This article is from the Wall Street Journal and mostly talks about Florida, but we wanted to share since hail / fire claims in Colorado have been ticking up and causing ripples in premiums locally...
Vulnerable areas on coasts are first to feel impact of higher premiums. Cape Coral, Fla., was devastated by Hurricane Ian last year, but real-estate agents still pitch waterfront homes as “Gulf access haven.”
Insurers take a different view. Home-insurance premiums are soaring in the Southwest Florida city, and there is evidence that the higher costs are starting to affect the real-estate market. Buyers’ concerns about insurance costs are slowing sales and causing some canceled deals in areas with particularly high flood or wildfire risks.
Home-insurance companies are trying to claw back steep underwriting losses by hiking rates, or pulling back from disaster-prone areas such as Cape Coral. The average annual home-insurance premium for Floridians has tripled in five years, from $1,988 in 2019 to $6,000, according to the Insurance Information Institute, an industry group.
The cost of flood insurance—mandatory for some in the Sunshine State—is rising faster still in many vulnerable areas. The federal National Flood Insurance Program, which provides most policies, recently changed its pricing to more closely tie premiums to risk. In Cape Coral, the average annual flood-insurance premium for a waterfront zip code has increased from $1,791 to $4,728 a year, federal data show.
Chance Hazeltine, a Sarasota, Fla.-based agent for Goosehead Insurance said flood rates in the Cape Coral area can be three or four times higher under the new system. While the local property market remains buoyant, he added, “at some point, as the cost to own the asset goes up, it’s going to affect its resale value.”
Higher insurance costs haven’t stopped Americans flocking to disaster-prone areas. Lower taxes, cheaper housing and sunnier weather have outweighed any concerns over floods or fires.
In the past two years, a net 60,000 people moved to Lee County, which includes Cape Coral, according to a study by online real-estate brokerage Redfin. Nationally, the counties with the highest risks of wildfires and floods also enjoyed a collective postpandemic net bump in population, the study found.
There are signs that buyers are growing more cautious. In a recent survey, almost a third of house builders in Florida said buyers’ concerns about home insurance were “somewhat slowing sales.” The proportion in Southern California was very similar, at 29%, the survey by John Burns Research & Consulting found. That is much higher than the national figure of 9% of builders reporting sales affected by insurance concerns.
“Insurance is absolutely having an impact on house purchases—and that’s going to continue to happen,” said Alexandra Glickman, the Los Angeles-based global head of real estate and hospitality at insurance broker Arthur J. Gallagher.
She cited an example of a client who was considering buying a $13.5 million home in the Pacific Palisades, an affluent region of Southern California tucked between the Santa Monica Mountains and the Pacific Ocean. The home-insurance premiums quoted were $100,000 to $300,000 a year. As a result, the client decided not to go ahead with the deal, Glickman said.
The cost “is laying a damp towel” on buyer enthusiasm for disaster-prone locations, Glickman added.
The risks of disasters haven’t been fully priced into property markets, partly because of flaws in the way federal flood insurance was priced, researchers say. If flood risks were taken into account, U.S. residential properties would be worth at least $121 billion less, according to a study earlier this year by nonprofit the First Street Foundation, the Federal Reserve and others. In Florida alone, properties in flood zones are overvalued by more than $50 billion, the study found.
Fewer than five million people have federal flood insurance, according to government data. Even in the highest-risk areas, on average 30% of homes have policies, a study by the Wharton School at the University of Pennsylvania found. Flood insurance is required for homes in high-risk flood zones with government-backed mortgages.
The relatively small numbers mean the pricing change is “not likely enough to tip the scale” against continuing construction of new homes in flood plains, according to Susan Asmus, head of regulatory affairs for the National Association of Home Builders.
The most affected spots are likely to be lower-income regions. The flood-insurance program’s new pricing system “will have devastating consequences for the Louisiana housing market,” said Nicholas Hebert, chairman of the Houma-Terrebonne Chamber of Commerce in the southeastern part of the state, in a filing that is part of a 10-state lawsuit seeking an injunction against the new flood-pricing system.
Hebert said the premium for his own home, which is more than 30 miles from the coast, is set to rise the maximum permitted of 18% a year until it hits $7,000, from the current $790.
Local lender Gulf Coast Bank & Trust has “already experienced sales contracts being canceled before the loan application was even complete,” due to higher flood-insurance costs, according to Louis Uzee, head of its residential-mortgage division. He fears sky-high insurance rates will lead to more people being unable to afford to stay in their homes.
David Maurstad, the senior executive for the National Flood Insurance Program, said the new pricing system would help people in lower-risk states. If it was stopped, “policyholders in 40 states would have to pay more so that policyholders in the high flood risk areas of Louisiana, Florida, Mississippi, and Texas could pay a lot less,” he wrote in a court filing this month seeking to have the states’ lawsuit tossed.
The law doesn’t give the Federal Emergency Management Agency, which runs the flood program, any authority or discretion to address the affordability concerns of policyholders, he added.
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