A recent Harvard Joint Center for Housing Studies (JCHS) analysis found that insurance costs are heavily weighing on housing affordability, having risen 74% since the Great Recession, with more homeowners forced to buy government-backed plans.
As a result of market conditions, private insurers have also faced a good deal of uncertainty in terms of unprofitability, insolvency and have even elected to exit certain markets because of issues with sustainable profitability, at least partially caused by climate-related damage.
According to JCHS, more than two-thirds of states have created Fair Access to Insurance Requirements (FAIR) plans to function as insurers of last resort in the instance where private insurance cannot suffice.
States such as California, Louisiana and Florida have had insurers pull out of the market entirely, the report said, leaving the FAIR state insurance plan as the only viable available alternative for homeowners who are seeking insurance.
FAIR plans typically rely on the authority of the states from which they were issued to issue assessments on firms and policyholders when insolvencies arise, the JCHS analysis noted. Such FAIR plans are often referred to as the “residual market.”
This residual market has shown the most robust activity in Florida, where the Citizens Property Insurance Corporation is the largest FAIR plan both in terms of policies issued and value of property insured.
According to JCHS, the total amount of property insured by FAIR plans has exceeded $1 trillion, showing possible movement away from private insurance companies in certain areas where their profitability model is under threat.
Even though state authorities typically want FAIR programs depopulated so as to limit financial exposure of their respective state’s taxpayers, the residual market’s value has continued to grow in recent years, which is an indicator of the health of the private insurance market, according to JCHS.
The report cites another recent analysis by risk management company Aon, which explicitly asked whether homeowners insurance is even a profitable business at this point.
There are also indicators that private insurance companies won’t participate in a given state unless they are allowed to raise premiums, as evidenced by the California Department of Insurance’s recent decision to grant Allstate’s request to raise insurance premiums in the state by 34%.
In some states, “non admitted” insurance providers are also poised to enter the market, which raises concerns about solvency and consumer financial protection.
The JCHS report noted that there’s reason for optimism in the field, with “parametric insurance” (which pays out pre-specified amounts after a disaster or damage) as an option for future coverage, as well as new government tools available to help homeowners navigate the market.
