articles Ratings /ratings/en/research/articles/241031-sustainability-insights-rising-insurance-costs-and-mounting-affordability-challenges-could-weigh-on-some-u-s-13300821.xml content esgSubNav
In This List
COMMENTS

Sustainability Insights: Rising Insurance Costs And Mounting Affordability Challenges Could Weigh On Some U.S. Governments' Creditworthiness

COMMENTS

U.S. Public Finance Housing Rating Actions, Third-Quarter 2024

COMMENTS

U.S. Municipal Water And Sewer Utilities Rating Actions, Third Quarter 2024

COMMENTS

U.S. States' Fiscal 2023 Liabilities: Stable Debt, With Pension And OPEB Funding Trending Favorably

COMMENTS

U.S. Local Governments Credit Brief: California School Districts Means And Medians


Sustainability Insights: Rising Insurance Costs And Mounting Affordability Challenges Could Weigh On Some U.S. Governments' Creditworthiness

This report does not constitute a rating action.

Higher Housing And Insurance Costs Could Constrain Economic Growth And Weigh On Government Credit

Why it matters:  By 2022, more than 55% of households earning the median income or lower were spending over 30% of disposal income on housing costs (also known as housing burdened), according to the U.S. Census Bureau's American Community Survey data. Existing affordability challenges are amplified when combined with costs from increasingly frequent and damaging storms and flooding. And weaker economic growth and property value decreases could occur in the long term without offsetting tax-base growth. This confluence of events could lead to a downward credit trend for some U.S. governments.

What we think and why:   When higher insurance premiums compound existing housing affordability problems, it can affect location and purchase decisions for homebuyers and employers. If these conditions persist, it could lead to lower taxable property values, affecting local government revenues and long-term growth. Playing catch-up to replace losses keeps governments from pursuing new economic growth and can affect long-term financial stability.

image

Insurers' Cost Recovery Typically Results In Higher Underwriting Actions

The rising trend of global economic losses from climate hazards averaged almost $333 billion annually from 2013 to 2023 (see chart 1).   Insurers' relatively high credit quality is supported by decisions to limit losses and exit unprofitable businesses in response to extreme weather-related events. Economic and population growth, as well as claims inflation, are the main drivers of this trend, while climate change contributes to the volatility of both event frequency and severity. (See "Insurers Focus On Underwriting To Tackle Climate Risk," published Sept. 10, 2024, on RatingsDirect.)

Reinsurance costs for insurers also contribute to higher premiums.   During the Jan. 1 to July 1, 2023, renewal period, property catastrophe reinsurers raised rates in the U.S. by 20%-50%, according to reinsurance broker Guy Carpenter & Co. Since insurers pass these costs along to policyholders (to the extent allowed by state regulators), premiums continue to rise. As insured losses mount, rising homeowner premiums cause housing affordability to fall.

Chart 1

image

Existing Home Affordability Challenges Are Exacerbated By Costlier Insurance

Housing affordability is decreasing in many places in the U.S., even before accounting for the cost of insurance.   The median U.S. home price reached 5.5x the median household income in 2022--the highest level since the 1960s. Since 2022, affordability has eased slightly in some places, but the long-term trend points to a growing challenge for state and local governments. A prolonged trend could affect revenue-generating capacity and economic growth, both key factors for government creditworthiness.

The affordability challenge is particularly visible in urban counties and coastal areas, where the proportion of households spending more than 30% of their income on housing can exceed 50% (see chart 2). Some of these areas overlap with states where homeowners' insurance premiums have increased the fastest in the past year, including Arizona, Illinois, Texas, and Utah.

Chart 2

image

Rising insurance premiums can also create a long-term drag on home prices.   In the near term, higher premiums can make it more difficult for middle- and lower-income households to afford housing, particularly in already high-priced areas. (See "The Impact Of Rising Insurance Premiums On U.S. Housing," published April 22, 2024.)

Chart 3

image

In some states, average homeowners' premiums written by the top 10 insurers increased by more than 50% between 2019 and 2024 (see chart 4).   In states where insurance rates are increasing rapidly and median home price-to-income ratios are well above the national average, we could begin seeing affordability constrain growth in property values and affect households' choices about where and what to buy. Furthermore, a lack of affordable housing can affect employers' ability to attract and retain workers, and local governments' ability to sustain economic activity and increase their populations over time.

Chart 4

image

U.S. States May Fill The Gap Left By Private Insurance

As insurers change coverage and availability, the financial implications for states who support residents through insurance-of-last-resort programs are growing.

