Homeowners Insurance Changes in Coastal Virginia: Causes and Consequences for Shoreline Communities

Private Homeowners Insurance and Adaptation

Homeowners insurance is becoming more costly along the Atlantic Coast and coverage is changing, especially for wind damage.  Some see this as a result of insurance companies responding to the first indications of human-caused climate change, showing up as extreme weather events along the shoreline.  If true, these insurance changes could be used to encourage people to adapt to climate change.

The reality, uncovered in a year-long study by Wetlands Watch, is much more complicated and confused.

We have been reading that private insurers are concerned about human-caused climate change impacts, such as sea level rise.  Since 2007, Wetlands Watch has seen insurance coverage in Coastal Virginia get more expensive with changing coverage and deductibles.  If these changes are due to concerns about climate change impacts, we reasoned it might be possible to use insurance as a tool to speed adaptation along the shoreline.

We secured a grant from the Virginia Environmental Endowment and, together with funding from West Wind, continued our work exploring private sector attitudes and views toward sea level rise and adaptation.  In the end, we found little private-sector adaptation activity or awareness, even among the insurance industry.  

This brought us to re-examine assumptions that shoreline homeowner’s insurance price increases to policyholders really were based on concern about increased coastal risks due to human-induced climate change.  We needed to understand homeowner’s insurance at the retail, street-level, not at the national or international level that was the focus of other insurance studies.

What this first-ever, comprehensive look at insurance revealed was insurance companies are not responding to projected climate change impacts as much as they are:

  • Noticing a periodic cycle of increased tropical storm activity that began in the mid-1990’s,
  • Trying to avoid more storm-based lawsuits like those in the Gulf of Mexico after Hurricane Katrina,
  • Responding to tougher economic times due to the recession, and
  • Employing more sophisticated ways of figuring risk based on personal information data: income, occupation, claim history, location and worth of house, etc.

The way most homeowner’s insurance premiums are calculated makes it very hard to find and put a value on the part of a policy increase due to any one of these changes. As a result, using homeowners insurance to send a climate change risk signal into coastal communities and to individual policyholders is not effective under current conditions.

However, there is no confusion about the fact that homeowner’s insurance costs are rising and coverage is changing, causing shoreline homeowners to worry.  Worse, these private insurance changes are coming as changes made by Congress to the National Flood Insurance Program (NFIP) are being felt, putting even more pressure on shoreline households and entire coastal communities.

These increased costs will start to affect home values and the ability to sell shoreline homes, since these insurance changes really kick in with new wind and flood policies needed by new homeowners.  Economic impacts fall harder on retirees and homeowners with modest incomes.  

Letting the market work its will risks the “gentrification” of the ocean/resort coast, as modest homes are replaced by larger homes and rental properties financed by people with higher incomes, who can absorb higher insurance costs.  In shoreline communities with lower real estate demand, or in communities with working waterfronts, these pressures can result in a “hollowing out” of the communities, lowering property values.

At the same time, interfering with the market by capping insurance premiums or assuming the high cost wind damages in risk pools causes other problems.  The experience in other coastal states, especially those along the Gulf of Mexico, is that private insurers will flee markets where they are unable to make profits, due to price caps.  Creation of risk pools (where the wind damage coverage is taken off of private polices and pooled in a state-run insurance program)  can appear to lower private insurance rates, but they usually result in higher premiums over the long run or special assessments that offset any premium discounts, meaning homeowners pay more.  A 2008 study by the Virginia Bureau of Insurance supported these conclusions.

Private homeowners coverage and government insurance changes will continue - and accelerate - in shoreline communities.  Impacts will be felt in dramatic fashion for some, as with Hurricane Sandy’s impact and rebuild.  For most the changes will be felt in a gradual and growing way as public and private insurance costs rise to reflect the risks of living along the shore.  As insurance eventually includes human-caused climate change impacts, these pressures will accelerate.

There is a clear need for a public conversation on where these changes will take us and what we can expect and/or tolerate in our shoreline communities.  Without these conversations and understandings, we risk a chaotic, expensive, and unproductive transition along our coasts.