Insurance, especially homeowners’ insurance, appears to be part of the affordability crisis. According to the Harvard University Joint Center for Housing Studies: “Insurance has grabbed headlines lately for good reason. As home prices remain elevated at historically high levels, rising insurance premiums are also contributing to the growing costs of homeownership and property management.”

How should we think about this? For insurance to break even, it should be the case that premiums (revenue) are set equal to the expected costs experienced by the insurer. The expected costs are the probability that an event occurs times the cost that must be covered in the case of an event.

Has the probability of an event risen? Evidently. According to The New York Times: “In the United States alone, there were at least 27 weather events that resulted in damages of at least $1 billion, according to data from the National Oceanic and Atmospheric Administration.” And certainly, the most stressed state insurance markets are those exposed to weather events: California, Florida, Louisiana, and so forth. Most coverage attributes fires and extreme weather to rising atmospheric temperatures.

Note that the increased probabilities are not set in stone. Better forest management can reduce wildfire risk. Building location decisions can reduce flood risk. And building codes can generate greater resilience. All these cost money and can be thought of as means of self-insurance to reduce the cost of commercial insurance.

Have events become more expensive? You betcha. Inflation alone is a central explanation for rising insurance costs. Previous years’ inflation means that the houses, cars, and other insured belongings cost a lot more to repair and replace. Insurance premiums will necessarily have to rise as a result.

And rising they are. The following graph (reproduced from the St. Louis Fed’s FRED system) simply shows the year-over-year consumer price inflation for renters and homeowners insurance. The most recent data point – September 2025 – shows inflation at a 7.5-percent annual rate.

What happens if premiums are not permitted to rise? Insurers will lose money and, eventually, simply exit the market. This is hardly a hypothetical event.

California, like other states, has a state-run backstop to the private-sector property and casualty insurance industry. Its FAIR (Fair Access to Insurance Requirements) plan is available to those who have been declined by private insurance. The data show the California FAIR Plan hit a record 646,000 policies on Sept. 30 — nearly double its policy count two years ago. This is an indicator of the poor health of the private market. The FAIR count surged in the third quarter of 2025 raising questions about recent state efforts to shift FAIR plan policyholders to private insurers.

The usual problem is the unwillingness of state insurance regulators to allow premium increases adequate to cover expected losses – which has certainly been a problem in California. The same reflexes mean that the public-sector plan is often underpriced for the risks that it is covering, which is a recipe for big losses that the taxpayer will have to cover.

The bottom line is that nobody is happy: Insurers, homeowners, and taxpayers are all facing pressures.