PolicyCast: Navigating the Homeowners Insurance Crisis 

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations

If you speak with any real estate agents in Florida or California, they’re likely to launch into their woes of finding available and affordable homeowners insurance policies for their clients. Whether it’s the changing climate, inflation or soaring labor costs, homeowners’ insurance premiums are skyrocketing. The higher costs are not only a barrier to buying a home but could also imperil existing homeowners living on fixed incomes. In short, it’s a crisis desperately searching for answers. It’s why I’m so excited to have Robert Gordon as my guest on the PolicyCast. Robert is head of Policy and Research at the American Property and Casualty Insurance Association. It’s his job to work with the insurance industry to propose solutions to policy makers at state and federal levels. Needless to say, his insights are in high demand.

Willison

Well, Robert, welcome to the Arch Mortgage Insurance PolicyCast. Great to have you here.

Robert Gordon

Great to be here, Kirk.

Willison
Well, I know that the homeowners insurance crisis is really a top of the mind issue for our viewers. So let’s just jump right into the conversation. We’ve seen a huge spike in homeowner insurance premiums over the last couple of years. And in quite a few states, insurance companies have stopped writing policies altogether. Just this past March, for instance, State Farm announced that it was canceling 30,000 homeowner and another 42,000 commercial apartment policies in California. And that’s you know, that’s on the heels of a number of other companies taking similar steps, would you walk us through the factors that are really driving the hike in premiums and cancellations?

Gordon

You know, Kirk, it’s very hard as a consumer. So, every time that I go to the grocery store or fill my gas tank, I get angry at how much inflation has increased prices. Egg prices went up 269% from the beginning of the pandemic to early last year, gas increased two and a half times before it taper[ed] down. In my house, a particular concern, the price of chocolate, has tripled just over the last year. So, inflation that’s hitting everybody, insurers included, and insurance is really a pooling of risks and a pass-through [of] the costs of repair and replace cars and homes. According to the Federal Bureau of Labor Statistics over the past five years, the overall CPI, that’s the consumer price index or inflation, has increased nearly 23%. You contrast that to U.S. car and truck prices, which have increased even more, over 29%, and auto parts and accessories have increased nearly 36%. And then you compare that to the Producer Price Index premiums for personal auto, which have only increased by 15 and a half percent. So, you can see that the inputs for insurance, the car prices, the auto parts, those are all increasing more than the underlying rate of inflation. And both of those are increasing more than auto insurance. Same thing for housing, the cost of shelter has increased 25 and a half percent. But construction material prices have increased nearly 42%. And you compare that to the producer price index for homeowners insurance, which is only a little over 13% over that time period. So again, the cost inputs for insurance, the price of rebuilding homes and cars, it’s been going up much faster than inflation, and much, much faster than insurance premiums.

Willison

So that’s the case nationwide. But we have seen certainly some real spikes in places like Florida, in Texas and Louisiana and California, and frankly even kind of in the Midwest. So, what kind of impact is climate change or increasing severity of natural disasters playing?

Gordon

Well, it’s playing some, but actually the biggest factor is a combination of inflation and people moving into more expensive homes in areas of higher climate risk. So according to Redfin, in the first half of the 20th century, only a bit over 14% of new homes were built in areas with high fire risk. But in the last few years, 55% of new homes have been built in areas that have a high fire risk, and more homes are also being built along the coast or in tornado-prone areas. There are a number of studies that have been done that have demonstrated while climate change and legal system abuse are contributing factors to insurance premium, it’s really the demographic shifts and inflation that are the primary cost drivers and some of that is like the increase in costs of food and gas. Now, it’s a little bit different in some regions like California, for example. It’s really the market crisis is a regulatory failure. So, you think about when a grocery store faces higher wholesale costs, they can adjust their prices on a daily basis if necessary. But insurers in California have to prepare these very extensive regulatory filings to get permission to increase rates and the average regulatory review times are currently nearly a year-long delay. And then insurers, after it’s approved, have to wait up to another 12 months for policies to roll over and to implement those rate adjustments. So, in California, that means even when insurers can obtain adequate rate requests that aren’t suppressed, the lag time can typically be two years, which means at a time of record inflation rate increases are always trying to play catch-up. So according to the state insurance regulators over the most recent 10 years available, homeowners in California suffered over a 13% net underwriting loss, that means they’re losing 13 cents on every dollar. You know, there’s the old saying when you find yourself in a hole, stop digging. And so, it’s really in states that have that kind of rate suppression it’s even worse. And again, climate change estimates it’s contributing about one to 2% a year. But inflation, again, has been at 40-year record levels, and that and the demographic shifts are really the primary cost drivers.

