Pricing climate risk: Hurricane models and home insurance over the last two decades

Homeowners insurance premiums have risen sharply across the U.S., particularly in places exposed to hurricanes, wildfires, and other disasters caused by extreme weather. How much of these higher premiums reflect worsening climate risk, and how much reflect other factors such as inflation, litigation costs, or changes in insurance markets? This paper provides new evidence by examining the relationship between hurricane risk and homeowners insurance premiums in Florida over nearly two decades.  

The study draws on two sources of data. The first consists of proprietary catastrophe (“CAT”) models used by insurers to estimate hurricane risk for individual properties. These models—developed by firms such as AIR (Verisk) and RMS (Moody’s)—are the foundation of modern insurance pricing and capital management. The second source is a hand-collected database of insurer rate filings submitted to Florida regulators by 16 large insurers who represent 70% of the current market share. The filings separately report the hurricane and non-hurricane components of homeowners insurance premiums. Together, these data allow the authors to trace how changes in modeled hurricane risk translate into the premiums homeowners pay.  

Hurricane risk has increased substantially, but not nearly enough to explain the sharp rise in insurance premiums. According to the industry’s leading catastrophe models, expected hurricane losses for a representative Florida home increased by roughly 50% between 2006 and 2023. Over the same period, however, hurricane insurance premiums increased by more than 200%. In short, growing climate risk explains only part of the increase in insurance costs.  

A central finding is that insurers charge far more than the expected annual hurricane losses on an insured property. Focusing on major model updates that follow the 2017 severe hurricane season, the study finds that a Florida homeowner with a typical pre-2001 masonry home paid roughly $4 dollars in hurricane premiums for every $1 of modeled expected hurricane loss.  

Why? The answer lies in the economics of catastrophic risk rather than in climate change alone. Hurricanes create highly correlated losses: A single storm can damage hundreds of thousands of properties simultaneously. Because insurers must remain solvent even after rare but devastating events, they need access to enormous amounts of capital, either by holding reserves or purchasing reinsurance. The costs of financing this “tail risk” are substantial and are ultimately passed through to homeowners in the form of higher premiums.  

The study highlights reinsurance—insurance purchased by insurance companies themselves—as an important driver of premium growth. Florida insurers rely heavily on global reinsurers to absorb the financial risk of major hurricanes. As reinsurance prices rose sharply after the severe hurricane seasons beginning in 2017, primary insurance premiums rose as well. Premium increases closely tracked the global reinsurance pricing cycle, suggesting that homeowners are paying not only for higher expected hurricane losses but also for the rising cost of transferring catastrophic risk to global capital markets.  

Florida’s insurance market structure amplifies these effects. Large national insurers, such as Allstate and State Farm, have limited their exposure in Florida’s highest-risk areas, leaving many coastal markets to smaller Florida-based insurers and the state-backed Citizens Property Insurance Corporation. Because these smaller insurers have less geographic diversification, they depend more heavily on costly reinsurance, and therefore charge larger premium increases for a given increase in hurricane risk than do diversified national companies.  

The authors investigate several alternative explanations for rising premiums. They find little evidence that catastrophe models have become substantially more pessimistic about the probability of extremely rare losses beyond the increase in expected annual losses. Likewise, litigation costs and other non-hurricane expenses do not appear to explain the rapid growth in hurricane premiums. Instead, the data point to the interaction of increasing climate risk with the financial costs of managing catastrophic risk.  

The paper also provides a statewide index of homeowners insurance prices that separates hurricane-related premiums from premiums covering other perils. The index shows that most of the acceleration in Florida homeowners insurance costs since 2020 has been driven by hurricane coverage rather than by other components of homeowners insurance. The index also closely matches observed premiums from mortgage escrow data, providing confidence that the standardized rate filings accurately capture market-wide pricing trends.  

The findings have important implications for public policy. Measures that simply suppress insurance premiums may improve affordability in the short run but risk weakening the price signals that encourage households and communities to adapt to increasing climate risk. At the same time, the research suggests there may be opportunities to reduce insurance costs without undermining risk-based pricing. Potential approaches include reforms that encourage greater participation by well-diversified national insurers in Florida. For example, the financing structure of the state insurance guaranty fund can penalize well-capitalized insurers who are more likely to survive severe disasters. Other options include policies that expand the supply of reinsurance—including revising the tax treatment of reinsurance or government-backed reinsurance programs that lower the cost of financing catastrophic risks. Such policies could reduce the frictional costs of insuring against hurricanes while preserving incentives for households to account for the risks posed by a changing climate. 

Read the paper