Wednesday, May 1, 2024

Post 45: Learning from Insurance

I should be, in my mind at least, the perfect customer for homeowner’s insurance.  I live in a neighborhood that is quiet and stable.  I haven’t made a claim against my current policy in decades.  My home is well maintained and my finances are solid.  I’m such an ideal customer my rates should be going down – right?

Nope.  In fact, over the past two years the amount I pay for insurance on my home has gone up by a total of 26.3%.  That is roughly double the rate of inflation based on the Consumer Price Index.  Clearly, I’m getting ripped off – right?

Nope.  I probably should be thanking my lucky stars that I’m not paying more.  In many locations across the county homeowners are being hit by percentage increases in the high double digit and even triple digit range.  Property insurance has gone a little crazy in recent years.  The traditional measure of insurance industry health is known as the combined ratio (insurance payouts plus expenses divided by premiums times 100) and it has been well above historical averages (bad) for the past several quarters.  Insurance giant State Farm announced that its property and casualty section had a net underwriting loss of $14.1 Billion in 2023 on top of a 2022 loss of $13.2 Billion, and many other companies are struggling as well.  

The aftermath of the 2023 Maui wildfires.
It would be fun to posit that the rate increases are the result of some nefarious conspiracy or to curse the greedy capitalists that run insurance companies, but alas that is not the case.  Insurance rates are rising for a variety of complex reasons, but it boils down to policy payouts being much higher than expected.  Rates are not rising because of random chance or bad luck, they are rising because the world is changing.  Understanding why this is happening is an opportunity to learn how to build buildings better and how to build cities better.

The Midwest Is Not Property Insurance Heaven 

Insurance rates are based upon the likelihood of claims being made upon a given insurance policy and on the likely size of those payouts.  Insurance companies have been writing property coverage policies for a long time and they have amassed a great deal of data which they mine constantly for ways to fine tune their rates and costs.  Unfortunately, the risks that property owners face are not constant which means that rates change as risks change.  It is also important to understand that the big drivers of insurance cost are not the occasional house fire caused by a careless smoker or the random break-in by local hoodlums, but rather the major weather events that can affect thousands of property owners across a broad swath of the country.

I have lived in the midwest all my life and have always thought of it as a relatively safe place.  Oh sure we have the occasional tornado, but at least we don’t have to worry about hurricanes which cause far more damage.  Unfortunately, it turns out that the midwest offers a smorgasbord of disaster opportunities which might be less damaging than a hurricane but which can still add up to big bucks.  The list includes not only tornadoes, but also thunderstorms, hail storms, derechos, ice storms and heat waves/droughts.   It turns out that 2023 was a banner year for disasters that exceeded a billion dollars in damage and, as the accompanying map illustrates, the vast majority were located in the midwest and great plains.  

Source: NOAA

Although tornadoes get the publicity, hail and high winds account for the bulk of insurance claims in the midwest.  As with most natural disasters, the amount of restoration and repair that needs to be done after the storm has passed will overwhelm local contractors.  As a result, out-of-town contractors often follow storms across the country looking for work that local companies can’t handle and charging excessive rates because no one has an incentive to get multiple bids, let alone use the lowest bidder.  Even relatively normal storms can generate high insurance payouts.

It should be no surprise then that midwestern states figure prominently in the list of locations with high insurance rates.  In 2021, Bankrate conducted a state-by-state survey of insurance costs for a standardized policy with $250,000 of coverage.  The State of Oklahoma was at the top of the list with an average cost that was 168% more than the national average.  The rest of the top 10 included Nebraska, Kansas, Arkansas, New Mexico, South Dakota, Texas, North Dakota, Kentucky and Montana. [1]  More recent data indicates that Florida, Louisiana and Mississippi may have pushed their way to the top of the list.

Climate Change

The vast majority of people accept that the earth has been warming at a fairly dramatic rate for at least the past 50 years.  I’m not going to get into why it is warming or what we should do about it because that isn’t relevant to this post.  What is relevant is that a warming atmosphere causes faster evaporation and can hold higher volumes of water vapor.  When warm, moist air meets a cold front, the result is typically a storm, and when the air is very warm and very moist the result is a severe storm.

