Suppressed insurance rates are leading to 'significantly overvalued' properties
Growing catastrophe losses combined with rate inadequacy are masking the true risks facing nearly 40 million properties.
Across the country, some 39 million properties — roughly 27% of the total proprieties in the continental U.S. — are at high risk of damage from flooding, wildfires or hurricanes, but those risks aren’t reflected in the insurance premiums collected to cover them. As a result of these artificially suppressed insurance rates, these properties are “significantly overvalued,” according to The First Street Foundation.
The climate risk-focused nonprofit reported that 12 million properties outside of FEMA-designated flood zones face significant flood risks, while 23.9 million properties have a high likelihood of facing destructive 3-second wind gusts. A further 4.4 million properties are in ZIP codes that have wildfire risks so severe that an average of at least 10 buildings are expected to burn down annually.
“The cost of climate exposure is not simply the damage from the floods, wind, and wildfire; it also makes its way into many other connected parts of the economy, and we are seeing that now in the insurance industry and real estate market,” Dr. Jeremy Porter, head of climate implications research at the First Street Foundation, said in a release.
First Street Foundation noted that the effect of these changing climate patterns on the insurance industry is demonstrated in the five-year average loss cost from wildfires. In 2016, wildfire costs averaged about $1 billion. This reached $17 billion by 2021.
The increasing costs are largely due to a 215% increase in the number of structures destroyed by wildfires in that five-year period. During that timeframe, the total area burned by wildfires increased at a considerably slower 48%, First Street Foundation reported.
The report authors pointed out that wildfires are not only occurring more frequently, but are happening more often in areas with higher population and structure densities. This makes adequate insurance coverage critical to protecting these areas as the risks grow.
Over-reliance on residual market
In addition, the First Street Foundation report found that homeowners are turning to insurers of last resort at an accelerated clip across a number of states.
This growth is most clearly seen in Florida, where Citizens Property Insurance Company went from fewer than 500,000 policies in 2016 to more than 1.3 million today. California’s FAIR plan has a 90% increase in policy growth from 2015-2021, reaching nearly 270,000 policies, according to the First Street Foundation.
“The over-reliance of property owners on state-run insurers of last resort is a big flashing sign that standard practices in the insurance market cannot keep up with our current climate reality,” Matthew Eby, First Street Foundation founder and CEO, said in a release. “We are rapidly moving to a place where the cost of insurance will make the most at-risk homes effectively uninsurable.”
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