Insurance Premiums and the Rising Cost of Homeownership

While the U.S. Consumer Price Index (CPI) has seen a significant decline from its 2022 peak, the shelter component remains somewhat stubborn. Shelter, a notoriously lagging indicator, represents a substantial piece of the U.S. CPI bucket at 36.2%.¹ As mortgage rates remain high and as property values hover at their peaks, many continue to wonder when this piece of the inflation picture will roll over. We recently highlighted that when the shelter component of CPI is replaced with more real-time rental data, this component is much lower than what the CPI bucket reports. While real-time rental data suggests shelter inflation may be trending lower, other costs are rising. One factor we are monitoring is the increased price of homeowners’ insurance over the last several years along with how that cost may be passed on to renters and homeowners alike. Importantly, homeowners’ insurance is implicitly included in CPI through owners’ equivalent rent (OER), which is adjusted to account for insurance premiums and other homeownership costs.

Homeowners Weather Rising Insurance Premiums

Homeowners’ insurance has increased nearly 34%, on average, in the U.S. in the last five years.² The rising premiums are in part due to rising prices of construction materials and labor. However, private insurers also are citing an increasing number of claims due to more frequent and severe weather events.

In Florida, for example, homeowners’ insurance has spiked by 43% from 2018 through 2023. The state has seen an increase in severe hurricane and flood events over the last several years, with the impact on insurance premiums compounded by rising prices of construction materials and labor. Many homeowners find themselves struggling to secure insurance policies that cover disasters as insurance companies retreat from the market, citing declining profitability and heightened risks.³

On the Pacific Coast in California, wildfires have similarly disrupted the insurance market. The wildfires of 2017 and 2018, for instance, wiped out 25 years of industry profits in California alone, prompting insurers to reevaluate their risk models and pricing strategies.⁴ California has seen a significant number of insurers withdraw from the market, leaving homeowners to rely on state-run insurance plans, like the California FAIR Plan, which often come with higher costs to the homeowner.

Texas has led the pack of higher insurance costs at nearly a 60% increase over the last five years, making it one of the most expensive places to have homeowners’ insurance in the country.^1,5 While insurers cite factors such as increasing construction costs (including labor costs), the primary factor is a higher number of weather-related claims, including tornadoes, hurricanes, and hailstorms. State and local governments have attempted to intervene in bringing premiums down with little success. California has introduced wildfire safety regulations and an improved rates approval process, but premiums have continued to rise due to persistent wildfire threat and insurer withdrawal. Florida created a market of small insurance companies backed by Citizens Property Insurance Corporation, a state-mandated insurer of last resort. This system worked until its business and pricing models were disrupted by Hurricane Irma in 2017 and several consecutive damaging storms.^6,7 Other states have blocked insurers from pricing climate change into insurance policies to prevent premium increases. However, this restriction only exacerbates the issue as private insurers find it less desirable to do business in such states and therefore discontinue coverage altogether.

UK's Flood Re Scheme

While no one approach is perfect, there are innovative solutions in other countries that have made it more affordable for homeowners to have home insurance, even in high-risk areas. For example, the UK’s Flood Re scheme, introduced in 2016, is an example of a public-private partnership designed to ensure that flood insurance remains affordable and accessible in high-risk areas. This initiative functions as a flood reinsurance fund, to which all insurers can cede their highest flood risks. This scheme allows insurers to offer coverage to properties at significant risk of flooding at more reasonable rates than would otherwise be possible. Funded by a levy on all home insurers in the UK, Flood Re charges insurers a fixed amount for each policy transferred into the scheme, based on council tax bands rather than individual risk assessment. The premiums paid into Flood Re are pooled to cover losses from flooding, effectively spreading the risk and stabilizing the market. With that said, there are some limitations, as the scheme does not cover homes built after 2009. While this restriction does leave newer properties vulnerable, it also discourages building on floodplains. Therefore, the program not only protects homes but also incentivizes better urban planning and flood risk management.

France’s Natural Disaster Insurance Framework

In France, French law mandates that all property insurance policies must include coverage for natural disasters, which includes damage from events like floods and storms declared as natural disasters by the government. When a disaster is officially declared, the government allows insurers to cover the claims, which are then partly reimbursed by a state-backed reinsurance program. This system is supported by a compulsory levy on all property insurance contracts, collected by insurers and transferred to the state’s reinsurance fund, known as the "Caisse Centrale de Réassurance." This public reinsurance mechanism stabilizes the impact on insurers, maintaining market sustainability and ensuring that premiums remain affordable for homeowners.

