Homeowners Insurance: The Other Affordability Crisis

This article first appeared in the May/June 2025 issue of Pro Builder.

The wildfires that swept through two Los Angeles neighborhoods in January 2025 destroyed 11,434 homes valued at nearly $30 billion. Less than two years earlier, a wildfire that took out most of Lahaina Town on the Hawaiian island of Maui leveled 1,500 homes valued at about $6 billion. And in October of last year, flooding from Hurricane Helene demolished 1,000 homes and severally damaged another 74,000, mostly in western North Carolina, resulting in an estimated $12 billion for replacement and repair costs.

As tragic and costly as those—and dozens of other billion-plus-dollar natural disasters across the U.S. in recent years—have been to communities and residents, a relatively ignored but increasingly troublesome hindrance to rebuilding and overall housing affordability is the impact of such events on the home insurance marketplace.

Having spiked nearly 20% over the past two years, home insurance costs nationwide are projected to rise another 8% in 2025, bringing the average annual premium to $3,520, according to Insurify, a digital insurance marketplace.

With that, the withdrawal of insurance companies from high-risk areas limits competition and raises premiums even higher. This further hinders home shoppers from qualifying for a mortgage loan, as that cost is calculated in their debt-to-income ratio. And in places where insurance is extremely expensive or difficult to obtain, it can even prevent some consumers from buying a home at all, creating a supply problem for home builders.

“We had builders in Louisiana facing foreclosure because their buyers couldn’t qualify for loans once homeowner insurance premiums had doubled,” says Buddy Hughes, a Lexington, N.C., home builder and 2025 chairman of The National Association of Home Builders (NAHB).

Surveys of NAHB members showed that while single-family home insurance cost issues were most pronounced in regions prone to catastrophic events, Hughes says, insurance problems for multifamily developers and property owners were more widespread.

And while insurance watchdogs see a calming trend so far in 2025, the fear is that one more major natural disaster could spike insurance costs again.

Impacts on Housing Supply and Affordability

For the past four or five years, insurance costs routinely increased by 30% to 50% for multifamily and large-scale developers, says Thom Amdur, executive director of Fairview Housing Partners, a nonprofit affordable housing organization in New York City.

“We need 5 million to 7 million more housing units in this country, and the rising cost of insurance has a direct, measurable impact on that,” he says. “Insurance costs have been the fastest rising expense, and they impact financing. It’s especially difficult for affordable housing developers because we can’t raise rents to offset higher operating costs.”

High insurance costs severely slowed construction of condominiums in California, often an entry point to homeownership, says Dan C. Dunmoyer, president and CEO of the California Building Industry Association, in Sacramento, Calif.

When insurance companies started non-renewals for condominium associations and then left the state, he says, it meant that instead of a homeowners association (HOA) paying $40,000 per year for the master insurance policy, they sometimes had to pay more than $2 million to a European company to be insured at all. “HOA dues went from $250 a month to $1,750 a month, which was impossible for most owners,” Dunmoyer says.

The Rise (and Risk) of Resilient Homes

Insurance companies rely on risk management and investments to balance their ability to pay claims while maintaining profitability. If a home is built to better withstand a fire, flood, or high winds, it logically poses less financial risk to an insurance carrier or underwriter.

“We can’t control the increasing intensity of weather events, inflation, or investment outcomes for insurance companies,” Amdur says, “but we can invest in design and construction improvements that harden properties to decrease the size of claims.”

In fact, the insurance industry has invested more than $40 million in building resiliency research through the Insurance Institute for Business & Home Safety (IBHS), says Leslie Chapman-Henderson, president and CEO of the Federal Alliance for Safe Homes (FLASH), a nonprofit consumer advocacy organization based in Tallahassee, Fla., that is dedicated to safeguarding families from and strengthening homes against natural and manmade disasters.

“Research and data from IBHS and others are a cornerstone that validates how much improved building codes can mitigate risk for everyone,” she says. In Alabama, Chapman-Henderson points out, insurance costs are lower because the state upgraded the building code and provided grants that would encourage the construction or retrofitting of more homes to meet IBHS Fortified Home standards—a set of voluntary construction practices designed to improve a home's resilience against severe weather.

Just ask Tom Hoban, president and CIO of Kitson & Partners, the developer of Babcock Ranch in southwest Florida. In 2022, as Hurricane Ian left an estimated $112 billion in damage in its wake across that state, the homes, businesses, and on-site water and energy utilities within the 17,000-acre planned community emerged basically unscathed.

“Our builders build to no less than a bronze level of the Florida Green Building Coalition standards, which is which is slightly better than the Miami-Dade code,” he says, referring to arguably the most stringent building code in the country for resiliency.

As a result, Hoban has been lobbying the insurance industry to consider assessing replacement and repair risk differently for Babcock Ranch residents and businesses. “We’re working to educate them to recognize the true (lower) risk of Babcock Ranch and advance their perspective for underwriting for it,” he says. “If you’re going to price risk appropriately, then you need to take that kind of micro-level view.”

In Alabama, says Chapman-Henderson, insurance costs are lower because that state upgraded its building code and provided grants that would encourage the construction or retrofitting of more homes to meet IBHS Fortified Home standards—a set of voluntary construction practices designed to improve a home’s resilience against severe weather.

In addition, that state and some others require that insurance companies provide discounts for homeowners who incorporate features that make their homes resilient to wind, hurricanes, wildfires, or other specific regional hazards, she says.

