Rising Home Insurance Premiums: Global Warming as a Cost Driver

The cost of homeowners insurance has surged dramatically, with climate change playing a critical role. The average U.S. household premium last year was $2,530, representing a 33 percent increase since 2020. This rise surpasses the inflation rate, which climbed 19 percent during the same period. According to researchers Benjamin Keys and Philip Mulder, who conducted a new study on insurance costs across various U.S. regions, premiums have risen most significantly in areas with extreme weather conditions. Surprisingly, these costs do not always reflect the actual risk. Premiums are highest in the central parts of the country as well as some sections of the Gulf and Atlantic coasts, although these are not necessarily the most at-risk regions. A more detailed comparison, which sets insurance costs relative to local property values, reveals an even greater discrepancy between premiums and the underlying risk. This mismatch appears to be significantly influenced by the decisions of state authorities that control the approval of premium increases. States such as California, which exercise stricter controls, generally see lower premiums compared to those with a more liberal approach, like Oklahoma. Ishita Sen, a professor at Harvard University, found that insurance companies tend to raise premiums in less regulated states following significant losses in heavily regulated states. This suggests that some homeowners might be subsidizing the costs of disasters in other parts of the country. However, insurers vehemently deny this claim. The distorted insurance market environment results in some homeowners having to pay particularly high premiums, while others may be paying premiums that are too low for the risks they face. These skewed premiums increase risk by enticing homeowners to build, buy, or remain in vulnerable areas. The current structure of the homeowners insurance market, according to Dr. Sen, promotes 'all kinds of crazy behavior.'