How GSEs Support Adoption of Climate Risk Mitigation within the Industry

Increasing insurance costs and property damage from natural disasters pose a substantial risk to both personal balance sheets and the economy. There were a record 28 weather and climate disasters with losses totaling over $1 billion last year in the U.S., according to the National Oceanic and Atmospheric Administration.⁸ With home equity value being one of the largest assets on U.S. personal balance sheets, valued at $31.8 trillion, this will certainly be an issue that needs attention sooner rather than later.⁹ In addition, how this impacts the shelter component of inflation continues to be analyzed.

Last year, we wrote about how government-sponsored enterprises (GSEs) are addressing the increasing climate risks to the U.S. housing market by enhancing insurance requirements and working with stakeholders to promote climate change resilience in housing construction and standards. GSEs have continued their efforts with a key focus on further enhancing housing resilience to climate change by promoting stronger building codes, as well as standards for new construction and existing homes. Another objective has been the continued improvement of climate risk assessment models in their work.

While the Federal Housing Finance Agency (FHFA) has not commented on specifics around the rising costs of U.S. homeowners’ insurance, it hosted a conference on climate risk that included the topic last year. Discussions on possible solutions from speakers ranged from enhancing regulatory frameworks and improving insurance pricing models to developing more accurate risk assessment tools.¹⁰ State and local government also continue to work to find solutions with private insurers.

As the FHFA continues to assess possible solutions, the UK’s Flood Re and France’s mandated natural disaster coverage could provide lessons in how government involvement and innovative insurance mechanisms can at least stabilize the market, making insurance both available and affordable, even in high-risk areas. As climate-related disasters continue to escalate, these examples offer insights for other nations grappling with similar challenges, emphasizing the importance of strategic planning and collaboration between public and private sectors to manage and mitigate risks effectively.

Assessing Longer-term Implications

For now, it seems that other factors, including an increase in vacancy rates, an oversupply of rental properties, and generally less demand due to the impact of higher interest rates on the economy, may be driving real-time rental prices down. However, we will continue to assess the longer-term impacts of higher insurance premiums on housing prices, rents, mortgage-backed securities, and the broader economy.

¹ U.S. Bureau of Labor Statistics, as of April 2024, https://www.bls.gov/news.release/cpi.t02.htm

² Clare Trapasso, “Here’s How Much Home Insurance Rates Have Risen in Every State,” Realtor.com, April 29, 2024

³ Deborah Acosta, “Home Insurance Is So High in This Florida Town, Residents Are Leaving,” The Wall Street Journal, October 17, 2023

⁴ Christopher Flavelle, Brad Plumer, “California Bans Insurers from Dropping Policies Made Riskier by Climate Change,” ,” The New York Times, December 5, 2019

⁵ 5Naheed Rajwani-Dharsi, “Texas and Oklahoma have the highest home insurance costs in the U.S.,” Axios, April 8, 2024

⁶ 6Richard Vanderford, “Pricier Insurance Makes Sense as Climate Risk Grows, Chubb CEO Says,” The Wall Street Journal, May 7, 2024

⁷ Jill Cowan, Christopher Flavelle, Ivan Penn, “Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse,” The New York Times, May 31, 2023

⁸ Adam B. Smith, “2023: A historic year of U.S. billion-dollar weather and climate disasters,” NOAA Climate.gov, January 8, 2024

⁹ Federal Reserve Bank of St. Louis, FRED Economic Data, “Households; Owners’ Equity in Real Estate, Level,” as of March 7, 2024

¹⁰ Eric C. Peck, “Climate Risk Takes Center Stage at FHFA Forum,” DS News, January 23, 2024

Index Definitions

The Consumer Price Index (CPI) is used to measure the change in the out-of-pocket expenditures of all urban households for a particular set of goods and services. In terms of its coverage, the CPI measures the cost of spending made directly by households for the items in its basket, with the notable exception that it also includes a measure of the rents that homeowners implicitly pay instead of renting their home. The CPI is constructed by the Bureau of Labor Statistics and is released around the middle of each month, with a one-month publication lag.