Amica Insurance, in Lincoln, R.I., offers premium discounts for homeowners who adopt certain loss-mitigation measures, including storm shutters, impact-resistant glass, newer roofs, or achieving IBHS Fortified Home certification, says Lynn Malloney, the company’s VP of actuarial. “By building a structure using more resilient materials, and to stricter codes, homeowners reduce overall risk by lowering both loss frequency and severity."

As newer and more sources of property data become available to further validate the impact of loss-prevention building features, such features will likely drive more premium discounts in the future, Malloney says.

“Insurance companies are also seeing that the building code improvements and investment in retrofitting homes for resilience reduces claims,” adds Florida Insurance Commissioner Michael Yaworsky. He recalls Hurricane Milton, which hit one of the most resilient sections of the state in October 2024. “Damage was expected to be more than $250 billion, but it was actually about $5 billion to $7 billion.”

Florida has invested more than $1.5 billion of state revenue to help homeowners fortify their homes, he says. Insurance companies must provide credits for specific mitigation measures, which can lower insurance bills by as much as 40% to 55%.

Federal support for mitigation grants and tax incentives to fortify existing homes also appears to be gaining traction,  says Austin Perez, senior policy representative on insurance with the National Association of Realtors (NAR). “The challenge is finding the funds to invest in risk mitigation (that would) make homeowners insurance more affordable.”

Sometimes, however, government-driven efforts backfire. In North Carolina, regulations force builders to elevate homes built within 1,500 feet of the waterline to mitigate the risk of  being washed away by storm surges. “Steps like that help homeowners get insurance, but it’s very expensive (to build),” Hughes says.

In California, insurance companies must provide a discount to homeowners who participate in the state’s “Safer from Wildfires” program, but builders and others question how much it moves the needle.

“A 3% discount is common but doesn’t provide enough incentive to offset the cost of building or retrofitting a house to be resilient to wildfire,” says Chris Kilpatrick, president of Foothill Construction General Contractors, in Glendale, Calif., who is involved in the rebuilding efforts following the LA wildfires.

The “Resilience Policy Resource Guide and Retrofitting Program Playbook for State Insurance Regulators” from FLASH and the National Association of Insurance Commissioners (NAIC) reviews policies that link resilient homes with affordable insurance. 

“There are 17 states that are either planning or have in place grants to help homeowners pay for retrofits for resilience such as winterization in Minnesota and floods in Maine, not just hurricanes,” Chapman-Henderson says.

“Insurance companies understand that they need to encourage resilient building,” she adds. “Builders understand that code changes are making homes insurable and are also reducing their long-term operating costs.”

Policies That Address Insurance (Sort Of)

State insurance commissions must approve rate hikes for insurance companies, which Kilpatrick and Dunmoyer believe is one reason why California’s insurance situation is so dire.

For years, California’s insurance commission denied rate increases, which caused many companies to leave the state entirely.

“States must balance home insurance availability and affordability,” NAR’s Perez says. “Artificially capping rates may make insurance temporarily affordable, but if companies can’t cover their costs, they’ll exit the market. Affordability and availability are two sides of the same coin.”

California also is among 33 states that offer a “Fair Access to Insurance Requirements” (FAIR) or equivalent plan, a state-funded program that enables homeowners to obtain insurance when private companies leave the market.

It sounds good in theory, but in practice FAIR plan rates are typically 300% to 500% more than standard rates and provide less coverage, Dunmoyer says. “It’s weird to support a rate increase by an insurance company, but that’s because an increase of 30% on a $40,000 annual policy is much better than being forced to pay the FAIR plan rates.”

Florida’s Citizens Property Insurance Corp., which also provides insurance for homeowners who can’t obtain private coverage, peaked at 1.38 million policies in 2023, Yaworsky says, and currently has about 820,000 policyholders.

According to Yaworsky, legislative tort reform, which made it harder for homeowners to sue insurance companies, encouraged carriers to return to the state. That, in turn, increased competition and helped reduce premiums. Six of the top 10 insurance companies have increased their business in Florida during the past year, he points out, a few of them without raising premiums.

A short-term solution to insurance issues is for lenders to use the “catastrophe model” for their insurance evaluation, says Danielle Lombardo, a New York City-based managing director and chair of the North American real estate, hospitality, and leisure division at WTW, a global insurance brokerage.

It works like this: Instead of automatically assuming that a $50 million project needs $50 million in insurance coverage, she says, lenders base their insurance requirements on extensive data of a building’s characteristics and probabilities of specific threats.

“Instead of a $4 million bill for full coverage, a data-driven approach could bring insurance costs down to $1 million,” Lombardo says. “I think Freddie Mac and Fannie Mae could lead the way on this. I understand they don’t want to take on insurance risk, but a data-driven approach could reduce costs and allow transactions to go forward.”

Amdur suggests that a federal program that offers a guarantee similar to FDIC insurance for banks for insurance companies could be helpful to encourage carriers to return to high-risk markets.

Others have floated the idea of a financial model similar to a 401(k) retirement account, in which an insurance carrier guarantees a certain payout for losses and the homeowner invests in an account dedicated to funding the balance.

“The time to reform insurance regulations is now, especially in California,” Kilpatrick says. “Every client who is rebuilding, and everyone in the building industry, is interested in resilience, especially fire-resistant construction. Insurance reform could be done in a collaborative way involving consumers, builders, and the insurance industry, along with regulators.”

Adds Hoban, “We’re not foolish enough to think there’s one silver bullet out there to solve this challenge for us. It has to be a consortium of insurance companies who believe in our vision, understand the data, and apply a risk-adjusted basis to us versus a community down the street.”

Related Reads:

• Challenges of Rebuilding After Disaster
• How Regional-Specific Home Design Can Boost Resiliency
• Where are Insurance Costs Rising Most?