The catastrophic fires in Los Angeles serve as a stark reminder of the ongoing insurance crisis facing homeowners in the U.S., as climate change exacerbates property damage risks, leading insurers to struggle with accurately pricing these mounting hazards.

To put it into perspective: between 2000 and approximately 2013, insurance costs represented 7-8% of a typical mortgage payment. However, starting in 2013, there was a significant increase in premiums. By 2022, insurance expenses accounted for over 20% of the average mortgage payment, according to data from analytics firm First Street.

Simultaneously, underwriting profits for homeowners insurance companies have experienced negative figures almost yearly from 2017 to 2023, as noted in a recent U.S. Treasury report. The report highlighted that the high loss ratios, largely attributed to climate-related catastrophes, significantly influenced the insurers’ overall profitability during this period.

“The reality of climate change isn’t just a political discussion; it’s a fact impacting us, particularly in the insurance sector,” said Amy Bach, executive director of the consumer advocacy group United Policyholders. She asserted, “We are indeed facing a crisis.”

Some of the most alarming natural disasters, including the recent L.A. wildfires and hurricanes Helene and Milton in late 2024, have primarily occurred in regions traditionally considered high-risk, like coastal areas. However, the increased risks are expected to eventually affect all Americans.

In response to rising insurance costs, state lawmakers and regulators are actively seeking solutions, often motivated by direct feedback from their constituents.

Many state insurance offices are trying out various methods to distribute risks and control costs, with industry experts hopeful that these innovative approaches will gain wider acceptance. Here are some of those potential solutions:

Requiring Discounts for Mitigation Efforts

Enhancing a home’s resilience against natural disasters through mitigation efforts should ideally benefit both insurers and homeowners. However, homeowners often struggle to receive acknowledgment or discounts from insurance firms for their improvement efforts.

In Colorado, state insurance commissioner Michael Conway was surprised to discover that many homeowners had invested in fireproofing their homes but failed to see a corresponding reduction in their premiums.

“We’ve often been told by modeling companies that they lack sufficient data to adequately assess the impact of mitigation efforts to reflect that in their pricing models,” Conway shared with YSL News. “To that, I respond that this is simply unacceptable. For years, insurance companies have advised homeowners to reinforce their properties to ensure insurance remains accessible and affordable.”

Colorado State Representative Kyle Brown, a Democrat, has previously introduced legislation to tackle this issue and plans to do so again, as reported to a local CBS station.

Residents in most coastal areas susceptible to hurricanes should be aware that insurers in those regions are mandated to provide premium discounts for resilience measures, according to Mark Friedlander, communications director for the Insurance Information Institute, an industry organization.

Promoting Community Investments by Insurers

Insurers have faced backlash for their financial ties to fossil fuel industries, which some advocates argue exacerbate the challenges leading to significant damages. Certain states are reconsidering their investment approaches—not by limiting fossil fuel exposure but by promoting investments that benefit their communities.

“In banking, regulations like the Community Reinvestment Act ensure that larger banks reinvest in the communities where they operate. Why not apply a similar concept to insurance companies?” proposed Sharon Cornelissen, housing director for the Consumer Federation of America, a consumer advocacy group.

By redirecting premiums into community projects, which could include climate resilience or other beneficial initiatives, insurers can become collaborative partners with the communities they serve, Cornelissen noted. Massachusetts has operated a similar program since 1998, and as it was set to conclude, insurers opted to extend their participation for another ten years, according to Tom Callahan, executive director of the Partnership for Financial Equity, a Boston-based nonprofit aimed at the financial sector.

“They recognize the positive impact of these investments on underserved communities throughout the state, responding to both emotional and financial incentives, seeing a modest return on these investments and a chance to reinvest for future projects,” Callahan added.

Since 1999, Massachusetts’ Property and Casualty Initiative (PCI) has allocated $544 million for various projects, such as affordable housing and healthcare infrastructure.

Avoiding Premium Suppression

California’s insurance market not only faces some of the country’s highest-risk real estate, but it also suffers from some significant flaws, particularly state laws that long prevented insurers from increasing premiums to reflect their actual costs.

A 2024 analysis by Democratic Governor Gavin Newsom’s office revealed that the average premium for a $300,000 home in California is $1,405 monthly, significantly lower than Texas at $3,851 and Florida at $4,419.

“Years of restrictive rate-making led to a market that does not accurately represent the inherent risks, promoting population growth in wildfire-prone regions, and ultimately limiting insurance options,” explained a representative for the American Property Casualty Insurance Association, a trade group, via email to YSL News.

Moreover, California law restricted insurers from projecting future risks, depending solely on past disasters to determine insurance costs.

The state is now allowing insurers to employ “catastrophic storm modeling” for pricing purposes. “These changes will assist California’s market in regaining balance, despite the added challenges posed by the recent Los Angeles wildfires,” said the spokesperson.

Addressing Pre-existing Conditions

The current turmoil in the homeowners insurance market is not a new phenomenon for the industry. Colorado’s Commissioner Conway recalls the difficulties seen when health care marketplaces were first introduced under the Affordable Care Act about a decade ago.

“We experienced substantial premium increases,” Conway recalled. “Insurance companies exited the market, leading to widespread confusion about individual market pricing.”

However, with adequate innovation across different states, the health insurance exchanges stabilized and have become some of the more functional and profitable markets for insurance providers, according to Conway.

Amy Bach of United Policyholders sees the healthcare analogy as lacking, though. While there remains considerable bureaucracy in health insurance, the ACA, or Obamacare, prevents insurers from denying coverage due to “pre-existing conditions,” thereby ensuring that they cannot solely select the healthiest clients.

In property insurance, living in a wildfire or flood-prone area, or having an older home could be seen as the equivalent of a preexisting condition, Bach explained.

Congress would need to implement measures to prevent insurers from cherry-picking clients, according to Bach’s belief. Although past legislation attempts aimed at achieving this have been made, she doubts current efforts will pass, given the current polarization in Congress.

Extended Wait Times for Cancellations

As homeowners insurance becomes increasingly expensive, many Americans face the risk of late premium payments. In turn, the industry has utilized late payments to justify policy cancellations, noted Cornelissen.

States might consider extending the time frames insurers have to cancel policies after a missed payment. This measure is currently under consideration in Maryland, where policyholders may face cancellation only 10 days after failing to make a premium payment.