Willison:

So, I mean, this is obviously a big problem for homeowners for potential homeowners. From the insurance industry perspective, what strategies or products are you guys exploring to mitigate the impact of rising premiums?

Gordon:

So, a couple of things. First of all, we always recommend to consumers: Shop around. Insurance is incredibly competitive, work with your agent to understand the right levels of coverage that are appropriate for you, it may be that adjusting your deductibles, adjusting your coverage levels, might make that insurance more affordable. Also, insurers are investing enormous sums of money into coming up with new safety standards and mitigation standards. So, insurers fund the Institute for Home and Business Safety, they fund the Insurance Institute for Highway Safety, those are the entities that are designing better fire safety standards, better car safety standards, and then we go and try and get policymakers to adopt those safer standards for consumers. If we’re going to try and make insurance affordable over the long term, you need some of those mitigation standards to offset the cumulative increase of climate change and some of these other demographic and inflation shifts.

Willison:

And do you think that the massive infrastructure package that passed Congress this term, will there be funds set aside for mitigation that can actually reduce the risks for homeowners?

Gordon:

There will be. So APCIA has been very active lobbying both state legislatures and Congress to try and adopt and implement more mitigation programs. And that includes some of the infrastructure package. So, we’ve been successful in getting a number of programs either developed or funded, that will help bend the cost curve over time.

Willison:

So, this is called the PolicyCast. We always like to delve into policy and as it relates to homeownership and just shelter for people. Property and casualty insurance companies are regulated at the state level, not the federal government. So, I have a two-part question for you. One, would you take a few moments and prioritize the most impactful recommendations that the APCIA is making to state policymakers? And second of all, why you aren’t regulated at the federal level, what’s your perspective on the potential role for federal intervention, or at least a federal solution to this issue is, as I know that, APCIA has been on Capitol Hill, testifying before Senate and House Committees on this very subject.

Gordon:

That’s right, Kirk. So, the most important role of government is to do no harm. Regulators and policymakers, they’re always under pressure from consumer activists and agitators to impose price control and coverage mandates on the market. But more government controls always end up first reducing affordability and then ultimately availability. So, insurance price controls are actually what drove most of the National Insurance out of Florida and Louisiana and recently caused a number of insurers to pull back from California. Insurance is incredibly competitive, with thousands of companies vying to provide the best product, you can’t turn on the television without seeing all these insurance ads. And most state regulators do a good job of letting the marketplace work while focusing on solvency and market conduct. And then some regulators are taking the lead in encouraging more mitigation. So, for example, Mississippi Commissioner Mike Chaney has been a leader in helping facilitate credits to homeowners adopting the various levels of IBHS building codes for which the number of windstorm insurers, whether it’s a state program or private insurers, then provide policyholder insurance discounts — those kinds of mitigation programs create a win-win for consumers and communities in the marketplace. At the federal level, we don’t need federal market intervention, there’s no NACA [Neighborhood Assistance Corporation of America] Santa Claus that’s going to magically make this risk disappear. Federal programs can tend to just subsidize overbuilding and environmental risk. So, for example, the National Flood Insurance Program, it’s a necessary program, but it’s currently over $20 billion in debt. And that’s after Congress forgave 16 billion. So, the insurance industry working through a PCI, we’ve been working successfully with Congress on dozens of mitigation resiliency programs, the administration just had a Wildland Fire Mitigation and Management Commission that has a number of very helpful recommendations. Again, state and federal governments really best serve consumers when they focus on mitigation and better building codes, rather than trying to interfere with market pricing.

Willison:

So, you point out that flood program and its struggles to remain solvent. And as we noted at the top of the show, here, homeowners in certain states are increasingly confronting the possibility that insurance may no longer be available from private insurance companies. Most states, I think it’s around 35, have their own public insurance plans. But you know, some of them too, are at the breaking point too. One more disaster might push them into bankruptcy. So, what’s the potential fallout in those cases for not only consumers, but private insurers?

Gordon:

Yeah, so the U.S. insurance industry has over a trillion dollars in surplus in the global reinsurance industry, has another roughly two-thirds trillion dollars of capital. There’s ample surplus for homeowners insurance risks, and the global markets are better able to spread that risk than local governments, that there’s a current climate alarmism that insurance might disappear somehow over the next decade. And that really doesn’t have any basis in fact, or logic. But insurance will continue to get more expensive. So I often hear in fact, testifying before some state legislators, the last couple of weeks, I get the question, “Well, now that insurance is coming down, when are you going to drop prices?” Well, the insurance is how fast prices are increasing, and how fast prices are increasing is slowing down. But we’re not experiencing deflation, we don’t have a sudden drop in the cost of building materials. In fact, building materials, building construction, labor has gone up significantly, auto parts are going up significantly, all those things are continuing to increase. So, climate change can increase the frequency and severity of natural disasters. But if insurance industry can get the right rates, and enough time to collect the adequate capital and build up capital, then carriers can adjust and provide coverage. And there’s nothing suggesting that insurers won’t be able to do that. Where we see the real friction is in states where insurers are unable to obtain an adequate rate or they’re unable to adjust their rate on a timely basis to reflect the increase in costs like we’re seeing in California. That’s why that’s where you have the market crises and deterioration.

