Rising reinsurance costs propelling homeowners insurance to new heights

Rising reinsurance costs propelling homeowners insurance to new heights | Insurance Business Canada

Reinsurance

Rising reinsurance costs propelling homeowners insurance to new heights

New study goes in-depth into crisis of access and affordability

Reinsurance

By
Kenneth Araullo

A recent study, which analyzed data from tens of millions of mortgage escrow payments, offers new insights into the challenges of access and affordability in the homeowners markets, as climate change-driven disasters are putting significant pressure on the industry across the West and the broader United States.

The study, which examined a 10-year dataset, revealed that insurance premiums rose by an average of 33% between 2020 and 2023, outpacing inflation. The increases vary significantly by region and are now more closely aligned with the risk of disasters such as hurricanes and wildfires.

“Wildfire risk is front and center when we’re thinking about the drivers of increased insurance premiums out West,” lead author Ben Khys said. Khys is also a real estate professor at the University of Pennsylvania’s Wharton School.

He referenced research by the First Street Foundation, which projects that wildfire risk, closely linked to climate change, will increase substantially over the next 30 years. A 2023 report by the foundation estimated that the average number of homes and other structures destroyed by wildfires annually will nearly double to 34,000 by 2053.

One factor contributing to the rise in premiums is the increasing cost of reinsurance, which insurers purchase to protect against large claims. These costs are passed on to homeowners through higher insurance premiums.

“If the conditions for the reinsurance shock continue, we estimate that the top 5% of climate risk-exposed homeowners would see increased premiums by 2053 of $700 per policyholder under a conservative climate change estimate,” the study said.