By Chris Isidore, CNN

New York (CNN) — The wildfires in Southern California this month, and the hurricanes in the Southeast United States late last year, could end up raising homeowners insurance rates in the near future, even for people who live thousands of miles from the natural disasters.

Regulators in many states are allowing insurance companies to raise rates to cover the cost of events that insurers have had to pay elsewhere, as well as increasing the money for things like the rising cost of reinsurance, which insurance firms purchase to limit their risks of major catastrophic events.

“In a world where we have persistently large shocks, you’re getting big cross-subsidies across the country,” said Ishita Sen, a professor at Harvard Business School who was part of a team that conducted a 2022 study on the effects of costly disasters on homeowners insurance rates nationwide. “The past suggests that after big wildfires, other states have ended up paying for it.”

The Insurance Information Institute, an insurance industry trade group, disputes the study’s findings. It says that increases in rates come because insurers are judging the greater risks and costs across most of the country, not because homeowners’ premiums in one area are being used to pay for disasters in other regions.

“Rates cannot be raised arbitrarily. Insurance is regulated by the states,” said Loretta Worters, spokesperson for the Insurance Information Institute, an industry trade group. “If you look at a state like Nebraska, which was mentioned (in the study), their rates are commensurate with the risks. Nebraska experiences frequent severe weather, including tornadoes, strong winds, hail, and wildfires.”

The insurance industry is more regulated than most other industries when it comes to rates that can set whatever prices the market will bear. But it is a state-by-state patchwork of regulation.

“It’s not federally regulated,” said Jon Schneyer, director of research and content for research firm CoreLogic. “What one state does can be very different from what other states do.”

That’s what Sen and her team found: Different states allow rates to rise at significantly different amounts based on what insurers argue are their costs.

Carmen Balber, executive director of Consumer Watchdog, a public interest group that is focused on the insurance industry, questioned its response to the study, saying that the patchwork of regulations results in high costs for insurance customers.

“In states where regulators apply less scrutiny, insurers are able to charge whatever they want,” said Balber. “If regulations were stronger across the country, we’d all have lower rates.”

Schneyer said some shifting of costs and risks is inevitable for large, national insurers, which benefit from customers facing different perils in different geographies. Asked about what he would say to someone in the Midwest paying more for hurricane risks along the Gulf and East Coasts, and fire risks in the West, he said that “they should hope if they need a new home because their home is destroyed by a tornado, or need a new roof that is damaged by large hail, their insurer would pay for that.”

“That’s risk-sharing. That’s how risk works in the insurance industry,” he added.

Large shocks becoming more frequent

What’s clear is that there are more and more significant weather-related catastrophes.

Five of the seven most expensive storms in US history have come since 2017, according to the Insurance Information Institute’s ranking, even when adjusting for inflation.

The fires burning right now in Southern California are poised to become the third most expensive disaster in US history — behind 2005’s Hurricane Katrina and 2022’s Hurricane Ian, which have inflation-adjusted losses of $102 billion and $56 billion, respectively. The wildfires are estimated to produce insured losses of between $35 billion and $45 billion, according to CoreLogic’s most recent estimate.

And the current wildfire losses come on top of last year’s Hurricane Helene, which cost private insurers between $6 billion and $11 billion, and Hurricane Milton, which produced insured losses of another $13 billion to $22 billion just two weeks later.

Both the Helene and Milton storms also caused tens of billions in flood damage, much of it uninsured or covered by the National Flood Insurance Program, rather than private insurers.

So the losses from those two storms, along with the recent wildfire losses, will mean insured losses total between $54 billion and $78 billion. Those last four months of losses will end up reflected in insurance premiums going forward.

The increasing frequency of climate-related disasters has caused homeowners insurance rates to rise 8.7% a year on average, faster than the overall rate of inflation between 2018 and 2022, according to Treasury Department data released last week.

“Homeowners insurance is where many Americans are now feeling the financial effects of climate costs directly,” said Ethan Zindler, the Treasury Department’s climate counselor at the time the data was released. “Extreme weather and other climate related events are now happening… more frequently and with greater ferocity. These weather eventsand other climate related events don’t really care what your political orientation is, or whether you even think climate change is real.”

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