Of course, there have always been thunderstorms, tornadoes and hurricanes but the evidence suggests that the severity of weather events is increasing which means that damage claims are increasing as well.  This chart shows the number of natural disaster events that caused at least a billion dollars of damage.  As touched on above, 2023 set a record with 28 such events, but the growth over the past 40 years is what is probably keeping insurance executives up at night and is certainly one of the factors behind rising insurance rates.  This statistic may be a bit misleading because although it is CPI adjusted, there is evidence that construction and replacement costs have been rising faster than the general rate of inflation.  Total damages were actually relatively modest in 2023 considering the number of events, but damage totals are trending upward as well. [2]

Source: NOAA

Rain storms are common and generally beneficial, particularly for agriculturally oriented midwestern states.  Problems occur when rain falls at a very high rate in a short period of time.  When that happens, virtually any location can have flood damage because the normal facilities and topography that drain away excess water get overwhelmed.  If the prevailing climate theory is correct, then extreme rain events should be getting more common.  That seems to be the case (see the accompanying chart) but weather events are influenced by a wide variety of factors so there is a considerable degree of variability.  

Still, the overall trend line is clearly sloping upward and the end result has been that stormwater engineers have sharply revised what is considered to be a 50-year, 100-year or 500-year storm.  When Hurricane Harvey dumped 4 feet of rain on Houston in 2017, that was estimated to be a 500-year storm.  Eight of ten homeowners who experienced flooding did not have flood insurance, largely because their homes were outside the official floodplain limits.  Those limits, however, are based on rainfall intensities that are badly out of date.  Recent estimates put the likelihood of what used to be a 100-year event in Houston at something closer to a 25-year event. [3] Storm sewer systems in many parts of the country that were originally designed to contain a 20-year storm may now only handle a 5-year or 10-year storm because of increasing rain intensities.

One advantage that the midwest has is that we don’t need to worry about hurricanes or the storm surge that accompanies them.  A recent listing of the most expensive U.S. natural disasters shows that the top eight are all hurricanes (and 6 of those occurred within the past 12 years).  [4]  Again, there is a great degree of variability but there is evidence of increasing frequency and severity.  What is more crucial, however, is that rising sea levels combined with sinking land elevations (due largely to ground water withdrawals) are increasing the amount of damage done by each storm.  It may be that in the future the areas which are most prone to hurricanes (e.g. southern Florida and parts of Louisiana and the Carolinas) will be almost uninsurable by the private market, or will at least have insurance costs that are so high that only the wealthy will be able to afford those locations.

Where We Choose To Live

Rising insurance rates are not all about changing weather patterns, however.  People are often their own worst enemy because they choose to live in disaster prone locations.  Despite the damage potential of hurricanes, almost 40 percent of the U.S. population live in coastal counties. Beachfront housing has always been popular, but now it is more densely developed than ever before and the buildings being built are more elaborate and expensive than ever before.   Thus, hurricane damages are often greater not because the storm is more severe but because the value of property in the path of the storm has increased dramatically.

A study in North Carolina estimated that 75,000 acres of floodplain land was zoned for urban development.  It also found that for every residence in the floodplain that was removed through buy-out programs, 10 new residences were built. [5]  Floodplain regulations are certainly not perfect, but they are a reasonable attempt to steer development away from locations that are likely to be damaged by future floods.  Unfortunately, they are ignored or circumvented in far too many communities.

High profile wildfires have brought us the term “Wildland-Urban Interface” (WUI).  It is defined as the zone of transition between unoccupied areas and human development, and it is particularly susceptible to wildfires in areas that are heavily wooded.  In the U.S., just over 9 percent of the land area in the contiguous 48 states is in the WUI but that area contains 44 million homes (or roughly a third of all housing).  To make things worse, that amount has been growing rapidly both in total population as well as total property value.  Why are we surprised when wildfires take lives, destroy homes and cause billions of dollars in damage?

Ironically, the more people that move into the Wildland-Urban Interface, the more resistance there can be to fire prevention activities.  The controlled burning of understory brush and dead trees that could reduce the severity of a wildfire is often opposed because of perceived dangers and a perceived loss of scenic value.  Finally, the insertion of infrastructure to support development sometimes creates lightly supervised and poorly maintained parcels of land that can become ignition points.  Last year’s Maui wildfire that destroyed Lahaina is now being blamed on a long-ignored electrical easement that was overgrown with brush and tall grasses – the perfect location for a fire sparked by a downed power line to smolder unnoticed.

The Inability to Price Risk

As risks rise, insurance companies want rates to rise as well, and for much of the country that is what has happened.  Property insurance, however, is regulated by each state and there are some states which have not allowed insurance rates to match the changing risk profile, or where risks are changing so rapidly that insurance companies have not been able to keep up.  Florida, California and Louisiana are the most commonly cited examples of this condition and in all of them the private insurance market is showing signs of failure.

