In the past few years, residential property and casualty insurance has transformed from an obligatory afterthought for many homeowners and developers to a near existential crisis of housing affordability. In a growing number of areas, taxes and insurance can be greater than principal and interest in home mortgages. Few of us in housing ever expected to be developing insurance policy. Insurance increasingly feels like housing affordability did five years ago — the alarm bells are ringing loudly inside the industry, but not everyone outside it can hear them yet.
Aside from a few high-risk markets, the full impact of rising premiums hasn’t reached most households. Still, developers and affordable housing operators are already warning of what’s ahead if costs keep climbing.
Housing affordability is a newsworthy topic not because we successfully convinced the masses that our jobs are exciting, but because so many people are struggling to afford rent and can barely dream of homeownership. The collective experience across communities has led to the public outcry demanding action from our policymakers on affordability.
Lived experience remains the most efficient policy driver and reports increasingly show that homeowners’ taxes and insurance now make up a larger portion of their monthly mortgage payments than principal and interest. On the development side, groups report stalling and abandoning projects altogether to contend with cost overruns threatening the efficacy of deals. This is especially detrimental to mission-driven affordable multifamily developers who already operate on thin margins.
Skyrocketing housing costs drive up construction expenses, which in turn increase insurance premiums. And increased insurance premiums contribute to continued high housing costs, resulting in another vicious cycle. Layered atop are the growing impacts of extreme weather events, which will only increase in frequency and intensity, further stressing insurance and reinsurance markets.
So, how do we respond to this doom and gloom? We start by talking to one another. At NHC, we recognize the need to work collaboratively with the insurance industry as we consider policy solutions to this emerging crisis. A true resolution should not upend the business of either party.
Insurers price for risk. Risk has gone up. It follows that insurance premiums have gone up as a result. In order to address rising costs, we must consider how to lower risk in ways that are tangible and have direct reflection in insurance premiums. We have learned that too much regulatory interference will result in insurers leaving markets altogether. That is the worst-case scenario for everyone involved.
While the current Administration is in no hurry to discuss climate or disaster resilience, insurers certainly are. There are good examples of programs, like the FORTIFIED program from the Insurance Institute for Business & Home Safety (IBHS), that offer real promise for reducing risk to insurers and better protecting the assets of home and multifamily owners. Notably, resiliency costs money. Determining how the costs are shared is essential to ensuring the long-term sustainability of both industries.
We are getting better at being able to model outcomes of extreme weather. Researchers like those at IBHS, Moody’s, Cotality, and more are studying how weather and disasters destroy infrastructure and what aspects of housing help to prevent property loss. IBHS watches how flame embers move, how roofs age, and what level of wind causes collapse. Moody’s explores complex and sophisticated modeling with newly available computational power allowing hyper-local analysis of tens of thousands of pieces of data. Cotality applies understanding of risk to the context of the overall housing market, helping understand larger systemic patterns.
More sophisticated modeling and data application will allow us to consider more sophisticated solutions as we build our understanding of how weather behaves, how infrastructure responds to extreme weather events, and how we can apply that intelligence to affordable and resilient housing.
NHC is committed to leading this work. Our new Residential Property Insurance Collaborative (RPIC) brings together advocates, researchers, lenders, and insurers to find a “third way” to manage rising insurance costs while securing the housing market’s future. Members interested in participating can contact bwebb@nhc.org. We can only navigate this challenge if we are all working towards a collective solution, and that is precisely what we intend to do.