SUSTAINABILITY
insurers in more regulated states handle rate adjustments compared to those in less regulated states .
The study highlights several significant aspects :
• Regulatory frictions : States vary in their regulatory stringency , which influences how easily insurers can adjust rates . High friction states face more obstacles in rate adjustments , leading to lower frequency and magnitude of rate changes .
• Cross-Subsidisation : Insurers offset the constraints of high friction states by increasing premiums in low friction states , spreading the financial burden unevenly .
• Decoupling of rates and risks : Over time , the misalignment between rates and actual climate risks grows , particularly in high friction states . This decoupling results in inefficient risk distribution and potentially inadequate coverage for homeowners in high-risk areas .
• Financial impact on households : Homeowners ’ insurance premiums can constitute a significant portion of household expenses , sometimes as much as 60 % of mortgage interest costs , underscoring the financial burden on families in high-risk and highfriction states .
Key findings reveal that insurers in highly regulated states adjust their rates less frequently and by smaller amounts after experiencing losses . This is due to the stringent regulatory environments that limit their ability to swiftly align
US
$ 3.35BN
IS THE SUGGESTED INVESTMENT IN RESIDENTIAL RESILIENCY BY DELOITTE TO POTENTIALLY SAVE INSURERS UP TO US $ 37 BN BY 2030
premiums with the increased risk . As a coping mechanism , insurers compensate for these limitations by adjusting rates in less regulated states , effectively cross-subsidising between states . This behaviour leads to a misalignment between insurance rates and actual risks , creating distortions in risk sharing across different states .
Climate risk significantly impacts home insurance premiums through various mechanisms . Firstly , the increasing frequency and severity of natural disasters such as wildfires , hurricanes and floods lead to higher claim payouts by insurers . These elevated payouts necessitate higher premiums to ensure the financial solvency of insurance companies . The rising cost of claims directly correlates with the premiums charged to policyholders to cover these potential future losses .
164 September 2024