Insurance Premiums are at Huge Risk in These Counties—Here’s What That Means to Investors

Natural disasters are becoming more and more costly, especially for homeowners. With risk from extreme weather events, such as flooding and wildfires, insurance companies are pulling out of or even stopping coverage in areas that they say have increased risk.

Insurance companies also report that they are struggling to cover the cost of rebuilding after disasters. In 2022 alone, global insured losses from natural disasters exceeded $130 billion.

Insurance rates could surge for millions of homes across the U.S. due to increased natural disaster risk, according to a recent study from First Street Foundation. While insurance prices have increased in areas already prone to extreme weather, such as California, Florida, and Louisiana, it’s growing in other areas of the U.S. as well.

In total, about 40 million homes and commercial properties are at risk of a spike in insurance premiums due to the increased costs of climate change. This climate bubble is only just starting to be understood, including its potential long-term effect on the housing market.

Where are Insurance Premiums at Risk?

Wildfires have become longer and more intense than they were 20 years ago, burning more tree coverage. Coastal flooding has become more frequent, especially along the Gulf Coast and East Coast. The U.S. is quickly leading the world in extreme weather events, with more tornados, hurricanes, droughts, heat waves, severe thunderstorms, and even the dreaded polar vortex.

Almost 7 million properties have already had an increase in insurance prices or been completely dropped by insurers, First Street found. And while most of this is in areas already prone to wildfires and floods, there are other areas where flooding and wildfires are increasing. 

For example, Vermont witnessed unusual catastrophic flooding in July, while Kentucky and West Virginia were also hit with costly and deadly flooding from rainstorms. And then there’s the tragic wildfires that occurred in early August in Hawaii.

Properties in more than 1 in 10 American cities are at risk of increased premiums, First Street data shows. This includes areas like California, Florida, and Louisiana, but also areas on the East Coast and along the Gulf Coast where properties are more vulnerable to hurricanes and rising sea level risk, such as Virginia, New York, North Carolina, South Carolina, Texas, and Alabama.

Some of the counties and cities where at least 80% of the properties are at risk include: 

New York

Florida

• The entire state is at least 80% or more at risk of increased premiums.

Alabama

• Mobile County
• Baldwin County

Louisiana 

South Carolina

• Berkeley County
• Charleston County

Virginia 

• Virginia Beach 
• Chesapeake 

Texas

• Brazoria County
• Cameron County

Homes in other parts of the U.S. are also vulnerable to increased premiums, although less so. More than 25% of properties in New York City and Phoenix are at risk, as well as a fifth of homes in the Chicago, Pittsburgh, Louisville, Kentucky, Cincinnati, and Los Angeles areas.

What Does All This Mean for Real Estate Investors?

While this data only covers future projections, there’s already been an increase in insurance prices, with 31 states seeing double-digit rate increases since January 2022, including Arizona, North Carolina, Oregon, Texas, and Illinois.

With homeowners already starting to see an increase in climate-adjusted insurance pricing, some are even forgoing insurance altogether. This will leave them unprotected if disaster strikes and could put more pressure on vulnerable populations. 

Related: How to Read Your Property Insurance Policy

And it’s possible it will only get worse, the First Street study found. In some areas at risk of rising insurance costs, over 640,000 mortgages are delinquent, which could increase the likelihood of defaults.

In the long term, rising insurance premiums could have an impact on the real estate market, especially along the coast. According to one study at the University of Berkeley, if an area experienced heat shocks, that led to a decrease in house prices. Meanwhile, another study found that property prices are currently overvalued when compared to their actual flood risk.

As homeowners look to sell their homes in areas at risk of extreme weather patterns, they could find themselves without any buyers or having to lower prices. If buyers aren’t able to get insurance coverage or have to pay a large premium to get insured, they simply might not be willing to pay as much as they would before.

In other words, the market likely hasn’t priced in the cost of climate change, which could ultimately lower the prices in areas prone to climate change risk.

The Bottom Line

With climate change impacting weather patterns in the U.S., real estate areas that were once sought after could see a change in pricing over the long term. Not only will insurance get more expensive for those living in coastal areas and places prone to wildfires, but housing prices will likely fall as fewer people are willing to take on the risk of living in an area where your investment could literally go up in smoke. 

For real estate investors looking to buy or rent out property long-term, it’s vital to take climate change into account and consider if higher premiums or even a lack of insurance coverage is worth the investment risk.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.