Weathering the Storm: The Impact of Climate-Driven Risk Reassessments on the Housing Market

One of the most pressing challenges facing insurance professionals today is the escalating impact of extreme weather events in traditionally disaster-prone areas. Last year alone, the U.S. witnessed a staggering $92.9 billion in weather-related damages, making it a record-breaking year for destruction and financial losses.

The increasing frequency and severity of extreme weather has drastically reshaped the industry, prompting a fundamental reassessment of risk management strategies.

The housing market has heavily felt the substantial effects of evolving weather patterns. In addition to climate change, inflation and supply chain issues have driven damage and repair costs to exponential highs, making homes more expensive to insure.

Consequently, homeowners are making more expensive claims for damage to their home and paying larger premiums to secure adequate coverage. Understanding the magnitude of changes to risk assessments is crucial for insurance professionals, as it directly impacts consumers, markets and the broader economy.

The shifting insurance landscape

Insurance professionals should brace for the hard market conditions that are poised to reach new regions and further alter the insurance industry. Rising premiums, reduced capacity and stricter underwriting standards are presenting unique challenges for insurers, prompting the reevaluation of risk exposure and pricing strategies.

Millions of properties across the U.S. are experiencing non-renewals and carrier withdrawals, especially those in newly deemed high-risk areas, including in the Midwest. In fact, as of September 2023, 35.6 million real estate properties in the U.S. had encountered reduced coverage and skyrocketing insurance costs due to high climate risks. Homeowners who have previously not had to worry about non-renewals or carriers pulling out of their area are left with a lot of uncertainty and questions about their next steps.

As the insurance industry continues to grapple with mounting losses from weather-related claims, more innovations in risk management will be necessary. A clear understanding of the underlying factors driving these market shifts is also essential for effectively advising consumers and mitigating potential disruptions to their coverage.

Reverberating impact on the housing market

The repercussions of the increase in weather-related claims and higher premiums extend beyond individual homeowners, reverberating throughout the housing market and broader economy. As insurance premiums rise and coverage options become more limited, homeowners face increased financial strain, impacting property values, mortgage affordability, and overall market stability. In regions most impacted by natural disasters, the cost of insurance can be a significant deterrent for prospective buyers, influencing demand and property prices.

Additionally, lenders and insurers may reassess their risk exposure, leading to tighter lending standards and higher premiums for borrowers. The slowdown in business within the housing market is evident, with homes sitting on the market for longer durations than usual, and existing homeowners choosing not to sell due to the higher costs associated with purchasing a new home. While potential home buyers typically factor mortgage rates into the total cost of a home, home insurance is often neglected until the very end, resulting in unexpected financial burdens. To address these challenges, some real estate professionals are partnering with insurance professionals to address coverage needs and affordability early in the home buying process, to minimize hurdles and facilitate a smoother transaction.

The insurance and housing markets are closely related, and paying attention to the broader implications of climate-driven insurance volatility is not only an opportunity, but a priority, to which insurance professionals should be paying attention.

The role of a broker in navigating insurance

With severe weather becoming an increasingly significant factor in insurance considerations, insurance professionals must adeptly assess risk exposure and identify appropriate coverage options. Protecting further volatility has become increasingly vital, and navigating this new wave of insurance necessitates a strategic approach for insurance professionals grounded in the following focus areas:

• Neutrality and choice are key: In the face of escalating weather-related risks, insurance experts, notably brokers, emerge as trusted advisors, navigating the complexities of insurance with impartiality towards any specific carrier. Tailoring coverage options to each client’s unique needs and offering policies from various carriers is more important than ever to provide consumers with the peace of mind they need to feel their most important assets are secure. Further, with more than 6.1 million homes uninsured in the U.S., brokers provide a crucial link between insurers and consumers, facilitating transparent communication on shifting risk management strategies and confirming that consumers are fully informed about their coverage options.
• Education and advice are necessary: Recent data indicates that over 70% of customers prefer to speak with an agent or representative when it comes to dealing with complex insurance issues, highlighting the need for personalized guidance and genuine dialogue on insurance intricacies, market dynamics, and coverage requirements. Despite the rise of digital platforms, the human touch remains invaluable, as consumers seek live conversations to navigate complex insurance decisions. Whether it’s assisting clients in procuring new policies or navigating renewals, insurance professionals must leverage their industry expertise to help clients understand and secure optimal terms and coverage.
• Opportunities in every industry: As climate change amplifies insurance volatility, it’s imperative for insurance professionals and insurers to recognize the value of insurance branches across a variety of industries. While necessary, it is something often misunderstood. For example, the housing sector stands as a prominent beneficiary, but other industries such as automotive, construction and hospitality are equally susceptible to weather-induced disruptions. Insurers have an opportunity to partner and guide strategic partners and their clients and serve as a resource for navigating insurance volatility.

The bottom line

Beyond the housing market, insurance volatility has a far-reaching impact on all businesses whose products and closed deals hinge on insurance coverage, as it complicates consumer spending habits.

Insurance professionals must remain vigilant in the face of evolving weather patterns and market dynamics. By staying informed about the latest developments in weather-related risks and insurance market trends, agents and brokers can better serve those struggling to navigate these turbulent times.

Taking on the role of a trusted advisor is paramount, providing the expertise and guidance individuals need to make informed decisions about their insurance coverage. Seizing an innovative approach will better prepare us to meet the challenges of tomorrow’s insurance landscape and safeguard the assets of those who need it most.

The bottom line – while reassessing climate risk is a necessity, so is adapting and modernizing customer experiences to achieve some sort of equilibrium within the evolving insurance landscape, and the larger economy.

Hodges is managing director of Omnichannel Sales and Service at VIU by HUB, an omnichannel insurance brokerage platform headquartered in Chicago, Illinois.