States can implement support mechanisms, including reinsurance programs or state-sponsored insurers of last resort, to support homeowners unable to obtain insurance.   As part of the 1968 Civil Rights Act, Congress created the Fair Access to Insurance Requirements (FAIR) program to provide a vehicle for homeowners experiencing discrimination or living in high-crime areas to purchase insurance. Initially 26 states adopted such programs and, in the decades since, other states have joined (see chart 5). Furthermore, many states expanded coverage to help homeowners and corporations get insurance even in high-risk areas exposed to physical risks from hurricanes, wildfires, or tornadoes.

Chart 5

image

Credit risk to U.S. states is twofold if insurers exposed to costly claims from residents and businesses raise premiums or cease operations in high-risk areas.   Recovering from a disaster, or replenishing reserves for insurance programs of last resort, can take resources and funds away from other priorities, such as pensions, Medicaid programs, and infrastructure investment. Frequent and recurring exposure to storm events, coupled with rising insurance rates, could cause economic growth to stagnate or decline, particularly if insurance premiums become a heavy burden on taxpayers, or if states have to increase assessments to fund statewide insurance. Slowing demographic growth could lead to limited economic expansion and dampen revenue trends or reduce revenue-raising options. Although these trends might not immediately affect U.S. state credit quality, in the long term, it could be an indirect driver of lower ratings.

Affordability Considerations Can Influence Our Credit Analysis

It can be difficult to predict how, where, and when affordability considerations might develop, the severity and distribution of their effects, or how and when creditworthiness might be affected. However, several aspects of our analysis can affect our view of the financial health and stability of U.S. governments' annual expenditures and balance sheets (see chart 6).

To effectively incorporate these factors, our analysis considers the additional costs and liabilities to offer insurance of last resort where private insurance is costly or unavailable for residents. Our view of debt and liabilities can also be informed by investments in adaptation and resilient infrastructure to manage vulnerability to physical climate risks, resulting in a higher debt load over time. Finally, our forward-looking view of gross state or gross county product could reflect dampening tax-base or population trends.

Chart 6

image

Proactive Preparation And Climate Adaptation Investments Could Keep Insurance Premiums In Check

Highly experienced management teams across the U.S. typically use a variety of techniques to reduce the potential for operational, economic, and financial impacts of acute physical risk events.   If an issuer's strategy to manage physical risk exposure succeeds in reducing insured losses following a disaster, it could help to stem future increases in insurance premiums.

Consistent with our criteria for analyzing U.S. governments and not-for-profit enterprises, we consider how issuers' risk-management practices might offset exposure to physical risks. In our view, robust disclosure of evolving risks and integration of climate and physical risks into financial and capital planning could reduce governments' vulnerability to those risks. This could take the form of investments in infrastructure hardening, integrating climate resilience into building and development codes, emergency plans that consider a forward-looking view of hazards rather than just focusing on historical events, and bolstering reserves to cover initial costs following an acute weather event.

Chart 7

image

Rising Insurance Costs Can Weigh On Home Values And Dampen Long-Term Growth

In recent years, the ability to own a home has become increasingly out of reach for many Americans, given rapidly rising prices and higher mortgage rates.   The ongoing growth in insurance premiums only exacerbates the problem for local governments, because without tax-base expansion resulting from a strong housing and commercial property market, economic growth prospects could be limited and revenue generated by property taxes is constrained.

Homeowners' insurance premiums will continue increasing, particularly in places where insurers are grappling with escalating losses from severe weather events.   In states where insurers are unable to achieve underwriting profitability, homeowners could have difficulty securing private coverage altogether (see "Record Weather-Related Losses Hit U.S. Homeowners Insurers And Pose Challenges In Estimating Catastrophe Risk Charges," published Sept. 3, 2024). Rising rates of participation in state-sponsored FAIR plans in states like California and Florida indicate this is already occurring. For some U.S. states, if they are the last insurer standing, they may face a choice between maintaining their own balance sheets or ensuring the financial and economic stability of their residents and local governments.

Olivia Fellbaum, James Patterson, and Robbie Whelan contributed research for this report.

Related Research

Primary Credit Analysts:Sarah Sullivant, Austin + 1 (415) 371 5051;
sarah.sullivant@spglobal.com
Jane H Ridley, Englewood + 1 (303) 721 4487;
jane.ridley@spglobal.com
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
geoffrey.buswick@spglobal.com
Secondary Contact:Nora G Wittstruck, New York + (212) 438-8589;
nora.wittstruck@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in