The home insurance market is collapsing. This owner paid the price

The home insurance market is collapsing. This owner paid the price

The home insurance market collapsed in New Orleans, leaving Alfredo Herrera with few options for coverage — and skyrocketing insurance premiums.

Herrera, 35, works in finance for a local bank. He bought his 900-square-foot home in the Mid-City neighborhood of New Orleans in 2020 for $270,000, and lives there with his partner.

In 2022, he pays $1,600 a year for home insurance. But last July, his insurance company canceled his coverage, saying it was leaving Louisiana In the past, getting or keeping homeowner’s insurance didn’t pose much of a problem.

But as climate change increases the frequency and severity of extreme weather, insurers – especially in areas most affected by floods and fires – are raising their premiums, or pulling out altogether, impacting the affordability and availability of home and fire insurance.

Herrera shopped around for a new plan, but she struggled to find a policy. Louisiana Citizens, the insurance company of last resort for property owners in the state, is undisputed. It will cost more than $7,000 annually.

Herrera eventually found a policy with a small company in the state that charged him $4,930 annually — a 208% increase from what he paid in 2022.

“It was a very difficult situation,” he said. He never imagined that when he bought his house, private insurance options would be limited and the insurance company of last resort would be so expensive.

“We were up against a wall,” Herrera said. “No competition.”

Everyone pays more
Herrera’s insurance story is common in Louisiana and other places around the country with an increasingly high risk for extreme weather.

There were a record 28 weather and climate disasters with losses totaling more than $1 billion last year in America, according to the National Oceanic and Atmospheric Administration. By comparison, between 1980 and 2023, the typical annual average for this event was 8.5.

A Louisiana State University survey last year found that 17% of Louisiana homeowners reported their providers canceled their policies. Sixty-three percent of policyholders said the cost of their insurance coverage had increased from the previous year, the survey found.

There was about a 10% to 12% increase in the cost of homeowner’s insurance last year in the United States, said Mark Friedlander, a spokesman for the Insurance Information Institute, a nonprofit industry association. A key driver is the higher costs faced by insurers, including from more severe storms; higher replacement costs; and reinsurance, a type of insurance used by insurers to limit their risk. This is communicated to the user. So, even if a homeowner doesn’t live in a high-risk area, that owner may pay a higher premium to cover people in the most at-risk area.

In 2023, Neil Fernandes pays $1,700 a year for Farmers Insurance coverage for his home in Santa Clarita, California, where the 42-year-old software engineer lives with his wife and son.

But last year, Farmers said it raised its premiums to $3,200. When he asked why, Farmer cited rising costs and increasing fire danger in the state. Fernandes said the fire danger around his home has not changed and he lives a quarter of a mile from the fire station.

He started shopping around for another policy, but he found the options limited.

Frustrated with the lack of options, he switched to AAA home insurance for $2,880 a year.

He and his family had to change their lifestyle to accommodate the increase. He drives less to save on car insurance. They don’t eat out much, or travel, and put off increasing home improvement.

Fernandes challenged AAA’s assessment of his home’s insurance value, which he said was an overestimate.

AAA did not comment to CNN.

And she worries about more home insurance price shocks in the future, something she didn’t expect when she bought her home.

“As a homeowner, I’m always worried about things like paying taxes for good schools and community care,” he said. “Now I have to worry about insurance coverage.”

The insurer withdrew
In some places most vulnerable to climate change, insurers have stopped issuing policies.

In May, State Farm, California’s largest home insurer, announced it would temporarily stop issuing policies in the state, citing the risk of wildfires. Farmers Insurance considers tIt is too risky to continue to insure homes in Florida and pull out of the market there entirely.

On March 20, State Farm said it would not renew 72,000 home insurance policies in California, representing just over 2% of the company’s policies in the state. The company cited “inflation, catastrophe exposure [and] reinsurance costs” among the reasons.

More people are being pushed into government-backed “insurers of last resort,” where they typically have to pay more money for narrower policies.

More states are looking to start state-backed insurance providers as companies pull out.

In Florida, Citizens Property Insurance has seen the number of policies it issues grow about 50% in the last year alone to 1.3 million — equal to 16% of the market and far more than any national insurer in the state writes.

The US Senate Budget Committee is launching an investigation into whether Florida’s state-backed home and property insurance companies have enough money in the bank to withstand future disasters.

Go without insurance
But climate change is not the only factor driving up costs. Insurance companies also point to increased costs of replacing homes, as inflation for building supplies and labor has increased.

The insurance industry says that the cost of reconstruction and replacement will jump 55% between 2019 and 2022. However, costs have decreased. And reinsurance has increased between 30% and 40% after years of losses in the industry, according to Matthew Carletti, an insurance industry analyst for JMP Securities.

Homeowners with mortgages can’t go without homeowner’s insurance because their mortgage servicer will require an escrow account for the insurance. But for those who have paid off their home or bought it with cash, the high additional cost of homeowner’s insurance and the challenge of obtaining it may cause some to take their chances without it.

About 6 million homeowners chose to forego homeowner’s insurance, according to a report from the Consumer Federation of America. That’s about 7.4% of all homeowners in the country, and amounts to about $1.6 trillion in uninsured value.

The CFA warns that the problem of uninsured homes is likely to worsen in the coming years unless major investments in climate change adaptation and stronger oversight of the insurance industry are made.

Premiums skyrocket
Diana Troxell and her husband weren’t sure how they were going to pay their 250% annual premium increase for their factory home in rural Cottonwood, California. Currently, they get help from family to pay for groceries and gas.

Troxell, 76, works seasonally as a face painter at county fairs. She and her husband rely mainly on Social Security to scrape by.

They have lived in their home for 19 years and have a policy with Foremost Insurance, paying about $1,910 a year.

But Foremost last year told them their policy would not be renewed because of bushfire exposure.

“We’re going into shock mode,” he said. “We can’t figure out what to do.”

They wanted to sell their house and rent in California, but they couldn’t afford it.

With no other insurance options available, they turned to the California FAIR Plan, a state program for residents and businesses who can’t get insurance through regular insurance companies. In 2021, the FAIR Plan accounted for 3% of the state’s policy in 2021, nearly double the share from 2018.

Now they pay about $6,660 a year through the FAIR plan.

“We’re in ‘how are we going to do this’ mode?” he said. “We live from month to month.”