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Climate insurance bubble in danger of popping

Home insurance costs could skyrocket when policies catch up to risks

(Getty)
(Getty)

A climate change risk nonprofit is sounding the alarm about the insurance “bubble” in the United States, cautioning how close it is to popping.

An estimated 39 million homes in the United States are insured at prices significantly lower than the actual risk they face from natural disasters and climate change, according to a First Street forecast reported by Bloomberg. 

Approximately 6.8 million of those homes are covered by state-backed policies considered last resort insurance, according to the report by the nonprofit. 

The reliance on state-backed last-resort policies “is a big flashing sign that standard practices in the insurance market cannot keep up with our current climate reality,” First Street executive director Matthew Eby said.

Natural disasters are becoming a larger threat for homeowners and real estate values. As damages from these events rise, the insurance market will shift enough to pop the climate insurance bubble, sending rates through the roof and property values tumbling.

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Millions of homes would become uninsurable when the feared bubble pops, leading insurers not to renew policies, Eby told Bloomberg. First Street said the average homeowner who receives non-renewal notice from their insurance company immediately loses a double-digit percentage of the property’s value.

First Street’s report, which has a 20 percent margin of error shows that even if the low estimates come to pass, however, that could still rope in roughly 30 million homes that are underinsured compared to risk.

Insurers are already acknowledging their own concerns about climate change, reducing coverage in high-risk areas. American International Group is limiting home insurance sales to wealthy customers in hundreds of high-risk zip codes. AIG, State Farm and Allstate are all scaling back in California, while Farmers Group quietly backed away from Florida.

— Holden Walter-Warner

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Climate ChangeHousing MarketInsurance