Home insurance shortfalls may turn cheap homes into costly futures

A conversation with Tom Larsen

Kent never thought much about his homeowners insurance — until the day his renewal notice arrived with a number that threatened to upend his family’s careful budget. Living in Oklahoma, he was used to the occasional hailstorm or tornado, but nothing prepared him for a premium that had jumped nearly 40% in just one year.

He’s not alone. Across the country, homeowners are facing a new and unsettling reality: insurance premiums are climbing at a rate that’s leaving many families reeling. Over the past 15 years, the cost of homeowners insurance has surged by almost 74% nationwide. But more recently, insurance costs increases in places like Oklahoma and Texas have begun to jeopardize the affordability of homeownership. These costs have also left some insurers struggling to adequately cover claims. Combined ratios are at unsustainable highs, and companies are scrambling to find new ways to measure risk— turning to AI, data analytics, and even rethinking the very policies they offer.

These threads are part of a much larger tapestry. In the latest episode of Beyond the Buildings, host Maiclaire Bolton Smith and Cotality’s Assistant Vice President of Product Marketing Tom Larsen explore why some states are hit harder than others, how government insurance programs can remain sustainable, and what new innovations might offer hope for homeowners.

In This Episode:

2:06 – What factors have come together to cause the insurance crisis right now, and why are Florida and California at the epicenter?

7:43 – Which areas of the U.S. are seeing particularly high jumps in insurance costs?

13:30 – Are government-backed insurance options sustainable in their current form?

16:56 – How are data analytics and modeling going to help create a path forward in high-risk areas?

20:34 – What impact is this insurance crisis having on homeownership across the U.S.?

24:00 – Erika Stanley goes over the number in the housing market in The Sip.

24:58 – How can homeownership remain secure in the current rising insurance environment?

Transcript

Tom Larsen:

Now we're living in a society where things are more fragile. So I think that part of what we look at now is there's going to be more expense in building homes that are more resilient. There's going to be focus on doing the right thing. Yes, it is going to be a little bit more expensive than it was in the past, but it is going to be worth it.

Maiclaire Bolton Smith:

Welcome to Beyond the Buildings By Cotality. I am your host Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle and look beyond the obvious. With every conversation we illuminate what is possible. Insurance is entering a new era, a perfect storm of environmental risk. Migration patterns, and complex regulations has made coverage either unaffordable or unavailable for millions of homeowners. For some, the rising cost of insurance means moving out of their dream home because it's too expensive to rebuild. If a hurricane hits or a wildfire sweeps through for others, inaccessible insurance prevents home ownership completely. So to talk about the state of property insurance and how the growing crisis is eroding affordability for homeowners, we have Tom Larsen, Cotality's Assistant Vice President of Product Marketing. Tom, welcome back to Beyond the Buildings.

Tom Larsen:

Well, thank you very much, Maiclaire. I'm glad to be here.

Erika Stanley:

Before we get too far into this episode, here's a friendly reminder about how to see what's coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online. Find us using the handle @cotality on all our social media channels. But now let's get back to Maiclaire and Tom.

Maiclaire Bolton Smith:

Okay, so let's start by addressing this elephant in the room here. The cost of homeowners insurance has jumped, I think 74% in the last 15 years, and that's almost impossible to even wrap your brain around. So why is this insurance crisis happening right now?

Tom Larsen:

Well, Maiclaire there's a lot. If we really want to unbundle that and look at what's driving it. Yeah, but you're absolutely right. The rates, your insurance costs have gone up. If we look at the last five years, if we look standard and pos, we'll give some statistics on it. So we look at different markets in the US for the increase rates. Just the last five years, California has gone up 55% and Florida is up 54%. But if you dig further and you look at, well, what happened last year, California is up 25%, just 2023 to 2024, but Florida is only up 15%, so it's not interesting. It depends on where you look at the statistics, but the number is definitely rising.

Maiclaire Bolton Smith:

Well, and I'm glad you called out those two states. I mean those are the two that people talk about the most and I know we're going to dive a little deeper into this too, but let's take a step back and look at what is it about California and Florida on why they have become these examples on the strain on the insurance market?