Louisiana, for example, is particularly susceptible to hurricane damage because much of its coastline contains very low-lying land.  Roughly half of New Orleans, in fact, is below sea level.  Hurricane Katrina in 2005 caused an enormous amount of damage but that was followed by a period of relative calm that lasted for roughly 15 years.  Development along the coast expanded and insurance rates moderated.  Then in 2020 and 2021, four hurricanes hit the state (Laura, Delta, Zeta and Ida) and problems mushroomed.  Although none were as severe as Katrina, the four storms combined to cause over $76 Billion in damages.  Local and regional insurance companies were particularly hard hit.  Eleven insurance companies serving Louisiana became financially insolvent between July of 2021 and September of 2022, and others simply stopped serving the state because of the high risk. [6]

Louisiana Citizens Property Insurance Corporation is the state’s “insurer of last resort” and as private insurers went bankrupt or left the state, Louisiana Citizens gained thousands of property insurance policies.  In fact, the number of homeowners insured by Louisiana Citizens nearly tripled since Hurricane Laura in 2020.  In January of 2023, a 63 percent rate increase was implemented and the legislature recently allocated $45 Million to the “Insure Louisiana Incentive Program” designed to stabilize the market and encourage new insurance companies to enter the state.  Typical rates for homeowner’s insurance are already nearly 40 percent above the national average and additional increases are likely.

In California the primary risk issue isn’t hurricanes but wildfires – particularly the kind that happen in the Wildland-Urban Interface (which California has a lot of).  The Insurance Information Institute estimates that in 2023 California had nearly 1.3 million homes at risk from extreme wildfires – far and away the most in the country and more than the next nine states combined. [7] 

The California insurance crisis reached new highs in March when State Farm announced that it wouldn’t renew 72,000 homeowner policies, joining Allstate, Farmers and several other insurance companies in either not writing new policies, limiting new policies, or tightening underwriting standards.  These actions are forcing thousands of homeowners to California’s insurer of last resort, known as the California FAIR Plan (Fair Access to Insurance Requirements).  The number of customers the organization insures now tops 350,000 dwelling and commercial policies with $320 Billion of exposure.  The number of customers has doubled since 2019 making the FAIR Plan one of the top five insurers in the state. [8]

Outdated regulations, many of which date back to Proposition 103 which was passed by voters in 1988, are also cited by many insurance companies that are limiting their coverage in California.  Those regulations, and subsequent additions, make it difficult to get adequate rate hikes approved in a timely manner according to the insurance industry.  A package of reforms is under discussion, including allowing both catastrophe modeling of future disasters and the rising cost of reinsurance to be included in rate hike decisions, but there is opposition from consumer advocates.

The problems in Louisiana and California, however, pale in comparison with the situation in Florida.  Since 2019, the average annual home insurance premium has risen from less than $2,000 to roughly $6,000, an amount that is three times the national average.  [9]  Farmers Insurance, Bankers Insurance, and Lexington Insurance (AIG) have withdrawn from the state and Progressive Insurance announced that it was not renewing 100,000 policies.  

Moreover, Florida relies on about 50 small insurance companies to cover close to 70 percent of policyholders.  Many of these insurance companies are rated by just one rating agency – Demotech Inc. – which has been accused of lax standards.  These smaller insurance companies became prominent as national companies either withdrew or scaled back.  Many of them have limited financial resources and insurance experience, so major ratings companies would not rate them.  Enter Demotech which was credited with “salvaging the homeowner’s insurance market” in Florida.  Nearly all mortgage lenders require homeowners to have insurance through a company approved by Fannie Mae or Freddie Mac, which in turn rely upon high marks from rating agencies.  Unfortunately, close to 19 percent of insurers that Demotech rated “A” and above went insolvent between 2009 and 2022. [10]  Where does this leave the Florida insurance market when the next disaster strikes?  Who knows.

To supplement the private market, Florida has its own version of the FAIR Plan known as Citizens Property Insurance.  Citizens is now the largest insurer in the state and Governor Ron DeSantis recently suggested that it has “not been solvent” and might not be able to pay all claims from a major hurricane.  That assessment was disputed by others, but it was enough to prompt talk of a Federal investigation.  The concern with all state run insurers of last resort is that if the private insurance market is unable to effectively price risk, why assume that a state agency is going to do a better job?  State insurance plans may simply be a ticking time bomb that will explode after the next major disaster.

What Can We Learn?

The past few years have been a struggle for property insurers and the future doesn’t look much better.  Natural disasters are becoming more numerous and volatile, people continue to build in hazard prone locations, construction costs continue to climb, property owners are more litigious, and state regulators are under political pressure to keep rate hikes down.  The pace of rate increases might moderate, but insurance costs are not going to come down so we need to adjust to a “new normal” where insurance is a significant line item in the household budget.  Although it may be cathartic to vent about the high cost of insurance, it is probably more productive to learn from what is happening and adjust our actions going forward.

