There is anger and finger-pointing in the homeowners insurance market these days. Many homeowners complain that premiums have become unaffordable. Insurers in more and more parts of the country say they can’t make a profit.
This won’t end well. Homeowners and insurers are both victims of something bigger, and that’s (mostly) climate change. “They are sitting in the same ecosystem — the challenges faced by one side are also faced by the other side,” Andy Neal, the senior managing director who leads public-private partnerships at Aon, an insurance broker and risk adviser, told me.
If you step back from the details, the picture is clear. The only way to keep the private homeowners insurance market from falling apart is to make it so rates can be affordable to homeowners and simultaneously profitable to insurers.
And the only way to make that happen is to change the physical reality. In the long run, by stopping the warming of the planet. (Essential, but incredibly difficult.) In the short to medium run, by coming to terms with the reality of more damaging floods, windstorms, fires, mudslides and so on. That mainly means either hardening homes against perils or moving out of their way.
A 5-year-old child could tell you that a sand castle can’t survive a rising tide, but people keep building mansions in the dunes. They also keep putting houses in fire-prone parts of California and erecting skyscrapers in Miami, which is just a few feet above sea level. When disaster strikes, they rebuild in the same danger zones because they’re just so pretty — and maybe because the insurance is subsidized.
My heart goes out to people who have lived in a place a long time, have put down roots and are facing unaffordable increases in their homeowners insurance costs. They feel cheated. That came through in a great package of articles last week in The Times. The lead of the main story was a guy in New Mexico who took every precaution to guard his house against fire — a steel roof, stucco walls, a gravel yard, trimmed trees — and still got dumped by his insurance company for living in “a brush fire or wildfire area.”
A congressional report issued this month found that the rate of non-renewals by issuers of homeowners insurance policies had tripled in more than 200 counties. Homeowners insurance is something everyone should have and it’s a requirement for people who have mortgages. If you can’t get a private policy, you need to get coverage from your state’s Fair Access to Insurance Requirements (FAIR) plan, which is more expensive because its customers have the highest risks.
Munich Re, a reinsurance company, found in a survey last year that about half of homeowners who don’t have insurance have a household income of less than $40,000 a year. In other words, the poorest homeowners are the ones most exposed to disaster.
For the majority of homeowners whose mortgage rates are fixed, annual principal and interest payments are predictable. But homeowners insurance premiums — which are often bundled into the monthly payment — are not. That’s a source of uncertainty and stress.
What homeowners may not fully appreciate is that insurers aren’t raising rates just to gouge their customers. Well, maybe some are. But for the most part, profit margins in homeowners insurance are low, and for some companies, mostly smaller ones, they are negative.
Here is a paragraph from an October report by Aon:
The last time the industry posted an aggregate underwriting profit was 2019 when the reported industry combined ratio was 99. Every year since 2019 the reported industry combined ratio for homeowners business was 105 or worse. Even with investment gains it is unlikely many insurers reported positive pretax income for writing homeowners policies. That compares with actuarial estimates from Aon’s homeowners return on equity report consistently in the mid-single digits. In other words: We expect insurers will earn meager R.O.E.s insufficient to support the underlying risk, in four of the five most recent years insurers failed to earn a profit at all, and in all five of those years insurers underperformed our actuarial estimates.
To decode:
“Underwriting profit” — the measure the paragraph leads with — is how much the insurer earns on policies, subtracting claims and expenses from premiums and not counting income from investing the premiums and capital.
The “combined ratio” is a scale based on losses and expenses divided by premiums. Insurers want it to be under 100, meaning they’re making money on underwriting, so the figure of 105 or worse since 2019 is a real problem for them.
It’s true that insurers can make a profit even when claims and expenses exceed premiums, as long as they’re earning a good return on those premiums and the capital they hold. But as the Aon report said, for many insurers, it is unlikely that they earned enough investment income to achieve positive pretax income on their homeowners policies. In other words, they lost money.
Another way to evaluate insurers’ profitability is their return on equity, which is the total profit divided by shareholders’ investment. Companies in risky businesses such as insurance ought to earn higher returns to compensate investors for that risk. Aon predicts that for many, returns on equity will be “insufficient to support the underlying risk.”
In addition to the tension between homeowners and insurers, there’s tension over how much, if at all, government should subsidize people at high risk of damage from natural disasters. The National Flood Insurance Program is supposed to charge actuarially fair rates and stand on its own, but it can borrow from the Treasury Department in an emergency, so it’s arguably subsidized. State FAIR plans generally are partly subsidized by their state governments.
Can subsidies ever be justified? Yes? Then what if the main beneficiaries are wealthy families, who are more likely to buy in scenic areas that produce lots of claims? “There’s not going to be universal consensus on what’s fair and what’s not,” Steve Koller, a postdoctoral fellow at Harvard’s Joint Center for Housing Studies, told me.
Neal, the Aon executive, used to be the chief actuary of the National Flood Insurance Program, so he’s had a lot of time to cogitate on what’s fair and what’s not. He told me that the two purposes of homeowners insurance (and flood insurance) actually conflict with each other.
One purpose of homeowners insurance is, of course, to protect people from losses by paying their claims. The other purpose is to prevent those losses in the first place through higher premiums that nudge people away from risky places and practices. Generous and cheap policies will achieve the first objective but not the second one, and vice versa.
Insurance, Neal said, “is the last economic signal” that steers where people choose to develop and live.
The homeowners insurance market is one place — for many people, the only place — where the damage from climate change is becoming impossible to ignore. As I said, tackling the underlying problems in the physical world is the only way to make the market function properly. Fortunately, Koller told me, “lots of bright minds with resources and good intentions” are working on solutions.
Elsewhere: Electric Cars Shouldn’t Be Luxuries
“Reducing upfront prices is key to boosting uptake” of electric vehicles, according to a commentary on Friday by Jules Sery and Jean-Baptiste Le Marois of the International Energy Agency. Last year, about 60 percent of electric cars sold in China were cheaper than their internal combustion engine counterparts. “Nearly 95 percent of small cars sold in the country in the first half of 2024 were electric,” and “electric models are set to account for one in two total car sales in China this year,” they wrote. Europe is catching on: Roughly nine electric models priced under 25,000 euros ($26,000) are expected to be introduced in 2025. In the United States, only five of the 25 models that came on the market in 2024 were priced below $50,000, the authors wrote.
Quote of the Day
“What’s interesting about gift cards is that they are a lot like cash but have emerged as a way to give the choice to the recipient without the ickiness of cash.”
— Joel Waldfogel, author of “The Deadweight Loss of Christmas,” in an interview with The New York Times (Dec. 19, 2014)
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