Tom Larsen:

Well, I mean first it's important to note I gave you those numbers of 55% increase over the last, I'm looking at only the last five years, 2019 to 2024, but nationally it went up 44%. So a lot of that is a reflection of the COVID crisis and the inflation that came immediately afterwards. So that's a big part of it, but then even with that, California and Florida are a little bit higher. What's notable about those two is I think that most people think about it as you read the newspaper is summertime we read about Florida hurricanes. Florida hurricanes are costly and the repair and getting people back in the homes is costly and California, what do we have there? It's been wildfires for the last few years, so they are these distinct perils that are really driving some of the cost amplification that we're seeing.

Maiclaire Bolton Smith:

Sure, and that does make sense because wildfires and hurricanes have become such top news because they've been so devastating in recent years, but it's not just about California and Florida. I mean, I was chatting with a friend of mine that lives in Oklahoma and his insurance premium is three times what mine is and I live in California and it's got to be things like the severe convective storm risk across the middle of the country that's driving that, isn't it? What do we have to worry about outside of these two states that everybody talks about? I kind of feel bad for the rest of the country that no one talks about them and their rates are higher than ours.

Tom Larsen:

Absolutely. You hit it on the head, it's the middle of the country that's really driving the big increases in the insurance rates right now. In fact, if we were to look at the combined ratio is a really important statistic on how to evaluate the profitability of an insurance company and just to get to the end point is to look at a combined ratio of about 102 where a situation where an insurer pays out 102% of their premium in a year in total expenses. That's generally historically been about the breaking point of where they can sort of break even yet in the middle of the country, we've been hitting the entire industry hit 110 in 2023 so that they spent 10 cents more than every dollar than they brought, they spent a dollar 10 for every dollar they brought in. It is these true expenses that are really of insurers that are driving these rate increases.

Erika Stanley:

If you haven't had a chance to meet Cotality yet, come say hi. We help you see property from every angle by analyzing the nuances behind billions of data points across the globe. A link to learn more is in the show notes.

Maiclaire Bolton Smith:

Interesting. And that is because of the increased frequency of them having to pay out on things like hurricanes, wildfires, severe convective storms, damaging properties and a thousand people needing a new roof every other week or something.

Tom Larsen:

Yeah, I mean there's a lot to be said about that if we want to try to understand what's driving that, because if we want to fix it, we have to understand it, right? We need to be able to measure the key piece of it. So what is going on there and why does it seems such an aberration? The expectation now is with the asphalt shingle roof is the most common roof type in the US and it is fragile. You get hit by a hailstone, it breaks it, and the expectation now in much of the middle of the country is that you don't buy a roof anymore. Whenever there's a storm, you get the insurance company puts on a new roof. Now, that didn't use to be the case when we had different types of roofing and maybe it won't in the future, but the asphalt roof remains the most affordable type of roof, but it's very fragile and it is driving the costs a lot.

Maiclaire Bolton Smith:

Interesting. I use this example of premiums of my house here in California versus a friend in Oklahoma, but is it true that rates in California just are typically less than elsewhere in the country and is there anywhere that insurance rates are on the rise exponentially higher beyond what we've already talked about?

Tom Larsen:

Well, and high if we want to look at that really is how do we judge it from a risk basis. California, if you look as a fraction of the home value, the home reconstruction cost, which is the typical way we look at insurance as a rate, not as a premium, but as a rate. California is fairly low still, but the challenge with that is that the California, the housing costs are higher, there are higher housing costs, so you take a smaller rate times a larger number. California insurance is still up there, but you go to an area part of the country, and this is where the inversion occurs, is the homes are less costly, But they are paying a lot more. But that house, that's the affordability, that's the anchor from which somebody bought a house. So in the middle of the country it's more of a, that's where you start getting the affordability challenges as equally as in California.

Maiclaire Bolton Smith:

That's exactly where my brain is too because houses, the friend that I was talking to because of where they live versus where I live, the home prices are a lot different too. Yet their insurance is still almost three times what mine is, and I have friends and family that live in Texas as well that are saying the same, where the home prices are relatively compared to California significantly in some places a lot less yet the home insurance policies are so much higher.

