Rising Insurance Costs and the Impact on Housing Affordability

Several other factors have impacted insurer costs, including:

• rising home prices, inflation, and the increasing cost to rebuild housing
• higher expenses due to fraud and changes in societal expectations and legal practices that have made litigation more common and more costly
• a sharp rise in the cost of reinsurance—insurance purchased by insurance companies to reduce and manage risk—due in part to the very high expenses of catastrophic disasters

Impact on Homeowners

Nationally, property insurance rates have been on the rise for 26 consecutive quarters, starting in the last quarter of 2017. From 2017 to 2022, homeowners insurance premiums rose 40% faster than inflation. Recent estimates for the national average cost of homeowners insurance premiums range from about $1,750 to about $2,500 annually, though average rates vary widely by region.^[i] In fact, in some states, homeowners pay as much as $500 per month for insurance. For millions of households already struggling to make their mortgage payments, these monthly insurance costs are a significant burden. They can also put homeownership out of reach for prospective first-time homebuyers.

As a result, many households are choosing to forego insurance and expose their assets to immense risk. In 2023, only 88% of homeowners had any sort of homeowners insurance, with about half of uninsured homeowners earning less than $40,000 per year. When a natural disaster strikes, many uninsured homeowners rely on federal disaster recovery assistance to fund home repairs or rebuilds. Although federal programs are typically not designed as replacements for insurance, the breakdown of private insurance markets can transfer greater costs from uninsured, at-risk homeowners to all federal taxpayers, many of whom do pay for insurance or choose to live in areas with lower risks.

To make matters worse, some insurance companies have announced they will be leaving certain markets because climate risks are too high to charge a price that consumers are willing to pay while still earning a profit. When insurance companies abandon a market, consumers are left with fewer options that cost more and provide less coverage. Many homes in areas with severe climate risks and soaring insurance costs may be approaching a tipping point, where they could become difficult to sell and plummet in price, slashing the net worth of existing homeowners.

According to a May 2024 Morning Consult poll, commissioned by BPC and the National Housing Conference, approximately 40% of homeowners surveyed reported experiencing either an increase in the cost of their homeowners insurance or difficulty securing coverage in the past year. Three-quarters of all respondents, including majorities from both parties, said it was important for both President Joe Biden and former president Donald Trump to release plans to ensure that homeowners have affordable property insurance options.

Impact on Renters and Multifamily/Affordable Housing

Property insurance hikes are also increasing costs for multifamily housing developers and providers. Between 2020 and 2023, multifamily insurance rates increased by an average of 12.5% annually. Stewards of Affordable Housing for the Future, a coalition of 12 of the nation’s leading affordable housing providers, saw their members’ insurance premiums rise 10% to 40% year-over-year during that same period. One affordable housing provider, National Church Residences, saw its property insurance premiums increase by over 400% in the six years leading up to 2023, along with higher deductibles and reduced coverage.

When insurance costs are so high for multifamily housing, apartment construction and operation become financially unviable, especially for affordable housing developers and providers who often cannot pass increased costs on to tenants through higher rents. This dynamic threatens to further constrict the already meager supply of rental homes available and affordable for low-income families. According to a 2023 survey, more than 90% of affordable housing providers indicated they would need to adjust their operations to manage rising insurance costs, with more than half saying they would decrease or postpone investments in both existing housing stock and new housing projects.

For market-rate multifamily housing, higher insurance costs lead providers to raise rents—a major concern when a record 50% of U.S. renters are already cost-burdened.

Where are Climate Risks Becoming Most Difficult to Insure Against?

Home insurance prices have increased nationwide, but Florida and California have garnered significant attention due to major insurance providers exiting the market in response to climate risks. As private insurance options dwindle in these states, residents increasingly turn to the residual market—insurance pools for properties deemed too risky for the regular private insurance market.

Florida:

• In response to catastrophic storms, hurricanes, and other risks, major insurers such as Farmers (with more than 100,000 policyholders) and AAA have withdrawn from the market, while an estimated 15 others have stopped issuing new policies. According to multiple estimates, the average annual homeowners insurance premium in Florida is close to $6,000, more than double the national average.^[ii]
• State-managed Citizens Insurance has served over one million policyholders in the residual market in recent years. However, recent program changes aim to reduce this number by preventing homeowners from retaining their Citizens policy if they receive a comparable offer for private insurance at a similar price.

California:

• Due in part to the severe risk of wildfires, 19 leading homeowners insurance providers, including major insurers State Farm and Allstate, have restricted coverage in the state, with some withdrawing entirely from the market. In some high-risk areas, private sector insurance is no longer available. California regulations impose restrictions on premium rate increases, which some critics claim hinder private insurers’ ability to maintain profitability.
• Like more than half of states, California uses Fair Access to Insurance Requirements (FAIR) plans to serve the residual market. FAIR plans, where they exist, offer a minimum level of coverage for homeowners at high risk who do not qualify for regular-market insurance. FAIR plans are provided by private insurers and are generally more expensive, and typically provide less coverage, than regular-market insurance.

Conclusion

Rising homeowners insurance costs are becoming an increasingly important part of the housing affordability challenge. As climate change continues to increase the risk of home damage and destruction, thus driving up insurance rates, policymakers must confront a pressing issue: How can we mitigate the impact of rising insurance costs on housing affordability while ensuring widespread and adequate insurance coverage?

Owen Minott also contributed to this blog.

---

[i] See: Policygenius, Nerdwallet, Bankrate, MarketWatch

[ii] Estimates vary widely depending on average home prices, zip codes, insurance companies, and other factors of the sample.