The cost of homeowners insurance is on the rise, and not just because property values went up -- almost 20% across the board -- during last year's homebuying frenzy.
How high insurance costs may go is anybody's guess at this time. But the Federal Emergency Management Agency is now operating under a new flood insurance rate structure that changes how it looks at risk.
Furthermore, the growing number of natural disasters is forcing insurers to reevaluate their risk, with the end result almost assuredly being higher premiums. Weather is even starting to inform lending decisions, with the distinct possibility that lenders will charge more for loans in high-risk areas -- or not write them at all.
Weather events always are a threat. But during last year's first nine months alone, the National Centers for Environmental Information counted a record 18 major storms, each with losses exceeding $1 billion.
Such events are why, back in 1968, lawmakers created the National Flood Insurance Program to protect property owners from flood losses. The NFIP also protects taxpayers who fund the program by reducing Uncle Sam's exposure. But almost annually, the NFIP well runs dry and requires additional appropriations from Congress, which, after years of inaction, has yet to reconstitute the program so it remains solvent.
Speaking of dry, as of Dec. 1, the NCEI also says moderate to exceptional drought conditions cover nearly half the country. So more disasters unrelated to flooding are in the offing, too.
To bolster its balance sheet, FEMA, which oversees the flood insurance program, has switched gears. Instead of rating risk solely on whether a house is located in a flood zone or not, the new formula looks at a variety of factors, including distance to a flood source, the severity and frequency of flooding, and property characteristics such as the cost to rebuild the property in the event of damage.
The result: Some 3.3 million homeowners who currently have coverage will pay more, according to a study from Porch, a provider of software and services to several home service industries.
The typical NFIP premium is $734 annually. FEMA predicts that 77% of those with flood insurance will see a price increase -- a hike of about $88 a year for most, according to Porch's calculations, but some by as much as $240 per year -- with the remainder enjoying a lower premium. For those hit hardest, the increase will be spread over a few years.
Granted, this only impacts owners who reside within a specified flood zone. But since floods can happen anywhere, anytime and for many reasons, it is a good idea to obtain coverage no matter where you live.
Floods are not covered by your homeowners insurance, but the costs of those policies are headed up, too.
"The growing number of climate events has left the insurance business reeling," says Jennifer Rasmussen, the author of a new white paper detailing what lies ahead for policy holders. "As the intensity and scope of future catastrophes grow, insurance rates for property owners will likely rise significantly," says Rasmussen, a vice president at SitusAMC, a technology provider in the real estate finance business.
According to LexisNexis, 39% of all home insurance claims in 2020 were due to catastrophic weather. And the SitusAMC paper says the rise in the number of severe hurricanes, wildfires, tornadoes and other weather events linked to climate change has created significant risk for insurance companies.
The impact is not limited to the coasts, either. Winter storms in Texas, for example, accounted for 40% of total property losses for insurers in the first half of 2021, and nonprofit Climate Central says the Lone Star State, not California, has the highest threat level for wildfires, with 72% of the state's population at risk.
Of course, recent demographic and migration trends are exacerbating the problem as more people move to flood- and fire-prone regions. A projected 1.2 million more houses will be at risk of flooding over the next 30 years, according to data from the First Street Foundation.
All of this has the mortgage business on edge as companies decide what to insure and at what cost. Some lenders have already started incorporating ATTOM Data Solutions' climate data into their decision-making scenarios, says the firm's Todd Teta. And more can be expected to do so.
A report from the research affiliate of the Mortgage Bankers Association says lenders "will not be spared" from the ravages of climate change. The physical destruction caused by extreme weather events will "influence the behavior" of lenders, investors and government-backed loan programs, it says.
The report says severe weather could lead to more mortgage defaults, placing increasing stress on housing and housing finance's sophisticated system of distributing risk across multiple stakeholders, including consumers, homebuilders, appraisers, originators and mortgage investors.
MBA officials say high-level industry discussions have taken place about incorporating weather-related risk into underwriting decisions. But Chief Economist Mike Fratantoni says that while regional climate models offer enough data, that's not the case for property-level decisions. "There just isn't enough information to make the call," he says.
Meanwhile, the Federal Housing Finance Agency, which oversees Fannie Mae, Freddie Mac and the Federal Home Loan Banks, has told these key entities to designate climate change as a priority concern, and to actively consider its effects in their purchasing decisions.
Eventually, lenders could charge a higher rate for a loan on a higher-risk property. They could require a larger down payment or a larger homeowners insurance policy -- perhaps even some sort of disaster policy. Or they just may not make the loan at all.