How Natural Disasters Impact Insurance Premiums

by Team eLocal
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Fires, floods, hurricanes and more: The destruction these events leave in their wake seems to dominate the news.

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The direct impact of these events is clear, but natural disasters can also have less obvious and potentially widespread effects. One of these potential effects is an increase in homeowners insurance premiums.

Do Disasters Affect Premiums in the Impacted Area?

Home insurance premiums are based on several factors, including:

  • The size of the home
  • Where the home is located
  • Construction type, age and special features
  • Personal property and liability coverage

Insurance companies recognize that homes located in areas prone to natural disasters can be riskier to insure. The higher risk means that home insurance premiums in these areas may be higher than premiums for a similar home in other areas. For example, your premiums are probably higher if you live in an area prone to wildfires or hurricanes. Natural disasters can also lead to higher deductibles.

Can a Recent Natural Disaster Affect Insurance Premiums?

Premiums can rise in response to recent disasters. In some cases, insurance companies have stopped insuring homes in certain areas. For example, some insurers decided there was too much risk associated with offering homeowners policies in coastal regions following Hurricane Katrina.

Regions that experience an increase in natural disasters or unexpected weather events also tend to experience an increase in insurance premiums. In Colorado, premiums are up due to an apparent increase in hail storms and wildfires.

However, a recent natural disaster doesn't always mean premiums will go up. If your home is in an area where insurers have already accounted for the possibility of tornadoes or fires, your rates won't necessarily increase due to that type of disaster. Additionally, state and federal insurance regulations can create difficulties for insurers attempting to raise rates in a specific location.

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Do Natural Disasters Affect Homeowners Insurance Premiums in General?

Natural disasters can cause a widespread increase in home insurance premiums. More frequent or costly disasters can cause rates to go up, even for homeowners in unaffected areas.

Insurance works because premiums are pooled to cover those who experience a loss. Therefore, all homeowners tend to pay more when the overall risk of natural disasters increases. One study found that natural disasters may disproportionately impact insurance rates for homeowners in unaffected areas due to state regulations. For example, California prohibits insurers from refusing to renew policies in declared disaster areas. These policies mean insurers sometimes need to adjust premiums across a wider area.

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Why Do Disasters Make Premiums Go Up?

Natural disasters aren't a new phenomenon. Weather events, such as hurricanes and tornadoes, have always impacted humans, so it may seem like insurance companies should have already accounted for these issues when calculating premiums.

To some extent, insurance companies have considered the risk of natural disasters, and a single event may not have a widespread impact on premiums. But insurers regularly recalculate their costs and risks, and natural disasters can impact these calculations and lead to higher premiums.

Climate change and evolving weather patterns may lead to more frequent and severe natural disasters. Even if the weather doesn't change much, disasters become more expensive as populations increase or more people move to affected areas. A wildfire in an entirely unpopulated forest doesn't cost insurers anything. But homeowners insurance policies must account for the risk if people begin building homes in wooded areas susceptible to wildfires.

How Can Homeowners Save Money on Premiums?

Insurance premiums have increased in recent years, which can create hardship for many homeowners. Fortunately, you have options for saving money on premiums that are rising due to natural disasters.

You may wish to consider higher deductible plans, which tend to have cheaper premiums. These can be a good option for saving money if you can afford to pay the deductible if you need to use your insurance.

You may be able to find insurance discounts or tax incentives for using disaster mitigation features in your home. Disaster adaption can include:

  • Creating a fire break around your home by clearing vegetation
  • Using roofing materials more likely to resist damage from hail and wind
  • Installing sprinkler systems to mitigate fire damage

Those with flood insurance through the National Flood Insurance Program may be able to save money with measures such as moving expensive equipment out of basements or ground floors of the home.

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