Introduction
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Yves here. Our discussions surrounding the rising unavailability and increasing costs of home insurance in certain regions of the United States, particularly in areas like Florida and California, have understandably focused on local challenges. However, the implications of these trends extend beyond borders, as home insurance is crucial for securing a mortgage. As insurance becomes scarce and expensive, housing prices will inevitably be affected. With many regions facing premium corrections and some even becoming uninsurable, we might witness significant declines in property values and a surge in mortgage defaults, impacting lenders as well.
While our earlier analysis concentrated on Florida’s flood risks, we must also consider wildfire threats, a real concern for residents in Europe and Canada. Many areas once deemed secure have been exposed to unforeseen dangers following extended dry and hot spells. Looking ahead, it’s unclear how long the prevalent mortgage financing model dependent on home insurance will remain viable across most of the U.S. market.
It’s essential to note that similar vulnerabilities are likely present in countries where mortgages for home purchases are common. The U.S. has one of the highest rates of home mortgage adoption, but many other nations also have significant mortgage markets. A recent Forbes article citing a 2022 OECD report highlights that the U.S. stands near the bottom in terms of homes owned outright. I estimate that any country with less than 40% home ownership free of debt is at risk of climatic changes leading to higher insurance costs and reduced access to mortgages, ultimately resulting in substantial home price corrections. I invite readers from these nations to share if their local commentators or officials are beginning to address these pressing concerns.
By Gilbert M. Gaul, a two-time Pulitzer Prize winner and author of the book “The Geography of Risk: Epic Storms, Rising Seas and the Cost of America’s Coasts.” Originally published by Yale Environment 360 and Undark
For decades, Sanibel Island, one of America’s beloved vacation spots, was a dream for insurers. Its 5,000 residents consistently paid for home and flood insurance but rarely filed claims, resulting in an impressive profit margin where insurers collected over $10 for every dollar they disbursed.
This changed dramatically in September 2022 when Hurricane Ian, a powerful Category 4 storm, inundated the island with up to 12 feet of water, damaging the only causeway in and out of Sanibel and flooding numerous homes and condos. Many residents found themselves displaced for over a year due to the devastation. In subsequent years, Hurricanes Helene and Milton only exacerbated the situation.
Sanibel’s situation was both staggering and unexpected. It had been years since the island faced a significant hurricane, and officials had taken preventive measures, limiting development on two-thirds of the island and designating land for a federal wildlife refuge. However, the island’s low elevation, with many older homes at ground level, rendered it highly vulnerable.
“After 30 or 40 years of good fortune, we were spoiled,” remarked Daniel Moore Thompson, whose two-bedroom home and gift shop were flooded. “Then Ian hit, and it felt like we lost our innocence. I essentially lost everything except my jeep and my dog.”
In just a few hours, Sanibel transitioned from being an insurer’s paradise to a financial disaster. The National Flood Insurance Program (NFIP), which administers most flood policies, faced $620 million in claims—nearly a hundred times the total paid to Sanibel homeowners over the past four decades.
Sanibel wasn’t isolated in its downfall; homeowners from nearby Cape Coral, Fort Myers Beach, and Punta Gorda collectively received over $1 billion in flood payouts. Insurers responsible for wind damages incurred further losses, making Ian among the costliest hurricanes on record.
These three hurricanes served as a wake-up call to insurers. The industry, which had long underestimated the risks from climate-induced storms, wildfires, and other disasters, now stands at a precarious juncture. Existing risk models, rooted in stable climate assumptions, are being challenged by increasingly frequent and severe events—from California’s wildfires to heavy rainfall and hurricanes like Ian. As climate change leads to rising sea levels and more extreme weather patterns, the growing costs are straining insurers financially and reshaping real estate landscapes.
“The insurance crisis in the U.S. is the canary in the coal mine, and that canary is dead,” stated Dave Jones, former California insurance commissioner, who is now the director of the Climate Risk Initiative at the University of California, Berkeley. His tenure saw devastating wildfires, and he warns, “We are heading towards an uninsurable future, both domestically and globally.”
Jones is one of many echoing these alarming predictions. During a testimony before the Senate Banking Committee, Federal Reserve Chairman Jerome Powell warned that in the next decade or so, certain regions might become un-mortgageable due to insurance unavailability.