Tom Larsen:

Absolutely. Texas follows the, we look at the same data points that I recited earlier from the s and p about it is that Texas insurance rates have gone up 2019 to 2024, about 55%.

Maiclaire Bolton Smith:

Wow.

Tom Larsen:

In the 2023 to 2024 timeframe, they went up 28%. This is much higher than California in a backdrop where nationwide the rates went up 24, but so Texas stands out as one of the highest in the country, the rate increase and it's driven from the severe convective storms.

Maiclaire Bolton Smith:

Sure. Well, and it's a 24% rate increase on a higher number that had increased so much 55% over the time period before. So it's like it increases and then the bigger number is increasing again, which is how we get to this nearly 75% increase over the next 15 years. But that's not it for Texas. Right. Texas obviously gets hurricanes along the Gulf Coast. There was the freeze events, the big one in 2021. There's been others since then as well too. There's been wildfires in Texas. I mean Texas has even had earthquakes. Not very big ones, but it kind of gets hit by everything these days.

Tom Larsen:

Absolutely. You nailed it. Maiclaire, Texas is a very large state. That large geographic area means you're exposed to a lot. The headlines last summer were the wildfires that extended out in the west. Now the area, the geographic area affected what's incredibly large. The number of homes was quite small, compare it relatively, but still was not insignificant. But we have those deep freezes which are really poignant and they can be quite expensive, especially because of the configuration of a modern home. And we've got floods, hurricane Harvey.

Maiclaire Bolton Smith:

That's right.

Tom Larsen:

Yes it is. That's a different part of the market and generally flood is not part of the homeowner's policy endorsement, but it triggers sort of a cascade of other losses. So there's a lot of exposure, a lot of things that can go wrong.

Maiclaire Bolton Smith:

So I guess thinking of that then Tom, Texas, but I mean other states too that how are they going to stress test the insurance industry knowing what they've had over the last few years and inevitably what's to come in the years to come?

Tom Larsen:

Well, you're seeing more reinsurance purchase now by insurers. What we've seen in the last few years. It's what are the perils that are viewed as material perils? It becomes an accounting term. Is that, is this material, can it materially affect Maya the operations of my business? And 10 years ago, if we were to take the time machine back to 10 years ago, the answer would've been hurricanes and earthquakes. But in today's environment, no. The perils that are viewed as material that can cause significant operations, operational challenges and require, should require reinsurance are include wildfires, severe storm and flooding. Even these deep freezes. So in addition to the earthquakes and hurricanes, and that really wasn't on the radar 10 years ago, but now it is on. It's in the boardroom. It's being discussed.

Maiclaire Bolton Smith:

Yeah, that is really interesting. Tom, you mentioned flood and how that being a little bit different and I want to talk a little bit about some of these government backed options that fill the gap for some of this insurance and floods. The perfect example of that with the National Flood Insurance Program, the NFIP, but is that sustainable with some of these government backed options that help with some of the insurance gaps and looking outside of just private insurance and can you talk about that perspective?

Tom Larsen:

Flood is a really difficult peril to insure here in the US for residential insurance, it's primarily insured by the National Flood Insurance Program, and so we have a jargon there. We talk about the NFIP, which is National Flood Insurance Program or private flood, which is they are the carriers that service the residential housing market that are not buying it through the NFIP. The commercial flood insurance market is as big as the personal lines and it is covered completely by commercial carriers so that there is a valid and viable flood insurance market. We see our Hurricane Harvey and with very large commercial flood losses, so we have the starter kit of this, but we have to take in the obvious shortcomings as well. I mean, if we want to try to paint this canvas completely, there is a very large gap in flood insurance we see in the us. If we look at the flood insurance gap of study after study shows that the National Flood insurance program does a great job. It covers the most severely damaged homes, but we see that it only covers about one third of the homes that are damaged in a flood. So there are two thirds of the homes are left on their own. They either repair it themselves or live in a depreciated home, a home that's not as nice as it was before the flood.

