Why US Home and Car Insurance Have Become Unaffordable, Hurting Economy

The causes for recent home and car insurance increases are being driven by 'natural' events: hurricanes, wildfires and tornadoes in the housing market, and the impact of a year's lost driving experience due to Covid causing more accidents for cars. 

But behind those  phenomenon are other issues: more homes being built in vulnerable areas as well as larger cars/trucks with more complicated and expensive electronics. On top of all that have been, in many states, legislatures anxious to please wealthy insurance companies in return for financial support. The result may economically impact some locales as houses become unaffordable and car costs reduce spending for other goods or services. JL  

Christopher Flavelle and Emily Flitter report in the New York Times:

Damage from hurricanes and earthquakes had the potential to overwhelm insurers' ability to pay claims. (And) previously small-scale threats like wildfires, hail and windstorms have become more intense and frequent. Insurers are spending more to fix damaged homes as disasters intensify. They’re raising rates, and abandoning some markets. (This impacts) real estate values and means less money going to the local economy. (In addition) car insurance rose 22% this year. Post-pandemic, prices of cars and parts are jumping even as out-of-practice drivers caused more severe wrecks; tech like motion sensors made even the simplest parts expensive to replace especially as cars and trucks got bigger.  “We’re marching toward an uninsurable future.”

As climate change gets worse, the immediate effects are becoming painfully obvious: More frequent and severe storms, wildfires, hurricanes and other types of extreme weather are wreaking havoc and pushing millions of Americans out of their homes each year.

Less obvious, but arguably even more important, are the consequences of those disasters, which are threatening the foundations of modern American life even for people who aren’t affected directly by extreme weather. One of the best and most recent examples is the insurance market. Insurers are spending more to fix damaged homes as disasters intensify. In response, they’re raising rates, squeezing homeowners already struggling with rising mortgage costs, and even abandoning some markets altogether.

The health of the home insurance market is inextricably tied to the health of the broader economy. A broad downturn in the insurance industry could spill over into real estate values and hurt local tax revenue.

And that scenario might not be as far-fetched as it seems. “I believe we’re marching toward an uninsurable future” in many places, Dave Jones, the former insurance commissioner of California and now director of the Climate Risk Initiative at the University of California Berkeley law school, told me.

My colleague Mira Rojanasakul and I set out to learn how widespread the tumult in the insurance industry has become. We spent months talking to those who track the financial health of insurers, including companies like AM Best, a rating agency that focuses on the industry. We also spoke with state insurance commissioners, insurance executives, academics and homeowners themselves.

We found an industry facing a level of disruption that is far greater than most people know. Here are the biggest takeaways from our investigation.

Climate change is upending the insurance market

Until recently, only widespread damage from hurricanes and earthquakes had the potential to put insurers out of business and overwhelm their ability to pay claims. That’s a big reason insurers have found it so hard to make money in Florida, which is more exposed to hurricanes than any other state.

But in the past few years, previously small-scale threats like wildfires, hail and windstorms have become more intense and frequent. That means the threat to insurers has grown as well. In Iowa, a number of insurers have stopped writing homeowners insurance since the start of last year, dropping tens of thousands of customers. Insurance agents say it’s getting harder to find companies that will write new business.

The same is true across the Midwest, in much of the Southeast, and in parts of the West. We found that the insurance industry lost money on homeowners coverage in 18 states last year, a list that includes Kentucky, Michigan, Utah, Illinois, Georgia, Arkansas and Washington . (You can learn about the health of the homeowners insurance market in your state here.)

Insurers made headlines last year for pulling out of California. But states across the Midwest — including Iowa, Minnesota, Indiana and Ohio — have also seen insurance companies stop writing homeowners insurance, or making it much harder to qualify for coverage, according to insurance agents there. They’re also raising rates by 50 percent or more in some places.

Tim Kuehner, a general contractor whose home just outside of Marshalltown, Iowa, was damaged in the 2020 derecho storm, saw his annual premium jump to $9,189 this year from $6,453, a 42 percent increase. His insurance agent, Bobby Shomo, told me that many of his clients are facing similarly large increases.

