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1 1 (November 22, 2024)

handle is hein.crs/goverle0001 and id is 1 raw text is: Congressional Research Service Informing the IegisI9tive debate since 1914 November 22, 2024 Natural Disasters and the Homeowners Insurance Market Insurance consumers in parts of the United States have been experiencing higher prices and gaps in coverage. Households have often struggled to find and afford homeowners insurance that sufficiently protects against hazards such as wind and wildfire. Some are unable to find insurance outside of state-created insurers of last resort. Known in many states as Fair Access to Insurance Requirements, or FAIR plans, these insurers often offer coverage that may be more expensive or less complete than private coverage. In contrast to perils like wind and wildfire, floods are not typically covered by homeowners insurance, and households must purchase a separate flood insurance policy. The National Flood Insurance Program (NFIP) is the primary source of flood insurance for residential properties in the United States. Recent media reports include accounts of insurers increasing premiums or withdrawing from homeowners insurance markets in many states. Changes in the availability of wildfire insurance in California and wind insurance in Florida have received the most attention, but recent reports also include accounts of insurance companies increasing premiums significantly or withdrawing from the markets in other states. Examples include Colorado, Texas, Hawaii, Washington, Louisiana, Iowa, and Illinois. In 2023, insurers paid more in claims on homeowners coverage than they received in premium in 18 states. These developments have multiple implications for various groups. Higher insurance rates can serve as an important signal regarding future risk, but may shift the risk of losses to individuals, the government, or other financial institutions. Lenders generally require insurance for buyers to obtain a mortgage, leaving people unable to purchase a home if insurance is unavailable. Current homeowners may be left facing greater financial risk without insurance and may find difficulties in selling their home. High prices and reductions in the availability of insurance tend to draw policymakers' attention to insurance markets and possible solutions to these problems. Although most such solutions, such as insurance regulation, are enacted at the state level, the scale of recent withdrawals from the market has increased in federal intervention with House and Senate committee hearings and introduced legislation (such as H.R. 3525, H.R. 3997, and H.R. 6944) in the 118th Congress. These bills differ in the exact mechanism, but each would have authorized the federal government to act as a catastrophic risk insurer or reinsurer, as it does for the NFIP, and thus bear more of the cost of disasters. Property Insurance Broadly defined, insurance is a financial contract that transfers risk from one party to another in exchange for advance payments, known as premiums. Generally, insurance firms seek to spread risk by entering into contracts with large numbers of policyholders-using the premiums and investment income to cover losses and expenses, as well as to make a profit. Property insurance is defined as coverage protecting the insured against loss or damage to real or personal property from a variety of perils, including but not limited to fire, lightening, business interruption, loss of rents, glass breakage, tornado, windstorm, hail, water damage, explosion, riot, civil commotion, rain, or damage from aircraft or vehicles. Homeowners insurance is a primarily a form of property insurance, although policies also offer coverage for homeowners liability as well. Property insurance in the United States is primarily regulated by the individual states. Each state government has a department charged with licensing and regulating insurance companies and those individuals and companies selling insurance products. State Insurance Commissioners typically head these departments. The National Association of Insurance Commissioners (NAIC) fosters some uniformity in insurance regulation, particularly in insurer solvency regulation. The Challenge of insuring Against NaturaD Sasters Recent rising prices and reduced availability of homeowners insurance largely involves the interplay between two large-scale factors: (1) increasing losses from natural disasters; and (2) a macroeconomic environment marked by rising inflation and interest rates. Insurance against natural disasters, often referred to as catastrophe insurance, can protect businesses and people against financial losses, but is a volatile type of insurance. Insurance works best for high-frequency, low-magnitude events which are statistically independent and have probability distributions that are reasonably stationary over time. In contrast, natural disasters are low-probability, high- cost events which are difficult to predict reliably; as such, insurers may be hesitant to offer coverage in high risk areas. Natural disasters violate to some degree nearly all of the standard conditions for insurability. Catastrophe insurance is also different from many other types of insurance in that it is difficult to estimate the total potential cost of an insured loss, and a catastrophic event results in a large number of claims being filed at the same time. Increasing Insured Losses from Natural Disasters Insured losses from natural disasters have increased over past decades, with nearly every major peril recording an individual insured loss event over $10 billion. Although large events such as major hurricanes cause outsized losses,

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