Here's What Happens When Home Insurers Exit the Market, and Why It's Really Bad for Consumers

Anyone who thinks it's an easy time to buy a home is clearly not paying attention (perhaps they've been living under a large rock?). According to the National Association of Realtors, there was only a three-month supply of homes for sale in May, and it generally takes at least a four-month supply to allow for a balanced market.

In addition to fewer homes for sale, buyers also have to contend with higher mortgage rates that are a far cry from the salad days of 3% rates in 2021. As of this writing, the average rate for a 30-year fixed-rate mortgage loan is 6.71%, per Freddie Mac. Ouch.

Let's say you manage to find a home to buy, and can manage your mortgage payments, even with a higher interest rate. You've still got to buy homeowners insurance for your new home. But this might be a difficult prospect, depending on where you live.

Climate change is making home insurers think twice

We can no longer pretend that climate change is fake, or some far-off threat -- it is here, it is real, and it is already impacting Americans from all walks of life and in all parts of the country. The National Oceanic and Atmospheric Administration (NOAA) has a division called the National Centers for Environmental Information (NCEI). This body tracks weather and climate disasters, and data collected shows that severe weather is on the rise in both number of events and severity. As of June 8, 2023, there were already nine confirmed events that exceeded $1 billion in damage each. These include flooding events, severe storms, and even a winter storm.

It's really no wonder that some home insurance companies are noping out of offering coverage in some parts of the country. As an example, one of the nation's largest insurers, State Farm, has decided to pause on writing new homeowners policies in the state of California. California is at high risk of wildfires, and State Farm has stopped selling policies to preserve its financial standing, as these claims are expensive. The costs of rebuilding and replacing homes has also increased dramatically, rising 55% between 2019 and 2022, as reported by CNN.

How is this impacting consumers?

Homeowners insurance is an absolute requirement if you're purchasing a home with a mortgage loan, which makes a great deal of sense -- lenders want to be sure the home they loaned you money to buy will be protected. But even if you bought your home in cash or paid it off, you still shouldn't forgo homeowners insurance. Having to repair or rebuild your home after a natural disaster would be catastrophic for your finances.

If you buy a home in an area prone to costly natural disasters, you might struggle to find affordable insurance to protect your home. The costs of homeownership include more than just your mortgage loan, of course, and include insurance. But ideally, you'd want to keep those costs to less than 30% of your monthly take-home pay to ensure you don't fall behind and put yourself at risk of becoming house poor, or even losing your home altogether.

What can you do?

If you're worried about affording homeowners insurance in the face of rising costs and increased risk of damage from natural disasters, here are a few moves you can make:

• Reconsider where you live: Nowhere is completely safe from the effects of climate change, but some areas of the country are better than others. If you have no physical reason to live in a potentially dangerous location, be it due to risk of wildfires, flooding, tornadoes, or any other severe weather or disaster, consider buying a home in a different place. It's heartbreaking to consider, but these are the conditions we're living with now.
• Turn to your state: Many states have property insurance plans called FAIR plans. These are available to individuals and businesses who are unable to get coverage in the regular insurance market. Unfortunately, they are more expensive and may have more limited coverage than regular insurance policies.
• Skimp selectively: To save money on an already-costly insurance policy, you might reduce coverage on outbuildings, such as your garage, or the contents of your home. You could also raise your deductible. This would save you money on your premiums, but you'd have to pay for any damage you incur below the deductible amount.
• Shop around: In buying insurance, as in most personal finance matters, homeowners may be able to save by checking prices with multiple insurers.
• Be proactive about protecting your home: My colleagues here at The Ascent have covered ways to protect your house against different disasters. Read about how to prepare for hurricane season. And check out how to ensure your home isn't as vulnerable to wildfires.

The rising costs of home repairs and insurance and an increasing number of natural disasters have teamed up to make life harder (and more expensive) for homeowners, especially those in areas most at risk from climate change. If this is you, buckle up and do your best to keep your existing coverage -- or find the best deal for new coverage.