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Written by Sienna Sheldon, CFA
While the US Consumer Price Index (CPI) has seen a significant decline from its peak in 2022, the shelter-in-place component remains somewhat stubborn. The shelter index, a very lagging indicator, represents a large portion of the US CPI at 36.2%.1 With mortgage rates remaining high and property values hovering at their peak, many are still wondering when this piece of the inflation picture will change. We recently highlighted that when The shelter component of the CPI has been replaced with more real-time rental data,This component is much lower than the CPI dataset indicates. While real-time rental data suggests housing inflation may be trending downward, other costs are rising. One factor we’re monitoring is the rise in homeowners insurance rates over the past few years, along with how that cost is passed on to renters and renters. Homeowners alike. Importantly, homeowners’ insurance is implicit in the CPI through the homeowner’s equivalent rent, which is adjusted to take into account insurance premiums and other costs of homeownership.
Homeowners weather insurance premiums rise
Homeowners insurance has increased by approximately 34% on average in the United States during the past five years.2 The rise in insurance premiums is due in part to higher prices for construction materials and labor. However, private insurers also report an increasing number of claims due to frequent and strong weather events.
In Florida, for example, homeowners insurance rose 43% from 2018 to 2023. The state has seen an increase in severe hurricanes and flooding events over the past few years, with the impact on insurance premiums exacerbated by rising prices for building materials. And work. Many homeowners are finding themselves struggling to secure insurance policies that cover disasters as insurance companies withdraw from the market, citing declining profitability and increasing risks.3
On California’s Pacific Coast, wildfires have similarly disrupted the insurance market. For example, the 2017 and 2018 wildfires 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 large number of insurance companies withdraw from the market, leaving homeowners to rely on state-run insurance plans, such as the California FAIR plan, which often come with higher costs to the homeowner.
Texas led the pack in rising insurance costs by nearly 60% over the past five years, making it one of the most expensive places to get homeowners insurance in the country.1,5 While insurers cite factors such as increased construction costs (including labor costs ), the primary factor is the greater number of weather-related claims, including tornadoes and blizzards. State and local governments have tried to intervene to lower insurance premiums with little success. California introduced wildfire safety regulations and improved the rate approval process, but insurance premiums continued to rise due to persistent wildfire threats and the withdrawal of insurers. Florida has created a market for 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 successive devastating storms. Other states have banned insurance companies from pricing climate change in insurance policies to prevent premium increases. However, this restriction only exacerbates the problem as private insurers find it undesirable to do business in such countries and thus stop coverage altogether.
UK flood restoration plan
While no approach is perfect, there are innovative solutions in other countries that have made it easier for homeowners to obtain insurance for their homes, even in at-risk areas. For example, the UK Flood Control Scheme, introduced in 2016, is an example of a public-private partnership designed to ensure flood insurance remains affordable and accessible in vulnerable areas. This initiative acts as a flood reinsurance fund, where all insurers can waive the highest flood risks they are exposed to. This scheme allows insurers to offer cover for properties at high risk of flooding at more reasonable rates than would otherwise be possible. Funded by a tax levied on all UK home insurers, Flood Re charges insurers a fixed sum for each policy transferred into the scheme, based on council tax bands rather than an individual risk assessment. The premiums paid in Flood Re are pooled to cover losses due to floods, effectively spreading the risk and stabilizing the market. However, there are some restrictions, as the scheme does not cover homes built after 2009. While this restriction leaves new properties vulnerable, it also discourages construction on floodplains. Therefore, the program not only protects homes, but also stimulates better urban planning and flood risk management.
Natural disaster insurance framework in France
In France, French law stipulates that all property insurance policies must include natural disaster coverage, which includes damage caused by events such as floods and storms that have been declared natural disasters by the government. When a disaster is officially declared, the government allows insurance companies to cover claims, which are then partially paid through a state-backed reinsurance program. This system is supported by a mandatory tax on all property insurance contracts, which is collected by insurance companies and transferred to the state reinsurance fund, known as the “Caisse Centrale de Réassurance”. This public reinsurance mechanism stabilizes the impact on insurers, maintains market sustainability and ensures that insurance premiums remain affordable for homeowners.
