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In the housing market, homeowners’ insurance is a materializing of the impact of climate change. Over the past few years, more frequent and expensive harsh weather events have been strained by insurance companies, despite rising premiums punishing homeowners’ wallets.
Nowadays, new research has proven what many observers expect, but is rarely quantified. Insurance protects homeowners from financial troubles in the wake of weather disasters, but existing coverage guidelines are not suitable for the scale and scope of potential hazards. More concerning, insurance costs could soon be much more affordable for homeowners.
The study comes from a report called Climate, the sixth “C” of credits released on May 19 by First Street, a financial modelling organization for climate risk.
In an interview with USA Today, Jeremy Porter, director of climate impacts at First Street, said:
To that end, First Street saw dozens of severe weather events since 2000. Few homeowners faced the pain of wildfires and heavy winds.
But flooding is another story. Homeowner insurance does not cover flood damage, so any property considered at risk of flooding must carry flood insurance. But FEMA, the federal agency tasked with assessing which parts of the country are at risk, has dramatically underestimated the number of properties to cover, Porter said.
First Street believes there are 17.7 million properties that should be covered by forced flood insurance. This is more than 7.9 million times the FEMA “special flood hazard area.” The inconsistency is because FEMA does not explain the serious precipitation in its model.
The states with most of these additional properties are Texas, Pennsylvania, California, New York and Ohio.
First Street analysis found that the majority of counties across the country have more counties in flood risk areas than those defined by FEMA, but the most notable finding is where gaps between ratings are the biggest.
For example, Letcher County, Kentucky, has around 11.4% of the property found in FEMA’s special flood hazard area. First Street has that figure at 60.6%. A difference of nearly 50 percent points is the widest margin in any county, according to a USA Today analysis of the data in the report.
Kentucky includes six of the top 10 counties with the biggest gap between ratings. Virginia and parts of West Virginia have completed their rankings.
In two-thirds of the floods investigated by First Street, it was found that uninsured homeowners experienced so much financial distress that extreme weather damage ultimately led to foreclosure. Foreclosure is the most extreme result of housing market distress, but it is also the easiest to track, Porter said. This means that all the different steps along the way from mortgage delinquency to default can occur in areas exposed to storms, not recorded.
First Street uses Hurricane Sandy, which hit New York City in 2012 as an example of this phenomenon. According to reports, nearly 400 more foreclosures were found in the area where Sandy was the most hit.
The areas Sandy had suffered during the subprime crisis were suffering when some homeowners were charged with exorbitant mortgage rates – and the economic recession that followed, and home prices hadn’t yet started to rise again. It is another important element of foreclosure that tracked the first street. Areas where home prices are rising tend to avoid suffering. However, it is important to note that when foreclosure is observed, the same undamaged properties are at risk as the damaged properties.
That’s partly because bad storms affect the entire community, Porter said – services like transport are down, people can’t get jobs, and businesses remain closed. Insurance costs are likely to rise too, and the value of the undamaged home may increase more slowly.
“It’s like insurance protects your property as well as protecting your community in many ways,” Porter told USA Today.
Insurance costs are increasing
With all the benefits insurance can offer, the key challenge is that it is expensive and you get more.
From 2000 to 2013, homeowner insurance accounted for around 3-4% of Americans’ average monthly mortgage bills, First Street data shows. However, premiums have skyrocketed since then, and now account for more than 10% of mortgage payments.
An analysis of First Street homeowner costs found that with every 1% increase in premiums, it is associated with a 1% increase in foreclosure chances. As the researchers write, “The only thing proven to prevent foreclosure is that it is so expensive that it causes foreclosure.”
Porter said First Street doesn’t focus on the policy implications of its investigation report, but it’s difficult to draw conclusions given the political situation in Washington and the threat to many institutions that help Americans rebuild in the aftermath of the disaster.
“Resource reductions only exacerbate the issues we saw today,” he said.
