New York, CNN —
The recent wildfires in Southern California and hurricanes in the Southeast United States could lead to higher homeowners insurance rates in the near future, even for those living thousands of miles away from these natural disasters.
Regulators in many states allow insurance companies to increase rates to cover the cost of events they have had to pay elsewhere, as well as rising costs such as reinsurance, which insurance firms purchase to limit their risks of major catastrophic events.
The Insurance Information Institute, an industry trade group, disagrees with a 2022 study that found that premiums in one area are being used to pay for disasters in other regions. The institute says that rate increases come from insurers evaluating greater risks and costs across the country, not from transferring costs to other areas.
However, a Harvard Business School professor and lead author of the study, Ishita Sen, argues that the past suggests that after big disasters, other states often end up paying for it through higher premiums.
Rates are set by states, and the insurance industry is regulated more strictly than most others. However, the level of regulation varies by state, leading to a patchwork system.
Consumer advocate Carmen Balber expressed concerns that this uneven regulation allows insurers to charge whatever rates they want in some states, resulting in high costs for customers.
The frequency of climate-related disasters has led to a 8.7% average annual increase in homeowners insurance rates between 2018 and 2022, outpacing the overall rate of inflation.
The recent wildfire losses in Southern California are poised to become the third most expensive disaster in US history, following Hurricane Katrina and Hurricane Ian. The total estimated insured losses from last year’s hurricanes and recent wildfires will reflect in insurance premiums going forward.