We don't want that. That is that flood gap. It's flooding. It's partly it's an urban thing. As we urbanize more, the floods come up a little bit faster, so we expect more floods in the future, so it's something that we can't lose sight of, but it is been untouchable. There are some nascent programs to go out beyond and as an optimist, and I think if you work in this business, you have to be an optimist. There is more data, a lot of it you try to dig in and say, what are the barriers? Why is it so hard to ensure? It's because the risk varies from house to house and you need to know more information and we're getting more of that information using AI and ml, those methods, we're able to get more information about a home and get to a point where we can have high confidence of the riskiness of a home and

Maiclaire Bolton Smith:

Interesting,

Tom Larsen:

Which leads to fewer underwriting mistakes for an insurer. And so that's greater confidence that you can create a business plan and achieve your goals.

Maiclaire Bolton Smith:

That is great. It

Tom Larsen:

Hasn't been accountability. You haven't been able to do that in the past.

Maiclaire Bolton Smith:

You read my mind there, Tom. That was exactly where I was going to go. Is the industry really starting to adopt more data and analytics and I guess specifically then with using data and analytics and maybe more predictive analytics and more robust modeling and data, is there actually a viable path forward for insurers specifically in these high risk areas?

Tom Larsen:

There are a lot of valid concerns about AI and the regulatory sphere, and we can read the NARC, the National Association of Insurance Commissioners has issued guidelines on the usage of it, but that's okay because this is an industry that's worked well within bounds. But the general concept that the successful insurers have been able to work with is go slow on your AI adoption and help build consumer trust and confidence that this is, it really does bring a value because it does, but it also sets up an expectation of gradual adoption.

Maiclaire Bolton Smith:

I think that's a great perspective, Tom, on slow and steady wins the race versus jumping all in, especially when things are evolving so much. Are there any examples across the industry where companies are having, I know if success is the right word, but are providing new opportunities that maybe they couldn't have done in the past because of technology and data that's now available particularly in these high risk areas?

Tom Larsen:

Maiclaire? There are, if you look at the landscape and you want to identify is where is there innovation on it? You don't generally see it in a lot of innovation in the admitted markets, and part of that is because of the structure of how the admitted markets work. The regulation really has a big influence of using historic, your loss experience. So you have to have the data

Then do all the analysis, then probe the rate, and then you get the rate 12 months into the future. So it's a very backwards looking in general, the regulation, it's been very effective in offering and really constraining prices and keeping a good, but it doesn't work well when the cost increase really rapidly and it takes a while and we have this crisis mode, and so you look, where do we look for innovation? And that's in the surplus lines. It's where can I create a new policy form? Maybe it add subtracts, it's a little bit different twist. And that's where you see innovators like the insurance program, Wiles insurance agency that come up with just a little twist that hey, makes it a more appealing package. It's a little bit more insurable. Certainly you can get the capacity, the amount of limits that you need. Interesting. And it's going to help us. It works as an incubator to help us test the things that work that are appealing to the buyers.

Maiclaire Bolton Smith:

Yeah, I love that example, Tom, and we actually did a podcast with Bob Feldman earlier this year too, looking specifically at what Wows insurance is doing to make insurability of, in particular high value homes and really high risk areas in California available and attainable. So I think that's a great example of what's being done, I guess that then leads into looking at home ownership across the us. What impact is this insurance crisis having on home ownership across the us?

Tom Larsen:

Well, it's an impediment, it's an increase, but these very large we've seen here, while they are large and material interest rates have gone up by interest rates have doubled in the last three years. So

It's difficult. How do you talk to someone who's they're just barely tipping over and oh, that increase isn't the big deal because everything else is going up as well. But it is a challenge and as a homeowner part of this increase, it's the uncertainty of this and we look at, because we want to start understanding what's going on here and we want to talk about why do the rates increase after these losses, why can't we just imagine a future where everyone anticipated it, that's part of it, and what will it look like as we return to normal? Because there are lots of symptoms that what we're at right now doesn't look like the last normal, and so it's reasonable to believe that maybe we're not at the normal, we're going to get back to a normal.

Maiclaire Bolton Smith:

Yeah, that was my question for you is how do you define normal in a situation like this?