Across much of the Southeast, insurers are also raising rates, dropping customers or both. The challenge facing the homeowners insurance market in Arkansas “is probably unparalleled in recent decades,” said Kelley Erstine, president of the association that represents independent insurance agents in Arkansas.

In the West, agents say insurers have become less willing to write insurance in areas at high risk from wildfires. That includes communities around Salt Lake City and other parts of Utah; parts of Washington, including towns near Seattle; and wooded parts of Arizona north and east of Phoenix. “Pretty much none of the carriers will write there,” said Matthew Baker, a risk adviser with Strong Tower, an insurance agency in Gilbert, Ariz.

A breakdown in homeowners insurance doesn’t just affect people who struggle to get coverage. Without insurance, banks won’t issue a mortgage; without a mortgage, most people can’t buy a home. Fewer prospective buyers can push home values down, which means less property tax revenue and less money for local government services.

“What happens in the insurance market generally spills into the housing and mortgage markets,” said Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund.

Another spillover effect is what happens after a disaster. People who are underinsured or uninsured will generally have a harder time repairing or rebuilding their homes, Dr. Kousky said. And empty homes don’t just mean the people who lived in those homes are suffering; they also mean less money going into the local economy.

States are intervening in different ways

State officials agree the trends aren’t good. They don’t agree on how to respond.

Some states like Louisiana and Washington, are trying to make it easier for insurers to raise premiums. The argument is that if insurers can make a profit, they’ll be less likely to pull back on coverage or leave the state entirely.

Other states — including California, Minnesota and Georgia — are trying to reduce the losses insurers face by encouraging homeowners to make their properties more resilient, say, by investing in stronger roofs. To get homeowners to make those changes, those states have required insurers to offer discounts for homes that meet certain standards.

Colorado, anticipating that insurers might start pulling back coverage after years of losses, is setting up a high-risk pool for homeowners who can’t get coverage on the private market. Florida is moving in the opposite direction: Its high-risk pool, called Citizens Property Insurance Corporation, now covers more homes than any private insurer, so the state is trying to push people off the plan.

The question facing insurance companies around the country, and the homeowners who rely on them, is which state might be heading in the same direction as Florida.

The answer from our reporting: It could be any of them.

Auto If your car broke down two years ago, it probably became a bigger problem than you bargained for.

A confluence of forces were to blame: The Covid pandemic disrupted supply chains, pushing used car prices to record highs and making spare parts hard to get; out-of-practice drivers emerging from lockdowns caused more severe wrecks; and technological advancements like motion sensors made even the simplest parts, like a fender or a rim, expensive to replace.

Things have since improved for car owners — except when it comes to insurance bills. Car insurers are still raising prices steeply: The price of motor vehicle insurance rose more than 22 percent in the year through April, the fastest pace since the 1970s, according to a report the Bureau of Labor Statistics on Wednesday. According to calculations by the Insurance Information Institute, a trade group, the average 12-month premium for car insurance was $1,280 in 2023, the industry’s most recent figures. That has made car insurance a prominent factor preventing overall inflation from cooling more quickly, which could force the Federal Reserve to keep interest rates higher for longer even as the prices for many other essential goods and services have slowed.

Geico recently reported a big jump in quarterly profit on higher premiums and lower customer claims. The share prices of other big auto insurers, like Allstate and Progressive, have beaten the rise in the overall market this year.

That has attracted scrutiny from economists. A key reason car insurance costs are rising so fast right now has to do with how the industry is regulated.

How does insurance regulation work?

Insurers are regulated by the states, not the federal government. In all 50 states, insurance companies must follow specific rules about how and when they can raise the price on their policies.

Each state’s laws are broadly similar, and require insurers to ask regulators for permission to raise prices. Insurers have to make a case — with data to back it up — that the increase is necessary and that they will not make too large a profit on the re-priced policies. This application, known in the business as a “rate filing,” involves complicated paperwork that may take weeks or months to resolve.

The data has to include an analysis of loss trends from the past couple of years, as well as projections for replacement costs and profits. If insurers are deemed to profit too heavily, regulators can make them return money to customers.

