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Wildfires: How Climate Change Will Impact Home Insurance

Climate change has resulted in an increase in extreme weather events in the U.S. over the years. One extreme weather event wreaking havoc on the west coast is wildfire, a natural disaster that has increased in frequency and severity in recent years.

For homeowners, climate change is having an immediate, real-world impact. Premiums and deductibles are increasing — and in some locations, homeowners insurance is difficult or impossible to get. Without access to homeowners insurance, people will be forced to pay for the damage out of pocket. And it’s not just insurance rates being affected by climate change. Houses in high-risk areas risk losing value due to unpredictable, damaging weather events. 

Wildfires are on the rise. The warming climate is a significant factor in this increase, as it leads to drier conditions and longer fire seasons overall. The warmer climate also affects rain, snow, and wind patterns — namely, less rain and snow and increased wind in drier regions — to create ideal conditions for fires to ignite and spread. As a result, wildfires have ravaged the western United States, with over 70,000 fires each year since 1983.

The costs of these fires are substantial, both in terms of property damage and firefighting efforts. In 2020 alone, the U.S. Forest Service spent over $2 billion fighting wildfires, while the economic cost of the damage caused by these fires is estimated to be in the tens of billions of dollars.

Beyond human impact, extreme wildfire events result in habitat loss and increased risk of landslides and erosion. In addition, there are health costs too. The smoke and other pollutants released by wildfires can damage air quality impacting public health, with increased rates of respiratory illness reported in areas affected by fires.

The damages caused by wildfires are extensive and far-reaching, affecting the immediate area, the broader environment, and public health. All of these factors trickle down to everyday costs for consumers, most visibly seen in how wildfires can impact home insurance premiums for those who live in high-risk areas.

How It Impacts Home Insurance Rates 

Climate change and the increase in wildfires have directly impacted homeowners insurance rates. Homeowners in areas prone to wildfires may see their rates increase as insurance companies factor in the increased risk of smoke and fire damage to homes. For example, in California, where wildfires have caused significant damage in recent years, some insurance companies have pulled back from offering coverage. Others have significantly raised their premiums. 

Homeowners can take proactive steps to reduce the risk of wildfire damage, such as clearing flammable debris from their property and creating a defensible space around their homes, which may help to lower their insurance rates.

Insurance Companies Pulling Out of Most At-Risk Communities 

As the frequency and severity of natural disasters increase due to climate change, many insurance companies are reconsidering their policies, leaving homeowners in high-risk areas with limited options for coverage.

California Wildfires 

California is no stranger to wildfires, with many devastating events in recent years. Since 2018, a year of catastrophic wildfires, the availability and affordability of homeowners insurance have significantly decreased across the state. Homeowners in high-risk zip codes have high nonrenewal rates, meaning that either the homeowner couldn’t renew their policy due to the increased cost or the insurance company chose not to renew the policy because of the risk. 

Homeowners having trouble finding affordable coverage are turning to the state’s “last resort” insurance program — the FAIR plan — which offers limited coverage at higher premiums. The number of people who obtained a FAIR plan policy because they could not find an insurance company that would work with their location increased in 2020 and is expected to grow every year.

Hurricanes and Flooding in Louisiana and Florida 

Hurricanes and flooding are a significant risk for homeowners in Louisiana and Florida. In Louisiana, insurance companies have been steadily increasing their rates for years, with some homeowners seeing their premiums increase by more than 200% over the last decade. Many companies have also stopped providing coverage for wind and hail damage, which can be significant in hurricane-prone areas. Similarly, in Florida, many insurance companies have stopped offering coverage for water damage due to flooding.

Other High-Risk Areas 

The issue of limited coverage is much broader than just the states mentioned above. Homeowners nationwide in high-risk areas for tornadoes, hailstorms, and other natural disasters face limited coverage options. For example, in Oklahoma, some insurance companies have stopped offering coverage for hail or wind damage, weather events that are common in the state.

The Importance of Homeowners Insurance 

Homeowners insurance is a crucial safeguard against the financial impact of natural disasters and other unexpected events. Homeowners may be left to pay for repairs and rebuilding costs out of pocket without adequate coverage. 

In addition, limited coverage options can lead to higher premiums, making homeownership less affordable for many people. This issue highlights the importance of proactive measures to address the impacts of climate change and the need for policies that ensure access to affordable homeowners insurance for all.

Rising Premium Costs and Deductibles 

In addition to limiting coverage options, insurance companies that continue to offer coverage in high-risk areas often raise premiums and deductibles. Insurers do this to help recoup the costs from past disasters and prepare for future ones.

In states such as California and Florida, homeowners are seeing significant increases in their insurance premiums, even if they have not experienced any damage to their homes in the past. For example, Florida homeowners pay nearly three times the national average for their premiums due to the high risk of flooding. Insurance companies may also increase deductibles in high-risk areas, meaning homeowners must pay more out of pocket before their insurance coverage kicks in. 

Homeowners insurance is a critical protection for all homeowners, and those who live in high-risk areas for extreme weather events are having difficulty obtaining coverage at all. And when they do, they’re paying much more for basic coverage. Fighting climate change to prevent the increase of these natural disasters is critical to the future of homeowners insurance and homeownership in general. 

Government Push to Hold Insurers Accountable

Many homeowners — especially in coastal areas — are finding it increasingly difficult to obtain affordable insurance coverage. In an effort to combat this growing issue, the U.S Treasury Department is requiring 213 large insurers to present information about their policies. They will then analyze the data to understand how climate change is affecting the availability and affordability of homeowners insurance. While the office does not regulate insurers, the data they collect could be invaluable towards our understanding of extreme weather’s effects on homeownership and more. 

Insurance coverage is a critical safeguard against the financial impacts of natural disasters and weather events. Without insurance coverage, homeowners may have few options for rebuilding and repairing their homes after a disaster. This can lead to financial hardship or even homeowners displacement from their community. While climate change can often feel like an abstract concept, it’s having real effects on homeowners across the country.