Natural Disasters and the Homeowners Insurance Market

Natural Disasters and the Homeowners Insurance Market

INSIGHTi

Natural Disasters and the Homeowners
Insurance Market
June 12, 2024
Insurance consumers in parts of the United States have been experiencing higher prices and gaps in
coverage, with households often struggling to find and afford homeowners insurance that sufficiently
protects against hazards such as wind and wildfire. This may leave some households unable to find
insurance outside of state-created insurers of last resort offering coverage that may be more expensive or
less complete than private coverage.
Recent media reports include accounts of insurers increasing premiums or withdrawing from homeowners
insurance markets in many states. Without such insurance, lenders are unlikely to issue mortgages,
leaving many people unable to purchase homes. Current homeowners may be left facing greater financial
risk without insurance and may find difficulties in selling their homes. Higher insurance rates may serve
as an important signal regarding future risk but may shift the risk of losses to individuals, the government,
or other financial institutions.
Although most policies addressing insurance markets are enacted at the state level, the scale of recent
withdrawals from the market has increased congressional interest in federal intervention.
Why Are Insurers Withdrawing from Some Insurance Markets?
Rising prices and reduced availability of homeowners insurance involves the interplay between two large-
scale factors: (1) increasing losses from natural disasters and (2) the recent macroeconomic environment
marked by rising inflation and interest rates.
Insured losses from natural disasters have increased over past decades, with nearly every major peril
recording an individual insured loss event over $10 billion. Although large events such as major
hurricanes cause outsized losses, secondary perils—lower cost but higher frequency events, such as
thunderstorms—caused higher combined losses in 2022 and 2023—the fourth consecutive year where
global insured losses topped $100 billion. Losses reached this threshold, although no single event caused
more than $10 billion in insured losses. The prediction of an above-average Atlantic hurricane season in
2024 is leading to concerns about additional increases in homeowners insurance premiums. Increasing
losses from natural disasters can be attributed to a combination of factors: rapid expansion of population
Congressional Research Service
https://crsreports.congress.gov
IN12375
CRS INSIGHT
Prepared for Members and
Committees of Congress

Congressional Research Service
2
into areas susceptible to natural disasters, increasing replacement costs, higher reinsurance costs,
inadequate building codes, and climatological and environmental changes.
The U.S. homeowners insurance industry has experienced net underwriting losses in all but one year since
2017, and over the past decade insurers have paid out more in claims than they received in premiums. If
risks increase or become more volatile, regardless of the cause, insurers often respond by reducing their
net exposure to these risks, typically by increasing premiums or reducing the insurance offered. Premium
increases allow insurers to increase the capital available to pay future losses and encourage consumers to
purchase less insurance, reducing future claims. Insurers may reduce insurance offered on an individual
basis by cancelling or not renewing insurance policies seen as the highest risk or, on a broader geographic
basis, by ceasing to offer insurance (either entirely or specific product lines) in certain areas. These
responses are primarily intended to protect the interests of the individual insurer and may end up creating
difficulties for individual consumers or the broader economy. This industry reaction is not new—the
National Flood Insurance Program (NFIP) was created in 1968 following widespread insurer withdrawals
from offering coverage for flooding.
Where Are Insurers Withdrawing from the Market?
Changes in the availability of wildfire insurance in California and wind insurance in Florida have
received the most attention, but recent reports also include accounts of insurance companies increasing
premiums significantly or withdrawing from the wildfire or wind markets in other states. Examples
include Colorado, Texas, Hawaii, Washington, Louisiana, Iowa, and Illinois. In 2023, insurers lost money
on homeowners coverage in 18 states.
What Are the Respective Roles of the Federal Government and the
States?
Homeowners insurance in the United States is primarily regulated by individual states, and states are
typically the first actors in addressing insurance market issues. Each state government has a department
charged with regulating insurance companies and the sales of insurance products. The National
Association of Insurance Commissioners, comprised of each state’s insurance regulator, fosters
uniformity in insurance regulation. States have used their regulatory role to address immediate market
disruptions though polices such as moratoria on cancellations and to encourage risk mitigation through
rate discounts for homeowners who build houses that are more fire resistant or who reduce flammable
materials around their houses or elevate flood-prone structures. In some cases, states have created the
aforementioned insurers of last resort to address gaps in the market. The state-based insurance regulatory
system falls under the auspices of the 1945 federal McCarran-Ferguson Act.
Because insurance plays an important role in the overall economy, larger-scale market instability can lead
to federal government intervention. For example, after the 9/11 terrorist attacks, insurers quickly moved
to exclude terrorism losses, with terrorism insurance coverage becoming extremely expensive or
unavailable. Congress responded with the Terrorism Risk Insurance Act (TRIA), which required insurers
to offer terrorism coverage, and created a federal reinsurance program to share in terrorism losses.
Congress has preempted aspects of state regulation in addressing insurance market disruptions. This
occurred in TRIA and in the Liability Risk Retention Act. Other programs, such as the NFIP and federal
crop insurance, supply insurance more directly.
Another federal policy option would be to encourage more hazard mitigation actions that may lead to
lower damages and claims. Effective mitigation actions, at both the individual level and the community
level, could make policies less expensive for households implementing them and potentially stabilize
insurance markets. Federal grants and loans already fund mitigation actions to allow homeowners and

Congressional Research Service
3
businesses to undertake property-level mitigation, possibly targeted at properties with repeated losses or
for communities to adopt and enforce hazard-resistant building codes. Federal funding could encourage
community mitigation actions for perils such as wind or wildfire, possibly modeled on the NFIP
Community Rating System. Federal funding could also provide incentives for insurance companies to
offer discounts for approved mitigation actions.

Author Information

Diane P. Horn
Baird Webel
Specialist in Flood Insurance and Emergency
Specialist in Financial Economics
Management

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.

IN12375 · VERSION 1 · NEW