Adjusting to Increased Housing Insurance Market Instability Caused by Climate Change and Other Factors

Published by Peter Lawrence on Wednesday, October 25, 2023 - 12:00AM

The rise in intensity and frequency of natural disasters has had a negative impact on the affordable housing insurance market, both for existing housing as well as production of new housing.

So much so that the Senate Committee on Banking, Housing and Urban Affairs held a hearing Sept. 7, Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers, on the subject. Witnesses discussed the potential solutions with respect to affordable housing, mitigation efforts, casualty loss and liability, national flood insurance, climate data collection and homeownership.

The first witness was Douglas Heller of the Consumer Federation of America, who elaborated on the key drivers of the current housing crisis. Michelle Noris from National Church Residencies provided insight on the impacts of insurance markets changes on affordable housing. Jerry Theodorou of the R Street Institute spoke about financial aspects of the insurance industry.

Rising insurance costs add to the myriad reasons, including rising inflation and construction costs, why developing and maintaining affordable housing is becoming more difficult. Proof that changes in the insurance market are gaining increased attention, the Federal Housing Finance Agency is hosting a series of property insurance symposiums Nov. 14 and 15 to “foster dialogue on the growing challenges related to the availability and affordability of property insurance.”

In addition, the National Leased Housing Association (NLHA) and npd | analytics released an October report that analyzed survey results regarding how affordable housing providers, who operate approximately 2.7 million rental homes across the country, have been dealing with increasing operating costs due to the rise in insurance premiums.

Key findings in the report include:

  • For 2022-2023 renewals, 29% of housing providers experienced premium increases of 25% or more, compared to 17% the previous year,
  • Limited markets and capacity are responsible for most premium increases; followed by claims history/loss and renter population, and
  • 67% of respondents reported increasing insurance deductibles to manage the increases followed by decreasing operating expenses and increasing rent.

How Insurance Market Disruption Affects Affordable Rental Housing

Norris told the committee that affordable rental housing owners, including low-income housing tax credit (LIHTC) property owners, cannot continue to raise the rents to cover cost increases because many are already charging the maximum allowable rent. Norris testified that being unable to raise the rents in affordable housing forces property owners to make difficult decisions, such as choosing between cutting back on important services, deferring maintenance, skimping on construction costs and disaster mitigations, or opting out of affordable housing altogether. Norris said that individuals in need of affordable housing are extremely vulnerable, and the decreasing availability of options could increase homelessness if this issue continues to be left unchecked.

Climate Change and the Increase of Market Dysfunction

As detailed during the hearing, the insured losses from natural disasters have jumped 40% over the past 10 years, and the United States accounted for more than half of global economic insured losses in both 2021 and 2022. With this large disruption in the market, insurance companies’ practices are also changing. Many companies are no longer writing multifamily property casualty insurance policies in California, Florida and Louisiana where natural disasters are frequent. Additionally, supply chain and construction costs have rapidly increased, which has increased the replacement cost of housing. For this reason, mitigation efforts were discussed in this Senate hearing, beginning with a discussion on flood insurance programs.

One way to measure the impact of climate change on the housing market is data tracking. During the hearing, Sen. Elizabeth Warren, D-Massachusetts, asked the panelists whether the data that the Federal Insurance Office (FIO), an office of the U.S. Department of the Treasury established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, is proposing to collect would be useful to examine the impact of climate change on private insurance companies in the United States. Currently, the impacts of climate change may seem unpredictable, but further data collection could help predict insurance coverage needs. Sen. Warren questioned the reasons that insurance companies are against the FIO’s collection of climate data. Heller expounded on the reasons the industry may not encourage government intervention, which included the industry’s desire to be responsible for setting the climate standards for which they are to be held accountable. Heller stated that there is currently a “black hole” of missing information that is key to understanding the full impacts of climate change.

Impact of Climate Change and Other Insurance Market Changes on Affordable Housing Production

Increases in costs across all lines of insurance have been seen by housing providers across the country. The insurance premium inflation largely caused by climate change is threatening affordable housing production. According to the National Multifamily Housing Council’s 2023 NMHC State of Multifamily Risk Survey & Report property casualty and builders’ risk have skyrocketed over the past 10 years. Marsh Specialty and Global Placement stated that U.S. property rates have also increased for 20 consecutive quarters.

Blog Graphic: U.S. Property Rates Have Increased for 20 Consecutive Quarters

Click to Enlarge

 

Per npd | analytics’ report, housing providers are taking a variety of measures to address rising insurance costs. For 2022-2023 renewals, 67% of survey respondents cited limited markets/capacity as the primary reason for the rise in insurance premiums, followed by claims history with 48% and renter population, which refers to type of renters such as elderly or affordable, at 28%. To manage insurance premium increases, more than two-thirds of respondents are increasing insurance deductibles. Other measures taken by at least 50% of respondent include decreasing operating expenses, increasing rent (if applicable), and decreasing or postponing investments.

The U.S. needs to build around 4.3 million more apartments by 2035 to meet the demand of the rental housing market. The lack of affordable apartments available is further exacerbated by the lack of housing for middle-income residents. A lack of middle-income housing causes people who could afford higher rents to occupy housing affordable to lower income renters. An increase of housing options affordable to a variety of income levels could address this issue. However, climate change is inhibiting the production of new homes and the increase in operating costs caused by rising insurance premiums makes it difficult to manage existing housing. Due to the increase of natural disasters, many insurance companies refuse to cover properties being built in high-risk areas. The price of builders’ risk policies has increased, even in markets that do not have an elevated risk for natural disasters.

Potential Policy Solutions

Many different potential policy solutions were discussed at the hearing for dealing with the emerging insurance crisis. As proposed by Heller, a federal back stop similar to what is provided for terrorism risk insurance would allow the government to cover damage from the worst-case scenarios of natural disasters. This would stimulate the private market into being able to cover more homes in the currently unregulated reinsurance market. Another option would be limited tort reform, which would force entities filing insurance lawsuits to provide a higher standard of evidence before submitting their claim to the court. According to Theodorou, price fluctuations in the insurance market are inevitably followed by an increase of court proceedings, which can be extremely timely and expensive. Meritless legal proceedings have plagued the homeowners insurance market and have become responsible for 79% of the entire country’s homeowner insurance litigation. Limiting these excessive lawsuits would reduce costs and allow for the insurance market to become more adaptable to the current changes.

Another possibility is for tax incentives, such as the LIHTC, to cover limited circumstance claims from named storms, presidentially declared disasters and catastrophic total loss or near total loss events. LIHTC policy could be changed to allow certain insurance costs to be included on a LIHTC eligible basis. The federal government and the IRS could also ensure that LIHTCs are still available to investors if properties are going through a major casualty event as a safety measure. This would prevent LIHTC investors from having to purchase additional coverage for insurance under the current standards. Under the current law, a LIHTC property experiencing a casualty loss not in a major disaster area must be placed back in service by the end of the calendar year regardless of the loss occurred. A provision in the Affordable Housing Credit Improvement Act (AHCIA) would address this issue by permitting states to set a reasonable restoration period.

Finally, increasing insurance costs may cause the U.S. Department of Housing and Urban Development (HUD) to re-examine its income limits policies to adjust for the changes. HUD maintained its 2022 policy on capping income limits for its 2023 income limits, which led to 87% of areas having capped income limits. Such capped income limits limit the ability of LIHTC property owners to cover increased insurance costs, among other rising operating costs.

Novogradac’s Income Limits Working Group provides expert analysis on potential policy impacts of HUD’s decision. For more information on how to join the group and conversations around pressing issues facing the industry like the insurance market for affordable housing, click here for membership details.

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