Homeowners and Related Insurance Products

Homeowners insurance plays an essential role in the American economy, providing security and protection of what is, for most Americans, their largest source of wealth: their home. Most homeowners are required to have homeowners insurance because they have a mortgage. Even for homeowners who own their home outright, it is a good idea because it enables homeowners to transfer the risk of losing their most valuable asset to the insurer for a premium. Thus, homeowners insurance is a key tool to building financial resilience.

Ongoing challenges in the homeowners insurance market: Consumers face a number of challenges in obtaining homeowners insurance, including those related to price (rising premiums), quality (shrinking coverage), and access (declining availability).

• Rising premiums: Homeowners insurance premiums rose by about 20 percent nationwide between 2023 to 2024 alone. In some states during this period, rates went up by more than one-third. The problem of high insurance rates is not just a coastal problem. In fact, the most expensive states for homeowners insurance are inland, often those with severe windstorm and hail risk. Notably, states with the highest premiums tend to have weaker consumer protection standards and less stringent regulatory regimes.
• Shrinking coverage: Some insurers are reducing the value of the insurance protection they provide, requiring consumers to retain more of the catastrophic risk associated with owning a home. Policies face higher deductibles and lower payouts for damages.
• Declining availability: Insurance companies are withdrawing outright from some high-risk markets and sending notices to an unprecedented number of households that they will not renew their coverage.

A concerning aspect of the insurance crisis is the significant number of American homeowners who own their homes outright yet do not have homeowners insurance at all. In 2021, an estimated one in 13 homeowners—some 6.1 million people—lacked insurance. Older homeowners who are Black, Hispanic/Latino, and Asian American/Pacific Islander were between 24 percent and 100 percent more likely to be uninsured than their younger counterparts. Uninsured homeowners face extraordinary risks. If their homes are damaged or destroyed, they are responsible for paying the full cost to rebuild.

Reasons for the homeowners insurance crisis: The increasing risk of loss due to extreme weather events, seven straight years of price increases in the global reinsurance market, and high inflation are among the key causes of the crisis.

• Increased risk: Disasters fueled by warmer air and sea temperatures have become more common, destructive, and expensive (see also Disasters and Extreme Weather). The current annual number of weather and climate disasters costing over $1 billion is six times higher compared with the 1980s. The problem is not just in coastal communities but inland as well. Notably, the majority (and fastest growing) of weather-related catastrophes have been severe storms and hail, which are most common in the Midwest.
• Global reinsurance crisis: The unregulated global reinsurance market provides insurance for insurance companies. Reinsurance rates increased by more than one-third between January and July 2023 alone. Reinsurance undoubtedly enhances the ability of insurance companies to provide coverage, but reliance on the private reinsurance market has been one cause of the current systemic affordability and availability crisis.
• Inflation: Homeowners insurance primarily covers the cost of repairing damaged properties. When the costs of construction material and labor rise, the loss costs of providing insurance rise. 2021 and 2022 saw the highest inflation the United States has experienced in 40 years.

Lowering home risk: One way to rein in the rapid rise in homeowners insurance premiums is to invest in risk reduction. For example, policymakers can create programs that provide grants or low-interest loans to homeowners with low and moderate incomes who need to make their properties more resilient and less risky. Likewise, communities can invest in loss-prevention efforts, such as brush-clearing in wildfire-prone areas and floodproofing to combat sea-level rise. In some cases, however, even individual and community resilience efforts cannot effectively lower the risk to an acceptable level. Managed retreat programs are one potential solution. These voluntary programs provide funding and other support to help people move away from high-risk areas. They can be expensive, so some have called for these programs to target homeowners with low and moderate incomes.

Ensuring transparency: A typical homeowners insurance policy covers the structure of the home, damage or theft of personal property, liability protection, and living expenses while a home is repaired or rebuilt. Knowing how homeowners insurance policies operate and the trade-offs among different policy options, as well as what is and is not covered, is critically important for homeowners. However, the benefits of and differences in policies are not widely understood.

Another area where greater transparency is needed relates to the climate risk of specific properties. Providing buyers with information on risks such as flooding, wildfires, and sea-level rise would empower them to make well-informed decisions. Without this information, buyers might unknowingly invest in homes that are vulnerable to significant damage, leading to financial loss and personal hardship.

The Federal Emergency Management Agency’s flood insurance rate maps (FIRMs) determine the flood insurance requirements for properties as part of the National Flood Insurance Program. In addition, communities use them to make land-use planning and zoning decisions that minimize flood damage. They also can help homeowners and homebuyers understand the flood risk of specific properties. FIRMs are most effective when they are regularly updated. However, many of them are outdated and do not reflect current and future flood risks, which are increasing. Some maps date back to the 1970s and 1980s.

