Texas Facing Fresh Insurance Crisis

The devastating wildfires that have burnt across Texas since last Monday, destroying an estimated 1.3 million acres in their passage, are likely to exacerbate an insurance crisis that's long been brewing in the state.

Texas, like other states particularly vulnerable to extreme weather events, has seen home insurance premiums rise in the past few years as climate change is expected to increase the frequency and severity of such incidents. According to Insurance.com, the average cost of home insurance in the Lone Star State is currently $4,142 a year, much above the national average of $2,777.

A majority of Texas residents fear that insurance costs will continue shooting up in the future, as proven by a recent exclusive poll conducted by Redfield & Wilton Strategies on behalf of Newsweek. The recent wildfires prove that their fears are justified as more extreme weather events wreak havoc across the state—likely leading to huge damage claims.

Steve Bowen, chief science officer with global reinsurance broker Gallagher Re, told Newsweek that assessments of the damages caused by the recent wildfires are still in their initial stages "and it will be a few weeks until a clearer picture emerges on the financial cost."

But the final sum is likely to be high, as the largest wildfire, the Smokehouse Creek Fire, burned nearly 1.1 million acres alone, "and is the most expansive fire ever officially recorded in Texas," Bowen said.

"By itself, this fire is larger than the combined annual acres burned in Texas for every year since 2011," he said. "With hundreds of homes confirmed damaged or destroyed, plus notable impacts to agriculture, livestock, and other interests, it is expected that the overall economic cost will reach into the hundreds of millions. This would already make this one of the costlier Texas wildfires on record."

More Disasters Coming in the Near Future

The recent wildfire in Texas—the largest in the state's history—was not completely abnormal, experts said, and it's likely to become the norm in the future.

"According to NOAA's Billion Dollar Weather and Climate Disasters database, Texas is already being hit by more disasters than any other state: 170 since they began counting in 1980," climate scientist Katherine Hayhoe, a professor at Texas Tech University, told Newsweek.

"This is in part due to the state's geographic location on the Gulf of Mexico, spanning the humid subtropical conditions of Houston in the east to the arid High Plains of the Llano Estacado in the west," she said. "As a result of its geography, we get nearly every type of climate and weather disaster there is—hurricanes, heavy downpours, droughts, ice storms, blizzards, heatwaves and, of course, wildfires, too."

According to Bowen, the state is facing an increase of a phenomenon called "weather whiplash"—defined as experiencing rapid shifts in differing types of weather extremes in relatively short succession.

But the vulnerability to such destructive events is also due to the fact that Texas has the second-largest population and second-largest economy in the country. "So when you are measuring the impact of a disaster in terms of dollars, the more people, infrastructure, and industry you have, the higher the costs," Hayhoe said.

"A state like Texas that already experiences more disasters than any other would be disproportionately impacted as all of these disasters are super-charged by a changing climate," she added.

According to Bowen, academic research suggests that "a combination of warmer temperatures, lower humidity, drier ground conditions, and more flammable fuels will intensify fire behavior" in Texas in the future.

Pricing Out Texas Homeowners

The higher risk of extreme weather events and related higher damage claims have been driving up insurance premiums across the country, especially in states like California, Florida and Texas.

"Insurance is already pricing people out of the market and/or refusing to offer insurance in high-risk areas in other states," Hayhoe said, commenting on the situation.

In California and Florida, several insurers have already either withdrawn from the state or stopped offering new policies because of the higher risk of extreme weather events, with many citing unprofitability as a reason for pulling out. This, in turn, has caused Floridians and Californians to flock to the states' insurers of last resort, despite unfavorable rates.

Many, left with a lack of options, are going bare—meaning they're giving up on insuring their home entirely. In Texas, Governor Greg Abbott, a Republican, said that many of those whose homes were destroyed by the wildfires had no insurance. "There are a lot of people in great need right now," he said during a press conference on Friday.

Research staff at The Texas Real Estate Research Center at Texas A&M University told Newsweek that Texas' rural areas, where the wildfires broke out and spread, "tend to have older population profiles and they tend to have lower income levels."

Both of these factors, they said, can lead to lower rates of property insurance coverage.

"Consider that mortgage lenders require borrowers to maintain property insurance. This protects the home which is the collateral for the loan. Once a household owns the home outright ('free and clear'), then it is a personal choice by the homeowner whether they want to maintain insurance," they said.

"Homes owned outright tend to be owned by older individuals. Many of them may be retired and thus have lower, fixed incomes. So, they may choose or be forced to forgo insurance," they added.

Researchers now estimate that between 50 and 60 percent of the homes in the areas affected by the recent wildfires don't have a mortgage. The share at the state-level is 43 percent. "A much higher share of households in those counties no longer have a lender requiring them to keep insurance," they said.

A 2021 study by the Texas Real Estate Research Center at Texas A&M University based on U.S. Census Bureau data showed that 11 percent of homeowners in the state's major metros don't have homeowner insurance, while in rural areas the number goes up to 26 percent.

"Rebuilding without insurance is a great burden. Some households will have other sources of wealth to pay for rebuilding. Many will not," the Texas researchers told Newsweek.

"The homes in the most impacted counties are older. Owners may not appreciate the gap between their original sale price and the cost of replacement in today's market. In the impacted counties 11 to 23 percent of homes were built after 1990," they added.

"Statewide the share is 49 percent. This age difference is reflected in lower monthly ownership costs in these counties compared to statewide. Outside the small metro areas like Amarillo, most of these Panhandle counties have been losing population for some time. If homeowners cannot rebuild, they are likely to relocate, adding to the out-migration trends."