The threat of returning money is not an idle one. At the height of pandemic lockdowns in 2020, when many cars sat idle, insurers returned almost $13 billion to customers through dividends, refund checks and premium reductions for policy renewals, according to the insurance ratings agency AM Best.

California was one of the most active states: Insurers there returned $3.2 billion to customers in 2020.

Ricardo Lara, the state’s insurance commissioner, “directed the department to do a very close analysis to make sure that drivers weren’t overcharged,” said Michael Soller, a spokesman for the California Department of Insurance. But starting in late 2021, the state became the poster child for a new problem: an epic backlog of insurers’ requests to raise prices. When the pandemic shut down most economic activity, it messed up insurers’ ability to use the past to predict the future. For months, they were frozen. They did not submit new rate filings to regulators for a spell — until they did, all at once, in the second half of 2021.

The prices of cars and parts were jumping and drivers were back on the roads and crashing left and right after a hiatus behind the wheel.

“You went from this period of incredible profitability to incredible losses in the blink of an eye,” said Tim Zawacki, an analyst who focuses on insurance at S&P Global Market Intelligence. No companies were willing to stick their necks out by offering lower premiums in the hope of winning new business, he said.

“Everyone was together in significantly pushing for rate increases.”

In California, the most populous U.S. state, insurers were getting creamed by expensive claims.

But the state’s regulator did not start approving insurers’ requests to raise rates until near the end of 2022. The backlog grew so large that the average wait time for approvals was longer — by several months — than the six-month policies that insurers wanted to sell.

“When state regulators delay or prevent companies from accurately pricing insurance, insurers may not be able to absorb the costs,” said Neil Alldredge, the president of the National Association of Mutual Insurance Companies, a trade group that represents many home and auto insurers. The squeeze can lead insurers to leave some states or stop some business lines, he added. “Inefficient regulatory environments in states like California, New Jersey and New York, combined with inflation and increased catastrophic losses, have left consumers with fewer choices of insurers and higher costs,” he said.

California is still the slowest state in the continental United States for auto insurance rate filings, taking an average of 219 days to approve a price proposal for a personal auto policy, according to S&P data provided by Mr. Zawacki.

“We fight for consumers by analyzing all of the data, not just what insurance companies spoon-feed us,” Mr. Soller, the California Department of Insurance spokesman, said.

The S&P analysis showed that New Jersey, the 11th-most populous state, had the sixth-longest wait time, while New York, with the fourth-largest population, had the 7th-longest wait times.

“The department performs a comprehensive review of requests to amend rates or rating systems to ensure compliance with New Jersey law,” said Dawn Thomas, a spokeswoman for the New Jersey Department of Banking and Insurance.

Ms. Thomas said the regulator needed to ensure that each proposed premium increase was “reasonable, adequate, and not unfairly discriminatory,” and that sometimes the insurers’ requests needed to be challenged or denied.

Shortly before the pandemic, the umbrella organization for state insurance regulators, the National Association of Insurance Commissioners, formed a team of data scientists to help regulators deal with their rate filings, which has gotten more complicated in recent years.

The data team became fully operational in 2021 and its mission is now to help speed up the review process: 37 states have signed up to use it.

This month, during a call with analysts to discuss Allstate’s earnings, company representatives said they had recently reopened their California auto insurance business after getting permission to charge higher rates. The company still wanted to raise prices in other states.

In New York and New Jersey, for example, “even with the rate approvals that we got late last year, we still don’t feel like we’re at the appropriate rate level to want to grow in those two states,” said Mario Rizzo, the president of Allstate’s property-casualty business.

In 2021, insurers’ personal auto businesses started recording losses. According to David Blades, an analyst for AM Best, the industry lost $4 billion in 2021, $33 billion in 2022 and roughly $17 billion last year.

According to Dale Porfilio, the chief insurance officer at the Insurance Information Institute, the trade group, many companies still need to raise prices to make up for those bad years.

Last year, insurers raised auto premiums by 14 percent, the biggest increase in over 15 years. Mr. Porfilio’s best guess is that premiums this year will rise another 13 percent.

“It’s going to take time for every company to get their rates to where they want to be,” he said