Pricing and regulation: State insurance departments are responsible for ensuring that rates for homeowners insurance are fair. That is, rates are not excessive, inadequate, or unfairly discriminatory. Insurers generally must provide documentation and justification for the rates they want to charge for homeowners insurance. However, the process for doing so varies by state. Some require this to be filed prior to the rate change, while others allow it to be filed once the higher rate is already in effect. States also vary in how much scrutiny they provide of rate increases. Rates generally increase more slowly in states that require approval of rates. This is because once rates go into effect, it is difficult or impossible for regulators to roll back rate increases.

Insurers price individual insurance policies through their underwriting guidelines or eligibility rules. In theory, insurers could charge a uniform rate to all customers. In practice, however, insurers develop complex rating rules. Some customers pay substantially more than others. When done well, the pricing structure is supposed to signal to consumers information about the risk associated with their home. That is, homes that are riskier (and more likely to have claims) will cost more than less risky homes. The key to doing so is to set premiums based on factors that have a clear and direct connection to risk. This provides an incentive for homeowners to make property improvements to lower their risk (and their homeowners insurance premiums). For example, a homeowner might repair or replace a roof, reinforce windows and doors, upgrade plumbing and electrical systems, or do a combination of these in return for a lower premium.

However, in practice, pricing does not accurately and fully reflect risk. Some factors used to set insurance do not have a clear and logical connection to risk. For example, most insurance companies use an insurance-based credit score as a major factor in setting the premium (see also Credit Reports and Scores). People with lower credit scores will pay more than those with higher credit scores, all else being equal. But a homeowner’s low credit score does not cause a property to be riskier. The use of such factors does not provide incentives to lower risk. In fact, it may do the opposite. In this example, those with high credit scores might not have an incentive to make improvements to their home that will lower their risk because they already enjoy a lower premium. Moreover, factors that do not logically connect to risk can disproportionately affect certain communities. For example, Black, Hispanic/Latino, and people with low incomes are more likely to have low credit scores and pay a higher premium as a result.

Supplemental coverage for specific perils: Homeowners insurance policies do not cover all risks. In particular, they do not cover damage from floods and earthquakes. In some coastal parts of the country with hurricane exposure, wind damage might be excluded from the traditional policy, making a special wind policy a necessary supplemental purchase. Unfortunately, many homeowners do not understand that these are excluded from homeowners insurance policies. Indeed, one survey found that over half of homeowners incorrectly believed their homeowners insurance coverage would protect them in the case of flood damage. Even if their homes are at risk, they may not know they need to buy supplemental coverage.

Experience from recent natural disasters shows that many policyholders who expected their residential policy to cover most of the damage to their homes regardless of cause were unpleasantly surprised to find out what was actually covered. Homeowners in risky areas need to buy separate policies for various hazards (flood, wind, and others) and deal with separate adjusters after an incident. This is cumbersome and inefficient. The National Association of Insurance Commissioners has proposed the development of all-perils coverage backed by the National Flood Insurance Program.

Additionally, catastrophe funds can provide immediate financial support for recovery and rebuilding efforts after major disasters. These funds ensure that there is sufficient money available to cover the costs of damage and recovery, helping to manage the financial impact of large-scale natural events. However, these catastrophe funds can also encourage risky behavior or inappropriately enrich insurance companies if they do not include adequate guardrails.

Force-placed insurance: Homeowners with a mortgage are required to have homeowners insurance. This is because the loan is secured by the home, and insurance protects the lender in case the property is damaged or destroyed. Lenders will force-place insurance if homeowners with a mortgage drop their insurance coverage, regardless of the reason. Lenders can obtain expensive insurance in high-risk communities where homeowners are unable to obtain coverage because they have access to specialized insurance products.

Force-placed insurance is typically very expensive. The cost is passed onto borrowers directly through a charge on the monthly mortgage bill. This can exacerbate affordability challenges for borrowers struggling to pay for their housing costs, putting them at risk of foreclosure. Moreover, the policies do not typically protect the borrower. They are designed only to protect the lender.

Condominium/coop insurance: Condominiums and cooperatively owned buildings include shared structures. To protect these assets, the homeowners association buys a master insurance policy to cover damage to the building itself and other common areas. To supplement that protection, individual owners can buy condo or coop insurance, which covers damage inside the unit. Like the homeowners insurance market for single-family homes, the market for condominium and cooperative building insurance is struggling. Policies are expensive; coverage is shrinking; and it can be difficult or impossible to secure a policy in some high-risk communities.

Manufactured home insurance: Manufactured homes are built in a factory and transported to their site. They are a major source of unsubsidized housing that is affordable for households with low and moderate incomes (see also Manufactured Housing). Manufactured homeowners, like traditional homeowners, rely on insurance coverage to manage their risk of loss. However, manufactured homeowners face some unique challenges in the insurance market. First, policies are very expensive. Despite being nearly half the size of a traditional home, a manufactured home’s insurance can cost twice as much, according to Consumer Reports. Second, most policies will reduce claims through a depreciation calculation. Recovery is often limited to less than is needed. Ultimately, manufactured homeowners with insurance coverage bear more of the risk than those living in traditional homes.