In a recent piece, economists Carolyn Kousky, Spencer Glendon, and Barney Schauble opined that the future might be impossibly uninsurable. “Natural disasters are becoming more frequent and severe, leaving more individuals and businesses unable to secure insurance,” they noted. “In areas with heightened climate risks, insurance has shifted from being a mere consideration to a major source of concern and frustration.”
Currently, both property and flood insurance markets are in turmoil, especially in high-risk zones. Many insurers in Florida, Texas, Louisiana, and California have faltered or become insolvent following extraordinary weather events. Large national companies, like Allstate and State Farm, have retreated from high-risk states or reduced policy offerings. Between 2018 and 2023 alone, nearly 2 million homeowners faced policy cancellations—over four times the average for such notice. Often, these notifications provided minimal explanation, leaving homeowners scrambling to secure new coverage, usually at much higher rates.
Deborah Brown experienced this firsthand in 2017 when she learned her long-held homeowner’s policy was cancelled. Living just ten miles from Fort Lauderdale, she initially felt secure, but her insurer deemed her home high-risk. When seeking a new policy, quotes were staggering: $8,000, more than double her previous premium and significantly above the national average of about $2,300. “That was the tipping point for us,” she remarked, ultimately leading her to sell her home and split time between an RV and her daughter’s place upstate.
Florida, along with other high-risk coastal regions, has the highest non-renewal rates, per data from the U.S. Senate Budget Committee. Signals show that this trend, although less pronounced, is spreading inland to states like Oklahoma and Iowa.
“Everyone wonders: Is insurance going to collapse?” commented Benjamin Keys, a Wharton economist who extensively studies climate change’s impact on real estate. “Well, it already has in numerous places. Insurers are wary of high-risk areas, and Florida’s insurance market has been in crisis for years.”
Following catastrophic damages from Hurricane Andrew in 1992, Florida launched the Citizens Property Insurance Corporation, designed to serve as a last-resort insurer. Though intended as a temporary measure, it has expanded significantly and is now one of Florida’s largest insurance providers, at one point covering approximately 1.4 million policies. With rising concerns about its financial exposure post-Ian, Citizens has begun the process of transferring policies to newer, smaller private insurers that are navigating the tumultuous Florida market.
Since 2000, Florida has recorded 36 presidential disaster declarations, with damages surpassing $300 billion over the last seven years alone.
Over 30 states have adopted legislation similar to Florida’s FAIR plans, aiming to address gaps in private markets. In California, a flood of homeowners turned to the state plan when private insurers cancelled their policies following intense wildfire seasons. However, these state programs often yield high costs and raise concerns regarding smaller insurer reserves and reinsurance capabilities amid major catastrophes. In 2023, Louisiana raised FAIR plan rates by over 60% due to back-to-back hurricanes Laura and Ida.
Some experts suggest that federal intervention may be necessary to stabilize the faltering home insurance market, reminiscent of the federal flood insurance program’s creation after private firms abandoned it decades ago. Yet, the NFIP has accrued debts amounting to nearly $20 billion due to losses over its tenure, even after addressing $16 billion previously forgiven. Recently, NFIP has hiked premiums, with average costs expected to double within five years. A wave of cancellations has already been triggered, and further increases are anticipated.
“The question isn’t whether insurance will be available; rather, it’s whether people can afford it and what pricing structures will be like,” said Keys. “Wealthy homeowners may not be deterred, but many will face increased out-of-pocket expenses or higher deductibles.”
Keys and other analysts indicate that the average homeowner’s policy costs have risen by 30% to 40% nationally in the past five years, with states like Florida seeing even more drastic increases—an average premium rise of $1,450 from 2020 to 2023. Florida now has the highest homeowner’s insurance rates, reaching up to four times the national average, along with steep deductibles that burden homeowners significantly.
The challenges from a warming, wetter world are escalating as disasters inflict more severe damages. Ten of the largest wildfires in California’s history have occurred in the past five years, and hurricane-related damages and flood losses have reached unprecedented levels.
In just the past seven years, Florida has sustained over $300 billion in damages from disasters, leading to 36 emergency declarations. Alone, Florida, Louisiana, and Texas account for two-thirds of the nation’s flood and hurricane losses.