Insurance payouts will likely mutate.  Let’s say your 12-year old roof suffers moderate damage during a hail storm.  Currently, your insurance company is likely to pay for a completely new roof, minus any deductible.  In the future, not only is your deductible likely to be larger, you are likely to get a settlement that reflects the depreciated value of your roof.  Sharing the risk with the homeowner will allow insurance companies to reduce rates and give the homeowner an incentive to seek out a low cost repair as opposed to a full re-roof.  It means, however, that homeowners need to have access to cash to cover a bigger share of unexpected disaster expenses.

Insurance rates must reflect risk.  This might seem so obvious as to be pointless, but unfortunately it is not.  When insurance companies are pulling out of a state or limiting renewals, or when a large number of property owners are being forced into state-run insurance-of-last-resort programs, it means that the private insurance market either cannot determine how to price risk at certain locations or that the state insurance regulators will not let them charge an amount sufficient to cover the risk.  Either situation should be a huge red flag.

Insurance rates will eventually affect migration patterns.  Consider this:  a $100/month increase in insurance costs is equivalent to a $17,000 loss in home value.  A $100/month increase might seem like a lot, but it is on the low side of what is happening in many high-risk locations and for most households it comes directly out of monthly cash flow.  Low- and moderate-income households will feel the pain first, but when they leave town labor rates will rise which will spread the pain all around.  At some point, property values and local economic output will fall and that will be a major reversal for areas which have largely been economic hot spots.  Migrants might not move very far – perhaps just 100 or 200 miles – but that will be enough to rock local real estate markets.

Community resiliency will be a hot topic.  There are a variety of things that can be done to help your community bounce back from a natural disaster, but having good insurance coverage be commonplace is one of the most important.  If property owners can’t rebuild because they were underinsured or uninsured, the entire community takes an economic hit.  Disposable income suffers, property tax revenue suffers, and financial resources are sucked away from the long-term drivers of economic growth.  Communities need to acknowledge the risks they face, advise property owners on how to minimize that risk, and work cooperatively to make whatever physical changes might lower community risk.

Building codes need to address local risk factors.  Building structures that can withstand most natural disasters is not rocket science.  Florida can build homes that stand up to hurricane winds, California can build homes (and home sites) that lessen fire damage, and midwestern states can build roofs that are hail and wind resistant. Adopting codes that require those steps is often unpopular in the short run because they increase the cost of construction, but they might save the community from economic ruin in the long run. 

Engineering will not save us.  Instead of changing where and how we build cities, people often turn to engineered structures to protect them from the next natural disaster.  Such systems can often accomplish a great deal, but they are expensive and prone to eventual failure.  This is particularly true given that natural disasters may be getting more severe and given our human tendency to under-invest in infrastructure maintenance.  Levees get breached, sea walls eventually crumble, and drainage pumps inevitably fail.  Engineered solutions should be considered a short-term band-aid not a long-term plan.

No one likes to buy homeowner’s insurance because it represents a lot of money for something you hope you never need to use.  A home, however, is many households' largest investment and a paid off mortgage is a key part of many retirement plans.  Risking all of that by not having insurance is silly, but rapidly rising insurance costs are forcing people into tough choices.  Insurance costs might end up being the canary in the coal mine that makes us rethink where we live and how we build.


Special thanks to State Farm insurance agent Paul Johnson and Lockton Insurance risk analyst Scott Johnson for their insights into the insurance market.

1. Mark Rosanes; “Revealed – The most and least expensive US states for home insurance;” November, 2021; Insurance News;,cost%20of%20an%20insurance%20policy.

2. Adam Smith; “2023: A historic year of U.S. billion-dollar weather and climate disasters;” National Oceanic and Atmospheric Administration; January 2024;

3. Alice Hill; “Climate Change and U.S. Property Insurance: A Stormy Mix;” Council on Foreign Relations; August 2023;

4. Nikhil Batra; “Top 10 Worst Natural Disasters in the US History;”; December 2023;

5. Miyuki Hino, et al.; “Growing Safely or Building Risk?”; Journal of the American Planning Association; February 2023;

6. Cate Deventer; “Louisiana’s incentives may encourage home insurers to return to the state;” Bankrate; December 2023;

7. Insurance Information Institute; “Facts + Statistics:  Wildfires;”

8. Matthew Robinson; “California Residents Issued Dire Warning About Insurance Rate Rises;” Newsweek; April 2024;

9. Andrew Dorn; “Some Floridians are seeing 6-figure home insurance prices;” NewsNation; October 2023;

10. Lawrence Mower; “Florida insurance market full of ‘low quality’ companies, study finds;” Tampa Bay Times; April 2024;

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