Home insurers have already exited markets along the Eastern Seaboard as hurricane risks increase. But State Farm’s exit from California last month due to wildfire hazards caused a stir.
“So now that they’ve bowed out, that’s going to be a real issue, especially in those heavy fire markets where you’re paying premium for that,” Josh Altman, co-founder of The Altman Brothers, told Yahoo Finance Live (video above). “Now, that’s going to be a major, major blow to those properties.”
State Farm cited “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market” for its decision.
The move from State Farm follows AIG’s announcement last year that it was leaving the California market. AIG recently stated that it was limiting property insurance coverage in New York, Delaware, Florida, Colorado, Montana, Idaho and Wyoming, according to the Insurance Journal.
And last week, Nationwide announced “it is taking [action] to mitigate risk and manage the personal and commercial lines portfolios in the current environment.” Although no details have been outlined regarding which personal insurance lines will be impacted, the changes vary by state and territory, according to the Insurance Journal.
As more insurers leave California it could morph into an impending issue as costs rise making homeownership pricier than it presently is with mortgage rates at 6.75%, Scott Sheldon, branch manager at New American Funding, told Yahoo Finance.
Property damage from wildfires and inflation is causing distress for primary and reinsurance carriers putting “the cost and availability of reinsurance as a risk-financing mechanism…under persistent pressure…to write profitable business in wildfire-prone areas,” according to a Gallagher report.
For instance, the average construction cost of a typical single-family home last year was $153 per square foot, according to a policy survey from the National Association of Home Builders. That marked the highest level in the history of the series and was up 43% from $114 in 2019.
Add to that the increasing losses from more frequent and intense natural disasters — from wildfires to hurricanes. A CoreLogic study forecast that annual losses nationwide could increase to $23.5 billion per year by 2050.
As a result, homeowners insurance premiums are getting more expensive. In 2022, these premiums increased by 10.72% in the first quarter, according to an S&P Global Market Intelligence analysis. The situation is even worse if there are few insurers in a market willing to cover your home.
“When your fire insurance is double your mortgage payment every month, that’s a big issue,” Altman said. “You’re going to see a drastic drop in those markets more than any before.”
Other homeowners across the country are experiencing escrow shortages from higher homeowners insurance premiums — along with increased property taxes.
Even the rich and famous aren’t immune to the wildfire risks and the subsequent costs that come with. Celebrities including Miley Cyrus, Gerard Butler, and Neil Young lost their homes to wildfires in 2018.
“The famous Mulholland Drive — try getting fire insurance up and down Mulholland right now,” Altman said. “It’s near impossible.”
Ronda Lee is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda
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