Tom Larsen:

Normal is, I'm a homeowner too, and the ability to select and choose from well-capitalized insurers is what I feel is a good market where I can choose and I can go shop for rates and that's not really the status right now. We can find that in the data lines, surplus lines. So the insurance where I buy insurance is what was called admitted. They're regulated by the states. They pre-file their rates and it's where you get the most competitive rates when markets hit a crisis. If we want to call this a crisis right now, you'll start seeing more insurers going into what they call the surplus lines. It's custom insurance always available, but generally more expensive. What we're seeing right now in those, let's talk about those three states again, California, Florida and Texas. California has had a 60% increase, 23 to 24 1 year, 60% increase in the homeowner's premium in surplus lines. So more insurers are going there, so there's less availability and people are paying a higher price

Florida. And then we want to look at Texas, the same story. It's about 70%. So Texas, we're seeing that same stress that leads us to believe that probably we're not reaching back to that normal yet, but the counter one is Florida. Now, Florida has had these crisis for a little bit longer, but the year over year increase in surplus lines, 23 to 24 was only about 10%. So it's much smaller. Interesting. So there is hope that the new normal may look like the old normal. It's just going to take us a few years to get there.

Maiclaire Bolton Smith:

Interesting. Okay.

Erika Stanley:

It's that time again. Cotality just dropped new numbers about what's happening in the housing market. Here's what you need to know. Florida home prices are outpacing the national average, but Miami is topping the charts at 60% above Florida's average price. As a result, 500,000 people left Miami between 2019 and 2023. They headed to other areas of the state like Tampa, Jacksonville in Orlando to compound those soaring prices. The state's insurance market is on shaky ground with insurance costs out of sight compared to even a few years ago. Many Floridians are skipping coverage altogether. That choice is a risky one though, since many areas in Florida are projected to become some of the riskiest in the nation for natural hazards according to Cotality analysis. To find out more about the pressures affecting Paradise, visit Cotality.com/insights. There's also a link in the show notes, and that's the sip. See you next time.

Maiclaire Bolton Smith:

I think that really leads into a good place to end here. And if you look into your crystal ball, Tom, what do you think needs to happen, I guess to just keep home ownership secure in this rising insurance market

Tom Larsen:

To understand what needs to happen? What do we want it to be? We want to be in a place where homeowners can live in a home that they can maintain and keep in a good shape and afford to be able to do that now. But we're living in a society where things are more fragile. So I think that part of what we look at now is there's going to be more expense in building homes that are more resilient. There's going to be focus on

Doing the right thing. Yes, it is going to be a little bit more expensive than it was in the past, but it is going to be worth it. So we're going to look at that and so we back forward what needs to happen. There's going to be more discussion about what mitigations can I do to make my home more reasonable? There's going to be a lot more focus for insurers. We want. Part of the challenge right now, if we look at the current state is this huge runup because like you and most people, we have to set a budget and having these big disruptions in the cost, it's fairly upsetting. And so how can we get to a stage where the increases are not as, wow. Well, that will require a transition from backwards looking focused on the loss experience and more forward looking kind of loss rating for insurers that is be less susceptible to the tops of the waves. We can go through these cycles and pay that. And so those are some of the key elements of this future state that I think that we'll see. We're not going to be, we're not done hearing about those innovations and work on that.

Maiclaire Bolton Smith:

Well, Tom, I know none of this happens overnight, as you said. So I look forward to continuing this conversation with you over time as we continue to see how the market evolves. So Tom, thank you so much for joining me today on Beyond the Buildings by Cotality.

Tom Larsen:

Thank you. Maiclaire and I look forward to joining you in the future.

Maiclaire Bolton Smith:

And thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life producer Jessi Devenyns, editor and sound engineer Romie Aromin are facts guru Erika Stanley and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another conversation that illuminates the ideas that will define the future.

Erika Stanley:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? Tom Larsen is the Assistant Vice President of product marketing at Cotality, where he leads efforts to advance natural catastrophe, risk management, and post-disaster response technologies with a career dedicated to mitigating the impact of large scale disasters. He has authored research, participated in industry panels, and held leadership roles in professional associations. Tom's achievements include transitioning risk models to advanced computing platforms, creating the EQUECAT Cat Watch newsletter and integrating catastrophe models into ensure focused solutions. He joined Cotality in 2013 following its acquisition of EQECAT, where he served as senior vice president and chief product architect.

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