We have all heard about climate change, and we have all noticed that the weather is changing. But we are just beginning to feel the impact of these changes in our pocketbooks. The rising cost of home insurance is the first sign that climate change will increasingly affect our wellbeing. It will increasingly determine where we can live, where we can build homes, whether we can pay for our homes, and how much disposable income we have left after paying for these costs of living.
In the US, the cost of the average home-insurance policy has risen 21% since 2015 and is expected to jump another 9% in 2023. To deal with underwriting losses (when claims exceed premiums), insurers are raising prices. In 2022, the loss was nearly $26 billion according to the American Property Casualty Insurance Association. It was the largest underwriting loss since 2011.
The main culprit insurers say: climate change. Consider this: In the 1980s, the US experienced an extreme weather event that cost $1 billion every four months. Now, it happens every three weeks, according to the US National Climate Assessment released in November. The trend is not limited to the United States, however. In the Netherlands, home insurance increased by 25% since 2019, and the Dutch Association of Insurers calculated that it paid nearly 887 million euros in insured losses due to severe weather in 2022. The highest since 2007.
Homeowners feel the pain. In the US, homeowners in high-risk areas such as California (wildfires) or Florida (hurricanes) are either facing unaffordable policies or are being dropped entirely by their insurers as they pull out of the riskiest regions. The consequences are dire. No insurance often means no mortgage. Home values plummet and some homes become unsellable. In Florida, people are already selling their homes because they fear the insurance costs become too high.
Despite the obvious risks, people continue to build new homes in areas threatened by climate change. According to Inigo (a Lloyd’s of London syndicate that specializes in high-risk reinsurance), demographic shifts have caused expected annual losses to more than double since 1970, compared with a 25% increase due to climate change. In other words, the rising cost of catastrophes has more to do with population growth in hazardous areas than with climate change itself.
Dutch insurers have pointed out that in the Netherlands developers continue to build new housing in high-risk areas, despite the Dutch government’s intention to determine spatial development based on soil and water. Since this intention is not (yet) enshrined in law, it is not enforceable, so local governments still provide permits, for instance for building 400 houses in the floodplain near Arnhem.
One consequence of building in such hazardous areas is that some of the known risks are uninsurable. For example, when excessive rainfall causes rivers to overflow, the resulting flooding is often not covered by standard home insurance policies.
This is not the only problem. Climate change also affects homes in safe areas. In the Netherlands, for example, foundation damage from drought is a major risk, in addition to water damage from flooding. Because this is a predictable risk, it is not covered by insurance. Nevertheless, without insurance or some other (government) safety net, homeowners will have to foot the bill. According to ABN AMRO, in some cases, the cost of repairing a foundation can amount to €50–€100,000.
According to experts, the foundations of hundreds of thousands of buildings in the Netherlands are at risk. The Dutch government is looking into the problem, and Minister Hugo De Jonge has asked the Council for Environment and Infrastructure to help determine the extent of the problem.
Whether or not the government steps in, homeowners will need to make climate risk a more important part of their real estate valuation, buying, and selling decisions. They can start by reviewing the climate risks that apply to their homes and use this knowledge to prepare their homes and mitigate climate risks. In the Netherlands, several experts and industry associations have called for a climate label to determine a building's climate resilience (similar to the Dutch energy label).
In addition to high repair costs in the event of an event, homeowners also run the risk of undervaluing their properties. They may not be able to sell their homes. Such uncertainty could cause a major shift in the housing market. If the risks are too high for an individual homeowner, people may prefer other forms of housing finance, including renting. Professional real estate companies may be better equipped to manage and spread the risks associated with climate change across their portfolios.
Other options are also possible, such as people banding together in resident collectives and/or governments stepping in with a climate change emergency fund (e.g. to buy back unsellable homes). Most likely, a combination of governments, residents, insurers, builders, real estate companies, and the broader financial community will work together to finance the transition to climate-resilient housing.