Willison:

You touched a little on reinsurance and anyone, if they’ve read about this issue, see that some consumer advocates and others blame reinsurance costs for the jump in in premiums, and there’s litigation expenses, Florida, for instance, has a particular problem in that regard. You touched on it as well, the changing building materials. How do those really factor into premiums, coverage limits, deductibles for homeowners?

Gordon:

You know, the reinsurance industry, actually, in 2022, the primary industry lost 70 something billion dollars of capital. The reinsurance industry lost about 12% of its surplus and both the insurance industry and the reinsurance industry have been trying to recover ever since. Insurance is really just a pass-through of these costs. So, the more legal-system abuse you have, and we’ve seen legal-system abuse increasing significantly, the more regulatory burdens you have. We just did a survey of our members on the cost of regulation; those costs are increasing. And again, all the building costs and auto costs, those are all going up. Those are all going to feed into this increasing price loop. It’s a little concerning, particularly because the capital of the insurance industry has actually contracted at the same time that all these costs, and the demand for coverage is going up. And that’s what’s creating some friction in the marketplace. And that’s what’s leading people the question, “well, is the insurance industry going to be around?” Yes, of course it is. But if insurers aren’t collecting enough rate, and our capital is shrinking, at the same time, the economy and demand for insurance is expanding, that’s going to create a mismatch between supply and demand. Reinsurance, again, is a critical component for insurers to be able to provide coverage. But again, reinsurance, it’s the same thing, they have to get enough, enough rate to grow their capital to cover the increased demand. And the United States over the last couple of years has been about 72% of global natural catastrophe losses. So, it’s really the United States cost increases that are driving up demand so much, and again, creating that mismatch between available insurance capital and the demand for the coverage.

Willison:

So, let’s look a little bit then at how insurers are looking at risk going forward. Traditional models of risk analysis kind of look backward to predict future risks. But what happened 10 or 20 years ago, we’re really seeing today, at least from a from a climate point of view is insufficient to understand what might happen tomorrow. So how are insurers now incorporating forward-looking climate models, real time data, other types of predictive analysis to begin to do their underwriting and set rates?

Gordon:

Yes, you’re right, catastrophe models are becoming increasingly forward-looking. But this is a big bet. Nobody knows exactly what’s going to happen with climate change, is it gonna get a lot worse than it has before? As I mentioned, some studies suggest right now climate change is currently contributing about a one to 2% annual increase in costs. That’s not the primary cost driver. But over time, that’s very significant. And insurers also don’t have any sort of magical crystal ball to predict what inflation and interest rates are going to be. So we don’t know how expensive our cost inputs are going to be long-term. We don’t know what our rates of return on our investments of our surplus is going to be. Where insurers have been making great strides is in overtime, and proving the windstorm and earthquake modeling, which has been done over the last several decades. And then much more recently, insurers have been developing and improving their wildfire catastrophe modeling. We’ve seen record wildfires, and particularly in California, that wiped out over 30 years of underwriting profit. But we’re now seeing the wildfire risk really going across a number of states in the country. And then insurers are also very closely analyzing the mitigation efforts, and then where those mitigation efforts have been proven, effective insurance compete, providing discounts to encourage consumers and policyholders to adopt those mitigation efforts.

Willison:

So, let’s dive into that just a bit more. What are some simple and low-cost ways that homeowners could reduce their risk from a flood, a wildfire, perhaps particularly or wind-related damage?

Gordon:
When purchasing a new home or doing major repairs or renovations, consumers should make sure to consider upgrading to the newest building code standards. Really having a more fire-resistant roof or hurricane-resistant roof is one of the most cost-effective important investments that consumers can do. If your home is in an area with, that’s prone to wildfires, one of the most important mitigation improvements is to remove all combustible materials within a five-foot perimeter around your house and that’s counterintuitive. I know when I bought my home, my wife and I, we love the bushes and trees next to the house. Now we’re being told if you’re in a wildfire area, you need to have brick or gravel or something so you don’t have combustible material right next to your home. Also, trimming the trees that are overhanging your home and removing the debris from your roof and gutter. It’s kind of like having a whole bunch of matchsticks on the top of your roof if you don’t clean your gutters from some of the dry debris. And then there’s some simple things like sealing your, if you’re in a hurricane risk, particularly if you know a storm is coming, seal your garage door seal your windows or any other openings. I know when Hurricane Ian was coming towards where I live, I have the, some of the windows boarded up, made sure all the storm shutters were closed. And particularly making sure your car isn’t out underneath any trees. I’m always surprised that how many beautiful sports cars or luxury cars I see with a big tree in the middle because they didn’t move it into their garage when the storm was coming. So there’s a lot of very cost-effective things consumers can do to mitigate their risks.

