Home Insurance Could home insurance companies pull out of parts of New England?

Could home insurance companies pull out of parts of New England?

by Cedric Guzman

Climate change is a global issue that is already affecting the insurance industry. In New England, experts say that while a dramatic exit of insurance companies is unlikely, homeowners’ insurance companies are recognizing the impact of climate change and making adjustments to policies that could affect premiums.

Massachusetts, in particular, is considered to be doing better than many states in terms of accessibility to insurance. However, experts argue that it is important to look ahead and make the necessary changes to prepare for the future impacts of climate change.

Homeowners’ insurance provides protection for homes in the event of a disaster, but the disasters covered can vary depending on the policy. Although state law does not mandate homeowners to insure their homes, lenders may require it to protect their financial stakes in the property. Factors that determine the premium include the age and condition of the home, the cost of rebuilding, and the location.

One key factor that is on the rise is risk, which experts agree will increase as climate disasters become more unpredictable in terms of scale, location, and frequency. This summer, New England experienced flooding, extreme heat, and a hurricane, while the rest of the United States saw a tropical storm hitting California for the first time in 84 years and a devastating wildfire in Maui.

As risk increases, insurance companies will individually decide how much risk they are willing to take on. Some companies may increase premiums, while others may refuse to issue new policies for riskier homes. For example, Neptune Insurance, a private flood insurance company, has refused insurance to just 5 percent of homes that they deem to be high risk.

Increased climate risk has also led to higher reinsurance rates globally. Reinsurers, who insure insurance companies, have been driving up their rates to cope with steeper losses. In the United States, property catastrophe reinsurance rates rose by as much as 50 percent at the July 1 renewal date.

Flooding is one of the biggest climate threats facing New Englanders, and the risk can vary based on factors such as the age of the property, elevation, and location. Homeowners in coastal areas and Cape Cod, which are more susceptible to hurricanes, may see higher insurance costs.

However, insurance companies can adapt. The Massachusetts FAIR Plan, a last resort for those unable to secure insurance in the voluntary market, has decreased policies on Cape Cod over the last decade. This means that more properties on Cape Cod are able to secure insurance as primary insurers refine their risk assessments.

One commonly misunderstood aspect of homeowners’ insurance is that it does not cover flooding. Flood insurance requires its own separate policy. Many homeowners who have flood insurance are insured through the National Flood Insurance Program (NFIP) offered by FEMA. However, NFIP coverage often protects less than private flood insurance. The market for private flood insurance is small, leaving homeowners with few options.

Another major issue is that a low percentage of homeowners are insured. In Massachusetts, less than 2 percent of the state was insured with federal flood insurance in 2023. In other New England states, the percentages are slightly higher but still relatively low.

FEMA maps indicate which areas are floodplains and require homeowners to have flood insurance. However, these maps are outdated and tend to underestimate the areas prone to flooding. Insurance companies have their own experts to calculate flood risk, but FEMA maps can give homeowners a false sense of security. Areas with less frequent natural disasters also tend to have lower rates of disaster insurance coverage.

To address these challenges, the Division of Insurance in Massachusetts is working to raise awareness among residents about the need for coverage. However, it is crucial for homeowners to take responsibility and ensure they have a safety net in place to protect them from increasingly frequent climate disasters.

As climate change progresses, other disasters in New England could become more unpredictable and severe. Hurricanes could become stronger and move northward as the atmosphere warms, while dry, hot summers could increase the risk of wildfires. It is important for homeowners to understand the coverage provided by their insurance policies and be prepared for the potential impacts of climate change.

In conclusion, while a dramatic exit of insurance companies is unlikely in New England, homeowners’ insurance companies are taking notice of climate change and adjusting their policies accordingly. It is crucial for homeowners to be aware of the risks and ensure they have appropriate coverage in place to protect them from increasingly frequent climate disasters.

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