How SMEs support the adoption of climate risk mitigation within the industry
Increased insurance costs and property damage resulting from natural disasters pose a significant risk to personal balance sheets and the economy. Last year, the United States witnessed 28 weather and weather disasters with total losses amounting to more than $1 billion, according to the National Oceanic and Atmospheric Administration.8 Since the value of home equity constitutes one of the largest assets on personal balance sheets in the United States, valued at $31.8 trillion, this issue is certain to need attention sooner rather than later.9 In addition, analysis of how this affects the shelter component of inflation continues.
Last year, we wrote about how government-sponsored companies are addressing rising climate risks to the U.S. housing market by strengthening insurance requirements and working with stakeholders to strengthen climate resilience in housing construction and standards. The GSEs continued their efforts with a primary focus on further strengthening housing resilience to climate change by promoting stronger building codes, as well as standards for new construction and existing homes. Another goal was to continually improve climate risk assessment models in their work.
While the Federal Housing Finance Agency has not commented on details about rising homeowners’ insurance costs in the United States, it hosted a conference on climate risk that included this topic last year. Discussions about possible solutions from speakers ranged from strengthening regulatory frameworks and improving insurance pricing models to developing more accurate risk assessment tools.10 State and local governments also continue to work on solutions with private insurance companies.
As the FHFA continues to evaluate possible solutions, the UK’s Flood Re program and France’s natural disaster coverage could provide lessons on how government involvement and innovative insurance mechanisms can at least stabilize the market, making insurance available and affordable, even in areas with high Risks. . As climate-related disasters continue to escalate, these examples provide insights for other countries grappling with similar challenges, emphasizing the importance of strategic planning and public-private collaboration to effectively manage and mitigate risks.
Evaluate long-term effects
Currently, it appears that other factors, including increasing vacancy rates, an increased supply of rental properties, and generally lower demand due to the impact of higher interest rates on the economy, may be causing real-time rental prices to decline. However, we will continue to evaluate the long-term impacts of rising insurance premiums on housing prices, rents, mortgage-backed securities, and the broader economy.
1 U.S. Bureau of Labor Statistics, as of April 2024, Table 2 Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, by Detailed Expenditure Category
2 Claire Trapasso, “Here’s How Much Home Insurance Rates Are Rising in Each State,” Realtor.com, April 29, 2024
3 Deborah Acosta, “Home Insurance Is Too High in This Florida City, and Residents Are Leaving,” The Wall Street Journal, October 17, 2023
4 Christopher Flavell, Brad Plumer, “California Bans Insurers From Dropping Policies Made Riskier Due to Climate Change,” New York Times, December 5, 2019
5 5Nahid Rajwani Darcy, “Texas and Oklahoma Have Highest Home Insurance Costs in U.S.,” Axios, April 8, 2024.
6 6. Richard Vanderford, “Higher-priced insurance makes sense as climate risks rise, says Chubb CEO,” Wall Street Journal, May 7, 2024.
7 Jill Cowan, Christopher Flavell, Evan Penn, “Climate Shocks Make Parts of America Uninsurable. It’s Getting Worse,” New York Times, May 31, 2023
8 Adam P. Smith, “2023: A landmark year of $1 billion 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. Beck, “Climate risks take center stage at FHFA forum,” DS News, January 23, 2024
Index definitions
the Consumer price index The Consumer Price Index (CPI) is used to measure the change in direct expenditures of all urban households for a given set of goods and services. In terms of its coverage, the CPI measures the cost of direct spending by households on items in its basket, with the notable exception that it also includes a measure of the rents that homeowners implicitly pay rather than renting their homes. The Consumer Price Index is generated by the Bureau of Labor Statistics and released approximately in the middle of each month, with publication delayed by one month.
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Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