Willison:

And do homeowners get the equivalent of a good driver discount if they take those steps?

Gordon:

Yeah, definitely. That’s one of those things. Ask your agent whether your current insurer offers those discounts or if there are other insurers or do that’s a way that insurers compete. For example, I mentioned the great success and Mississippi with the Insurance Commission are leading the way to encourage people to build more fortified homes, we’re seeing that in Paradise Area in California that had the previous wildfires, they’re building all of those new homes to very high levels of codes. And insurers will often compete to offer discounts to homeowners that have adopted those mitigation techniques.

Willison:

So you mentioned earlier that we have so many people who are pouring into areas of the country that are disaster-prone, whether it’s, you know, the coast of Florida or Carolinas, whether it’s the wildfire-prone areas of California and the Mountain West. Do you think local and state government should actually prohibit rebuilding or building in certain disaster-prone areas?

Gordon:

Well, it’s up to policymakers what kind of land-use policies they want. I think the important thing if we do continue to overbuild in these areas is to make sure that consumers understand their risks. So when I bought my home in Florida, or when I was shopping for homes, I should say I went to the Triple I [Insurance Information Institute] website, the Insurance Institute website, they have a resiliency risk indicator where you can put in whatever address home you’re looking at, and see exactly what the weather risks are, you know, how, what kind of fire risks, what kind of hurricane risks flood risks, so I did that for all the homes I was looking at and contacted all of my family members and sent their home profiles to them. That helps you make better decisions, if you’re in a flood-prone area or hurricane-prone area, you know, you’re going to end up spending more money on insurance over time to live there. If policymakers are going to allow that kind of increased building, then they also need to consider stronger mitigation standards. And that’s where, again, insurance industry has funded some, for a long time, standards on hurricane safety. Really, the best new work has been done on fire safety, and then some really good new research on making your roofs more hail-resistant. So again, I think if the government’s going to allow it, don’t be surprised when the rates go up and you need to work a lot more on mitigation to try and retain some affordability for the protection and the environment.

Willison:

So, it really is kind of a partnership between insurance industry, the government and the homeowner to become knowledgeable and reduce their own insurance risks?

Gordon:

That’s right, very much a partnership and APCIA spends a lot of time working with the local fire chiefs, the state governments, the insurance regulators, and Congress and the administration to try and understand the cost factors and work on mitigation standard safety standards. It’s also a benefit to consumers because it helps improve the value of their home and the resale value of their homes if they adopt some of the new building code standards and environmental mitigation measures.

Willison:

That’s a good point. Let’s wrap up the podcast by looking a little to the future. What emerging risks might homeowners and insurers alike face next, for instance; cyber attacks, smart-home vulnerabilities, new types of weather-related activities and disasters? How might you be adapting your own policies going forward? And what can homeowners expect for the future?

Gordon:

Well, you’re absolutely right that cyber attacks, we think, will become more of a problem for homeowners as the smart homes become more advanced and more automated. We’re also expecting liability risks will continue to grow as our country faces increasing legal-system abuse. Insurers are offering more flexibility to consumers [on] things like insurance on demand or pay by the mile. So there are a lot more options for consumers, again, something good to talk to your agents about. And then over time, this is one of the big shifts in the insurance industry, insurers are becoming more trusted experts in providing Loss Prevention and Control Services, in addition to indemnification. So, for example, a lot of cyber insurance now will help consumers improve their cyber defenses, and then also indemnify you after an attack and then provide recovery services. So, a lot of new products available to consumers. And then artificial intelligence, AI, is going to be very transformative, it will fundamentally change our economy. It’s going to create some incredible new opportunities and efficiencies. But there are going to be a lot of risks and challenges and liabilities. And so, insurers are trying to work out some new products to protect individuals and businesses. So, I think it’s going to be a very exciting future.

Willison:

A very exciting future and still a little precarious for a lot of homeowners. Robert, you’ve been a great guest, I really appreciate you taking the time today to talk to us to explain to the viewer some of the challenges that the insurance industry is facing going down the line.

Gordon:

Well, thanks Kirk, it’s been great to be on your PolicyCast and I look forward to hearing more from you.