Housing Coalition Calls on Lawmakers to Address Rising Insurance Costs
Annual premium increases for affordable housing sites are ranging from 30% to 100%.
A broad coalition of groups representing America’s housing providers, lenders, and residents recently sent members of Congress and the Biden administration a letter outlining a number of bipartisan policies to address the causes of rising insurance premiums across the nation’s housing market.
The letter highlighted the fact that as of the fourth quarter 2023, U.S. property insurance rates have increased for 25 consecutive quarters. And U.S. casualty insurance rates have increased for 17 consecutive quarters. Further, over the past three years, insurance premiums have been subject to unprecedented increases, with providers reporting annual premium increases ranging from 30 percent to 100 percent for affordable rental housing communities.
More Disasters, More Insurer Failures
The letter also highlighted the volatility in the insurance market over recent years. Insured losses arising from natural disasters were calculated at $121 billion and almost $125 billion in 2021 and 2022, respectively, which are both well above the 10-year average of $81 billion. Last year saw a record high 142 insured natural catastrophes across the globe, and insured losses exceeded $100 billion for the fourth consecutive year.
As a result of this sharp upward trend, the letter notes that many insurers have simply ceased to underwrite multifamily or other similar property casualty policies. For example, at least 15 insurance carriers in Florida have become insolvent since 2020, including United Property & Casualty Insurance Company, a significant regional insurance carrier. In Louisiana during a similar time period, at least 20 insurers became insolvent or left the state entirely. In California, major insurers such as State Farm, Allstate, and AIG all discontinued underwriting new homeowners’ insurance policies due to several natural disasters. And while these impacts have been publicized for their significant effect on the single-family housing market, the letter notes that the multifamily rental housing space has seen similar, if not worse, trend lines.
Proposed Solutions
In an appendix the letter offered some solutions meant as a starting point for the lawmakers and the Biden administration to consider to address rising insurance costs and their effect on housing affordability. The letter cites the following possible solutions:
Federal backstop or guaranty. A federal backstop (i.e., guaranty) for catastrophic coverage above an established dollar amount threshold is an option that has been deployed in other instances where market solutions have been inadequate.
Adjust OCAF methodology at HUD. Under Section 524(c) of the Multifamily Assisted Housing Reform and Affordability Act of 1997, the HUD Secretary is authorized to annually adjust rents for Section 8 housing contracts (following the initial renewal thereof) by an Operating Cost Adjustment Factor or on a budget basis upon the request of the applicable owner and approval by HUD. The letter says, in recent years, OCAF adjustments have not accurately reflected unprecedented increases in commercial property insurance rates nationwide.
Modernize and coordinate insurance requirements for federally backed loans. Several federal agencies, including HUD, FHA, Fannie Mae, Freddie Mac, Veterans’ Affairs, and USDA, among others, provide or guarantee federally backed loans within the affordable housing market nationwide. However, many of these loans are subject to very stringent insurance requirements, including, but not limited to, minimum insurance coverage amounts for the term of the loan, maximum deductible amounts per occurrence, total insurable value minimums, coinsurance maximums, and minimum business income insurance covering perils including windstorms, floods, earthquake, and terrorism, among others. The letter asks the administration and Congress to encourage appliable federal agencies to revisit their insurance requirements.
Expand reach of existing federal grants and programs. Legislation has been passed in recent years that contain a number of programs that can be repurposed with congressional direction and/or through agency action that may help alleviate the crisis in the insurance markets. These include weatherization assistance program funds, community development block grants, and FEMA’s flood risk mitigation grant programs.
Expand the Liability Risk Retention Act. The letter asks lawmakers to revise and expand this law to allow Risk Retention Groups (RRGs) to insure the property of affordable housing providers by offering coverage not presently available or affordable in the commercial market.
The Nonprofit Property Protection Act (NPPA) has been introduced previously on a bipartisan basis and would allow 501(c)(3) nonprofits that acquire their insurance from their own RRGs to get the property coverage that fits their needs and would expand insurance capacity and risk management for nonprofits. The letter urges Congress to consider expanding the availability of RRGs to affordable housing providers regardless of their tax-exempt status.
Establish federal support for community-based insurance. Community-based catastrophe insurance (CBCI) is defined as disaster insurance arranged by a local governmental or quasi-governmental body or community group covering a group of properties within the community. The letter suggests that the Biden administration and Congress take steps to allow federal agencies, like HUD, USDA, VA, and FHFA, to help finance CBCI policies.
Support affordable housing through the Federal Home Loan Bank (FHLB) system. Insurance companies have been members of the FHLB system since its inception and have become an increasingly large segment of its membership. FHLB banks offer insurance companies extremely competitive interest rates compared to commercial lenders. The letter suggests there is an opportunity to require property and casualty members to provide a minimum level of flexible and/or subsidized coverage for affordable rental housing. Additionally, insurance FHLB members could be required to invest in and/or lend to affordable housing properties.
Expand Fair Access to Insurance Requirements (FAIR) Plans. The Urban Property Insurance Protection and Reinsurance Act of 1968 established FAIR Plans for states to adopt to provide more insurance options to homeowners and mitigate the costs of urban riots. FAIR Plans are generally backed by all private insurers in a given state, and each insurer shares profits and losses proportional to its market in the state.
Over recent decades, FAIR Plans have served as a source of insurance for homeowners who live in high-risk areas and own high-risk properties, often located along the ocean or near frequent wildfire areas. As a last-resort option for most individuals, the plans tend to be expensive and offer limited protections compared to the open market.
Given the increasing reliance on FAIR Plans in certain states, the letter suggests lawmakers investigate the potential for expanding FAIR Plans that may serve as a compliment to the private insurance market and, in doing so, help alleviate the pressures of rising costs associated with insurance premiums, particularly in jurisdictions that are prone to natural disasters.
Use federal resources to incentivize state and local relief. The letter notes that several states have attempted to address insurance-related challenges through legal reforms. For example, in 2023, Florida passed HB 837 in light of the insurance crisis in that state. The letter notes that previous efforts examining the impacts of legal reforms have found a correlation between certain policy changes and insurance costs. In 2004, the Congressional Budget Office found that “caps on damage awards reduced the number of lawsuits filed, the value of awards, and insurance costs.”
Given the impact that legal system changes have had on other aspects within the insurance sector, the letter asks lawmakers to review solutions that can positively influence insurance premiums in the property insurance market and offer support for state and local consideration of such policies.