How climate change exacerbates insurance supply

For most people, purchasing a home is the biggest financial event of their lives. Unless an individual or a couple happen to have the cash on hand to pay for a home outright, securing financing is a necessary step – as is finding adequate homeowners insurance. Homeowners insurance isn't just a requirement of lenders, it's crucial to protecting the investment in a home.

The problem is that the process of securing homeowners insurance is thornier than ever before. Economic volatility over the last few years has pushed inflation and interest rates sky-high, resulting in eye-popping premium increases. At the same time, climate change and increasingly severe natural disasters like hurricanes and wildfires have upended regional markets, leaving millions of people in states like Florida and California without coverage. 

The combination of skyrocketing insurance premiums and reduced coverage options has left homeowners in a bind. Many can't get the necessary coverage that they need. For those who maintain homeowners insurance protection, carriers are raising rates to the point that some have been forced to reduce their coverage in order to maintain protection at a more affordable cost. 

This problem is so pressing that the National Association of Insurance Commissioners (NAIC), a group that represents state insurance regulators, is embarking on a sweeping investigation to better understand exactly why homeowners insurance is so costly and supply is hard to come by. In one of the largest efforts yet to investigate this issue, the group is asking 400 insurance carriers for detailed data points like their history of claims payouts in different zip codes and deductible size. Much of this data will also be shared with the Treasury Department in the hopes that it could help the federal government to better protect property owners in high-risk areas.

Don't blame it on the rain

Climate change and resulting severe weather events have received much attention as the root cause of the double whammy dilemma of the insurance supply scarcity and rising premiums. While climate change has played a role, there is another problem lurking in plain sight. What is not discussed is the sheer challenge and complexity of bringing new insurance products to market rapidly and updating them once in market. Making matters worse are the hurdles of launching insurance programs digitally so that consumers have the experience they need and want for buying insurance and managing claims in the digital age.

The mess in the insurance market as a result of climate change is a symptom of not being able to react fast enough to the volatility of a changing market. In other words, climate change isn't to blame for all the mess in the insurance market – it's the underlying issues of complexity within the insurance industry that are exacerbated by climate change.

Infrastructure issues

There is one primary pain point that fundamentally needs to change to make things less complex: The plumbing and pricing of the insurance industry. Despite the complexities of the infrastructure that stands up parts of the insurance industry, there are carriers and consumer brands that want to quickly serve the insurance needs of homeowners across the country. The problem is that it's time consuming and requires a huge investment upfront. In order to stand up a new insurance program, it takes around three years to get these products up and running. Even if they were able to get these products to market more quickly, large brands and carriers still lack the technology and infrastructure to distribute insurance products digitally. 

This is usually where rate service organizations (RSOs) enter the picture. RSOs are an integral part of the insurance ecosystem. They have policies and rates that have already been approved by regulators, allowing organizations to work with pre-approved insurance policies. Essentially, RSOs provide the architectural plans of an insurance program.

While this might sound like a great solution, the reality is that working with RSOs still requires a lot of time and money to get new insurance products to market. The 2024 State of Digital Insurance Report from Sure found that 75% of organizations spend at least $1 million annually to execute these programs — and 31% report spending $10 million or more. Moreover, over 70% of respondents feel that RSOs require a massive amount of effort to get insurance programs off the ground. Many insurers have been forced to deal with this mismatch of effort and ROI because there simply aren't better options in the market.

With only 12% of survey respondents very satisfied with their RSOs or ones they are evaluating, it's clear that steps need to be taken to make the process of launching and maintaining new insurance programs less complex, and as a result much faster. Decades old infrastructure is not capable of keeping up with the needs of present day carriers and brands that are looking to extend insurance to customers. While RSOs can provide the architectural plans needed to stand up new insurance products, it can still take upwards of 30 different vendors to launch something like an embedded homeowners program for an online lender. 

While complexities of the insurance industry aren't new, the worsening impact of climate change in high-risk areas has breathed new urgency into fixing the issue. The insurance industry is failing consumers, and this failure will only be felt more and more acutely in the years to come. Now more than ever, we as an industry need to rethink how insurance products can be combined with modern technology solutions to better serve consumers when they need protection the most. The demand is there – we just have to make the process of meeting demand less complex.