Insuring The Worst, Ensuring The Worst

As climate change continues to drop more and more intense floods, fires, storms and blizzards, more and more insurance companies will jack up property insurance, or will simply stop issuing new policies altogether, making it impossible to afford to remain in disaster-prone areas.  Florida and California are the most susceptible to this as residents are paying the price. Flood insurance rates in South Florida are tripling in the wake of record Miami flooding and hurricanes last year.

 

Events of the past year have convinced more Florida homeowners of the need to carry flood insurance.

Flooding caused by hurricanes Ian and Nicole caught hundreds, if not thousands, of homeowners across the state by surprise, and without flood insurance.

Similarly, many homeowners affected by last month’s historic rainfall in eastern Broward County had no flood insurance and learned tragically that damage caused by water rising from the ground was not covered by their normal homeowner insurance.

It’s not just flood victims who are experiencing hard lessons about flood insurance.

Just as homeowners are realizing the increased risks of going without flood coverage, the Federal Emergency Management Agency has released data showing that coverage costs are exploding for properties in coastal areas most vulnerable to flooding.

The cost hikes stem from mandates by Congress to require rates charged by the National Flood Insurance Program, which is run by FEMA, to reflect the cost of flood risk to individual covered properties, and to pay down the program’s deficit, which was $20.5 billion as of last November, according to FEMA.

The result is a new risk pricing model called Risk Rating 2.0, which took effect on Oct. 1, 2021, for new NFIP policies and on April 1, 2022, for renewing policies. Rather than set rates solely based on a property’s elevation within a zone on a Flood Insurance Rate Map, the new approach considers more risk variables such as flood frequency, types of flooding, and distance to a water source, along with individual property characteristics like elevation and the cost to rebuild, FEMA’s website states.

Improved modeling, however, is of little comfort to homeowners who will have to pay more for flood insurance at the same time costs of regular multiperil property insurance are skyrocketing.

Recently, FEMA released a spreadsheet that compared average premiums currently and how high they’ll climb under the new pricing model.

For example, homeowners in Boca Raton’s 33432 ZIP code can look forward to a whopping 229% flood insurance premium increase, from an average $950 per policy to $3,128.

In Broward County, the 33305 ZIP code that includes Wilton Manors and Fort Lauderdale neighborhoods near the Middle River will pay 209% more, from $1,099 to $3,400.

In the 33315 zip code, which includes Fort Lauderdale’s Edgewood neighborhood that was among the hardest-hit by last month’s flooding, average rates will increase by 64% — from $863 currently to $1,420.

These numbers are averages. Within each ZIP code are less expensive homes with cheaper coverage costs and pricier homes that will cost even more to insure.

Unsurprisingly, homes nearest the coast, particularly in low-lying areas, cost far more to insure than homes on higher ground in western suburban cities.

For example, homeowners in Coral Springs’ 33071 ZIP code are looking at a total premium increase of just 17.6% — from $669 to $787.

FEMA says the new pricing model will also drive down the cost of flood insurance for customers with low-risk characteristics. Yet, none of South Florida’s ZIP codes will see average rates decrease, FEMA’s data shows.

 

And in California, State Farm will no longer issue new policies for any property in the state. 

Across the country, the climate crisis is wreaking havoc on insurance markets. As climate change fuels more intense storms and wildfires, home insurers in disaster-prone states like Texas, Louisiana, and Florida have stopped issuing and renewing policies. In some cases, companies have even gone under in the aftermath of a particularly damaging natural disaster. As a result, homeowners are contending with skyrocketing premium payments and even beginning to struggle to find insurers willing to cover them at all.

The latest sign of the insurance industry tumult came from State Farm, the largest homeowners insurance provider in California. Last week, the company revealed that it would no longer offer policies to new Golden State customers due to “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

“It’s necessary to take these actions now to improve the company’s financial strength,” the company noted in a press release. State Farm indicated it would continue to keep the customers it already has on its books in California.

California’s insurance industry has been struggling to stay afloat in a state increasingly ravaged by fires and floods. Since 2017, when a series of catastrophic fires caused $33 billion in damages, insurers in the state have lost two decades of underwriting profit. As a result, the cost of homeowners insurance has risen by a quarter since 2015, and insurance companies have been withdrawing coverage in the most fire-prone parts of the state in an attempt to reduce the liability on their books. Meanwhile, Californians who have been unable to secure policies from insurance companies have flocked to the California FAIR Plan, the state-run insurer of last resort. The result is an unstable insurance market that appears to be teetering on the edge of crisis.

 

I expect that large sections of the country will be uninsurable at all in the next few years, especially in coastal states and wildfire states. The federal government will have to step in, or no more buildings and homes will be built in entire regions of the country. And even then, expect a lot less new construction ahead.

 

For example in Arizona, the state is already limiting new construction because Phoenix's water situation is unsustainable. 

Arizona has determined that there is not enough groundwater for all of the housing construction that has already been approved in the Phoenix area, and will stop developers from building some new subdivisions, a sign of looming trouble in the West and other places where overuse, drought and climate change are straining water supplies.

The decision by state officials very likely means the beginning of the end to the explosive development that has made the Phoenix area the fastest growing metropolitan region in the country.

The state said it would not revoke building permits that have already been issued and is instead counting on new water conservation measures and alternative sources to produce the water necessary for housing developments that have already been approved.

On Thursday, Governor Katie Hobbs, a Democrat, said Arizona was not immediately running dry and that new construction would continue in major cities like Phoenix. The analysis prepared by the state looked at groundwater levels over the next 100 years.

“We’re going to manage this situation,” she said at a news conference. “We are not out of water and we will not be running out of water.”

Maricopa County, which includes Phoenix and its suburbs, gets more than half its water supply from groundwater. Most of the rest comes from rivers and aqueducts as well as recycled wastewater. In practical terms, groundwater is a finite resource; it can take thousands of years or longer to be replenished.

The announcement of a groundwater shortage means Arizona would no longer give developers in some areas of Maricopa County new permits to construct homes that rely on wells for water.

Phoenix and nearby large cities, which must obtain separate permission from state officials for their development plans every 10 to 15 years, would also be denied approval for any homes that rely on groundwater beyond what the state has already authorized.

The decision means cities and developers must look for alternative sources of water to support future development — for example, by trying to buy access to river water from farmers or Native American tribes, many of whom are facing their own shortages. That rush to buy water is likely to rattle the real estate market in Arizona, making homes more expensive and threatening the relatively low housing costs that had made the region a magnet for people from across the country.

“Housing affordability will be a challenge moving forward,” said Spencer Kamps, vice president of legislative affairs for the Home Builders Association of Central Arizona, an industry group. He noted that even as the state limits home construction, commercial buildings, factories and other kinds of development can continue.

And as climate shifts render more and more of the country vulnerable to new flooding, fires, storms and disasters, we'll all be paying much higher premiums for property in the future. Eventually, millions of Americans will be stuck in homes that they can't sell because they are in uninsurable areas, and they'll get to wait until they are wiped out. I guarantee you that the people who can afford to move out will do so, leaving ruined economies and neighborhoods behind.

The people who will pay the highest cost will, as always, be those who can least afford it.