No matter where you live, there’s a good chance the weather’s getting wilder. In just the past few weeks, tornadoes have wreaked havoc on Midwest and Southern states, and large swaths of southern Florida were flooded.
Weather-related catastrophes have caused the cost of homeowners insurance to spike. Premiums have risen at rates well above general inflation.
In places such as Florida that are particularly exposed to natural disasters, homeowners insurance isn’t just expensive – it’s becoming difficult to find. That has caused some homeowners to go without it entirely.
More than 6 million American homeowners don’t have homeowners insurance, according to a recent Consumer Federation of America analysis. That’s about 1 out of every 14 homeowners. Collectively, they have at least $1.6 trillion in unprotected market value.
As a math professor and an expert in actuarial science, I’ve watched the mounting homeowners insurance crisis closely.
If catastrophic weather events continue to escalate, so-called “self-insurance” – buying no insurance and paying for any losses yourself – might be the only viable option for homeowners in disaster-prone areas.
In general, the price of risk, as reflected by an insurance premium, is a function of the risk’s potential frequency and its severity. Potential frequency means the likelihood of a loss occurring, and severity means the financial cost associated with the loss.
So, increases in the frequency or severity of risks result in higher homeowners insurance premiums. Given climate change, it’s likely that many of these catastrophes will become stronger and more common, leading to higher insurance costs.
Instead of buying homeowners insurance, you may choose to self-insure. Finance experts consider self-insurance to be a legitimate risk management strategy. But that’s only if you choose it with full knowledge of the risk exposure and financial consequences.
Self-insurance is a common component of large organizations’ overall risk strategy. For example, as many as 33% of privately employed workers nationwide are insured by employer-sponsored, self-insured group health plans. For many organizations, self-insurance is also common for workers’ compensation insurance.
For those homeowners wealthy enough to absorb a major uninsured loss, it makes sense to consider self-insurance.
Of course, there are some caveats.
First, homeowners need to be realistic about their ability to respond to a significant uninsured loss. Having a thorough knowledge of your personal financial situation is critical.
Second, self-insurance is likely to be viable only for homeowners who own their homes outright. If there is a mortgage on the property, the purchase of an insurance policy is typically required to protect the lender.
And finally, it’s important to remember that homeowners insurance is a “multi-peril” policy, which includes liability coverage for accidents. While the size of a property loss might be limited to the value of that property, liability risk is potentially unlimited.
Without homeowners insurance, potential liability exposure should be addressed in some other way – for example, through risk-control efforts such as warning signs or limiting guests on the property, or through some type of standalone personal liability insurance policy.
Most insurers try to maintain stable rates and premiums. But historically, most property-liability insurance has followed a multiyear underwriting cycle. This cycle, from the standpoint of the insurer, goes from a high-premium/low-loss ratio to a low-premium/high-loss ratio, and back again.
This stems from several factors, including price competition within the insurance industry and uncertainty associated with future losses. The result is that when it comes to homeowners insurance, affordability and availability problems are often just temporary.
Whether this will be the case for current issues in homeowners insurance depends on a number of challenges facing homeowners. There’s some reason for pessimism: mortgage rates have recently hit their highest levels in over 20 years, and in the meantime, prices in many areas have skyrocketed.
Meanwhile, in 2023, the National Association of Realtors Housing Affordability Index reached its lowest level in almost 40 years. And the future impact of climate change on homeowners insurance losses remains uncertain at best.
Amid all this uncertainty, one thing is clear: being, or aspiring to be, a homeowner is a real challenge these days.
Rick Gorvett is a professor of mathematics and economics at Bryant University. Distributed by The Conversation and The Associated Press.
