums - It’s advisable to compare quotes from multiple insurance providers to find the best coverage at the most affordable rates. Each insurer assesses risk differently, so shopping around can help you find a policy that fits your needs and budget.
Keeping detailed records and inventories for claims - In the event of a disaster, having detailed records of your property and possessions can expedite the claims process. Maintain an up-to-date inventory of your belongings, including photos and receipts, to provide to your insurer if needed.

By implementing these mitigation and adaptation strategies, homeowners can better protect their properties from the impacts of climate change and manage rising insurance costs. Staying proactive and informed is key to navigating the evolving landscape of homeowners insurance and ensuring comprehensive coverage in the face of increasing environmental risks.

What about Greenly?

At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.

If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.