From 1979 to 2003, Florida homeowners recorded $1.52 billion in flood claims. However, following four major hurricanes in 2004 and other significant storms, flood claims soared to $18.9 billion, predominantly affecting coastal counties along the Gulf of Mexico, including Lee County, where Sanibel Island is located.
Keys believes the escalating costs linked to rising sea levels, hurricanes, and more frequent disasters are sounding “a loud and clear alarm” for the housing market. “Though various individuals have remained skeptical of climate risk, financial strain tends to change perceptions,” he noted.
Potential homebuyers are increasingly inquiring about climate risks, seeking discounts for properties situated in coastal flood zones, known as Special Flood Hazard Areas, subject to a 1 percent annual chance of a significant storm. The surging costs of general and flood insurance are dampening interest in homes, leaving many properties unsold. Others are deliberately avoiding high-risk locations.
According to economist Selma Hepp from the research firm Cotality (formerly CoreLogic), buyers are adjusting their financial plans to account for insurance rates, future storms, and potential resale issues. “They’re factoring in these climate risks more than ever,” she said.
These challenges are particularly pronounced in storm-vulnerable Florida, which boasts 1,350 miles of coastline filled with countless homes and condos along beaches, lagoons, and canals. Following three major hurricanes in two years, the housing boom in the state appears to be stagnating, even hinting at a potential bubble.
On Sanibel Island, numerous properties have been on the market for months, following the three hurricanes since 2022.
“In Fort Myers and Cape Coral, we have 12,000 properties available for sale. Just five years ago, that number might have been around 30,” lamented real estate agent Susanne Perstad to The Times of London in April. “We’re seeing an excessive number of listings—perhaps five or six houses on every block—with nothing moving. It’s absurd.”
On Sanibel Island, several homes and condos have languished on the market for extended periods, with some owners offering discounts reaching $100,000 to attract buyers.
During the COVID era, the demand for homes soared throughout Florida, especially along the Gulf. “We quickly ran out of inventory; anything could sell at any price,” remarked Eric Pfeifer, a popular real estate agent in Sanibel. The median sales price peaked at $1.3 million, but has since retraced to pre-COVID levels around $830,000. “That level of demand was unsustainable,” Pfeifer concluded. “Many people overlooked the implications of sea level rise and climate change. It now seems quite unfortunate.”
By the three-year mark post-Ian, thousands of Sanibel homes have been repaired. However, surprisingly few have been elevated, and with the island’s elevation at less than five feet, these properties are still hazardous to future storms and flooding. The statistics reveal that older properties at ground level constituted around 70 percent of the total $620 million in flood losses from Ian.
According to NFIP regulations known as the 50% rule, properties suffering damages exceeding half their market value must elevate to retain their flood insurance. Yet many Sanibel homeowners circumvented this by seeking new property valuations. Higher assessments mean that the damages might not cross the 50% threshold.
Daniel Moore Thompson applied for a state grant to help elevate his two-bedroom house located near Blind Pass. However, he was denied when state funds were depleted. “Elevating on Sanibel costs between $100,000 and $200,000, which I simply don’t have,” he lamented, considering his existing expenses.
Thompson received a new assessment which allowed him to remain at ground level for now but still aims to elevate his home. “It’s all a matter of timing and when I can afford it,” he stated.
His home suffered flood damage from Ian, but the NFIP compensated him $250,000, plus an additional $75,000 for contents. “I still have my regular homeowner’s insurance, which only increased by about 30%,” he added. “Hearing horror stories from others fighting their insurers or facing policy cancellations, I feel fortunate.”
Yet, Thompson’s gift shop, Suncatchers, lacked flood insurance, and he estimates he lost around $1 million in inventory. He has since relocated to an elevated commercial space on Periwinkle Way.
Regardless of these obstacles, Thompson intends to remain on Sanibel “as long as nature permits.” “After moving from Western Pennsylvania, when I saw this exquisite nature and water, I knew it was where I belonged. Every morning I walk out and fish—who wouldn’t want to live by the water?”
Conclusion
The rising challenges in home insurance availability and affordability pose significant risks not only to individuals but also to entire communities and local economies. As climate change exacerbates these issues, it is crucial for stakeholders to address emerging trends and prepare for an uncertain future. Only through proactive adaptation and policy reform can we mitigate the impact of these growing risks.
