Climate Change and State Regulators Push Up Home Insurance Rates

It's not news that for the past several years we've been locked in a "hard" insurance market. Faced with billion-dollar settlements and the rising cost of their own insurance coverage (known as "reinsurance"), insurers have raised premiums, cut coverage and added numerous exclusions. The changes have forced co-op and condo boards to scramble to control insurance costs while making sure their properties are adequately covered.

Now, according to an extensive new nationwide study by The New York Times, you can add two more factors to the recent rise in home insurance costs. First is climate change, which has tended to cause insurance costs to increase the most in the parts of the country with the greatest exposure to extreme weather. Second is the fact that insurance rates do not always rise or fall with levels of risk or a property's value.

Much of the difference in insurance premiums seems to stem from actions by state officials, who have the authority to approve or deny rate increase requests by insurers. Some states use that power to keep rates low, while others hardly use it at all. Homeowners in states with more controls, like California, tend to pay less than those in states with a hands-off approach, like Oklahoma.

Glen W. Mulready, Oklahoma’s elected insurance commissioner, has never exercised his power to deny a rate increase requested by an insurance company for home insurance. He said he believed that competition, not regulation, was the best way to hold down prices. Maybe not. Oklahoma is the sixth-most expensive state for home insurance.

The typical U.S. household paid $2,530 in home insurance premiums last year, which was 33% more than in 2020 — and nearly double the rate of inflation, a sore spot with most Americans. In Manhattan, where home values are well above the national average, the typical homeowner paid $7,941 for insurance in 2023, up a whopping 87% since 2020. It's also 433% more than other counties with the same level of risk.

“Families with the same level of risk exposure pay wildly different amounts to protect themselves from harm,” says one of the researches, Benjamin Keys, a professor of real estate at the University of Pennsylvania’s Wharton School. “Different prices for the same risk feels unfair.”

Ishita Sen, a professor at Harvard, has found that after insurance companies suffer big losses in states that are tightly regulated, they tend to raise rates in more loosely regulated states. That suggests that companies are using homeowners in some parts of the country to subsidize the cost of disasters elsewhere. Insurers deny this.

But there's no denying the fact that the nation's distorted insurance rates can promote potentially disastrous decisions. Artificially low rates can encourage people to build, buy and stay in dangerous areas. The way the home insurance market works now, Sen says, is “incentivizing all sorts of crazy behavior.”