The property insurance industry has long been secure, providing financial coverage to policyholders for damage caused by theft, fire, flooding and extreme weather events.
Michael Pakko is chief economist and state economic forecaster with the Arkansas Economic Development Institute at the University of Arkansas in Little Rock. He said, from an economic perspective, the insurance business has always been about pooling risk.
"The original insurance companies were mutual societies where people would pay in and hope that they weren't the subject of a hurricane, tornado, or hail damage," Pakko said. "And those who were then subject to those natural disasters would be paid out of that fund and made whole again. So it was really a cooperative risk pooling, literally, operation."

Both independent agencies and national insurance corporations rely on the same pooling principle today, Pakko said. But now, the insurance industry is operating under increasing uncertainty.
"Uncertainty about what kind of catastrophes are going to occur, where they will occur, and how much they'll cost to repair," he said. "And so there's a lot of effort that's gone into kind of predicting the magnitude of storms, the cost of those repairs and how frequent storms will be. And so if those expectations don't come to pass then the insurance companies can find themselves in a real bind."

Extreme weather events are increasing across the U.S., ranging from broiling heat domes, raging wildfires, high-velocity derecho winds and atmospheric rivers to frigid polar vortexes. A massive tornado outbreak struck nine states in March 2023, including central Arkansas. And this late spring season in northwest Arkansas, over a dozen tornadoes tore through portions of Benton, Madison, Boone and Marion Counties, killing at least 10 people and destroying homes and businesses over the Memorial Day weekend. The National Weather Service recently confirmed that an EF3 tornado nearly two miles wide that destroyed portions of Decatur in northwestern Benton County set a state record.
Pakko said these very costly storms are causing more insurance companies to pay out more than they collect in premiums.
"In 2023 insurers in Arkansas paid out $1.66 for every dollar in premiums that came in," he said. "Obviously that's not an outcome that is sustainable. So we're seeing companies dropping out of the business altogether or pulling out of particular markets and some consolidation in the industry."
The other side of the equation, he said, is reconstruction costs.
"So that's another source of uncertainty for insurance companies," he said. "They have to predict not only the intensity, severity and frequency of these storms, but also what inflation is going to do to the costs of repairing the damage from those storms."
Insured property owners, Pakko said, can choose policies that offer different levels of coverage.
"Most individual homeowners have replacement cost policies," he said, "which means that whatever the damage costs or how much depreciation might have already taken place on your property, the insurance company will pay whatever it costs to make it whole, to fix it, replacement costs. And there's usually a deductible so there's a limit on how much you pay upfront and then the insurance company will pay the rest."
Insurance policy provisions known as riders provide additional coverage or may restrict coverage to deal with changing circumstances.
"Let me quote from the National Weather Service Arkansas Yearly Climate Summary for 2023: 'In June there was way too much hail,'" Pakko read. "So I guess that's the official meteorological assessment of our circumstances. Now, they go on to describe softball-size hail, golf ball-size hail, in places all across the state, so that has really been one of the costs that's hit insurance companies hard."
Pakko said the Arkansas Insurance Department in Little Rock earlier this year provided regulatory relief to insurers by recalculating roof depreciation, or the gradual decrease in the value of a roof over time due to aging. In effect, this reduced insurance claims payouts based on aging roof structures.
"The Arkansas Insurance Department this year lowered that threshold from 10 years to seven years," Pakko said, "so that if you have hail damage, repairing your roof is going to cost you a little bit more."
The director of the Arkansas Insurance Department declined to be interviewed for this report, but in a comprehensive email response to our questions, the department’s compliance director, Jimmy Harris, wrote that over $2.5 billion was paid to insureds for personal and commercial property damage last year.
So the department, Harris wrote, has issued several changes. Insurers in Arkansas can now require a separate deductible for wind and hail damage and broaden the timeframe an actual cash value settlement (ACV) endorsement for wind/hail damaged roofs could be added to a homeowner’s policy. ACV, or actual cash value, is calculated by taking what it would cost to buy your property new today and subtracting depreciation for age, condition and obsolescence. Arkansas had previously allowed insurers to offer an optional ACV settlement endorsement for wind and/or hail-damaged roofs over 15 years old. Going forward, insurers are allowed to add a mandatory ACV settlement endorsement, with approved notice, on replacement cost policies for wind and/or hail-damaged roofs after age 7.
In other words, insurance consumers in Arkansas will be expected to pay more out of pocket for aging roof repairs now and into the future. Due to rising insurance costs, the Arkansas legislature recently approved Act 471 of 2023, which requires insurance companies to notify customers of the monetary amount of their deductible based on a percentage of their home's insured value. For example, if the home is insured for $300,000 and your deductible is 2%, you would pay $6,000 out of pocket for a claim, Harris wrote.
So, is it a good idea to purchase a policy from a regional insurance agency or a national carrier operating in-state?
"You might find that the rates are lower with companies that are local and know the market better," Michael Pakko said. "On the other hand, those might be the companies that are more likely to run into trouble because they're not diversified as much. If a storm hits the state and only their insured parties are in the state of Arkansas, then that means they're going to suffer a lot of losses. Whereas if they had insurance policies in other parts of the country, some losses would offset other gains and risk would be pooled."
Arkansas Insurance Commissioner Alan McClain issued a letter to the Arkansas Legislative Council in January, alerting them to insurance rate increases and changing policy coverage. He warned lawmakers that storm-related claim expenses are having a significant financial impact on the solvency of insurance providers, bringing them dangerously close to being no longer able to offer coverage to Arkansans.
In late March, insurance industry representatives addressed the joint Senate and House committees on insurance and commerce, listing factors contributing to insurance rate increases in Arkansas. Nationwide, insurers in California and Florida were among the first to terminate property coverage, followed by more states, including Louisiana, Texas and the Carolinas.
Michael Pakko said property owners in Arkansas facing terminated coverage are protected for now.
"If your company goes out of business or stops writing policies in the state," he said, "as long as you paid your premiums, you're still covered. Even if they go bankrupt and into liquidation, there's a solvency fund at the state level that makes sure that those policies are honored. They take care of the process of liquidating the company that were selling its assets off to others."
Consumers will be required to find a new insurance company and that could mean paying a higher premium, Pakko said.
"The worst part about this particular bind that insurance companies are finding themselves in right now is that many are choosing to get out of the business altogether," Pakko said. "Recently, American National Insurance announced they weren't going to write homeowners policies in Arkansas anymore and are getting out of the business nationwide, altogether."
The state of Arkansas operates a nonprofit property and casualty guaranty fund, created by state statue, to pay outstanding claims on insolvent insurance companies. The current value of the fund is sufficient for now, according to Arkansas Insurance Department compliance director Jimmy Harris, who stated that an assessment is underway to replenish the fund this year.
Purchasing property insurance is not required, but all mortgage holders are required to have it. And with insurance premiums expected to rise into the future, Harris suggested a couple of strategies.
Property owners can opt to raise their deductible, meaning they pay more out of pocket. They can also purchase home and auto insurance from the same insurance agency, which results in cheaper rates. Senior property owners and longtime policyholders may qualify for rate discounts. Properties can also be upgraded, made more resilient to disasters and less expensive to cover.
But recent storms in northwest Arkansas reveal a new looming hazard. After weeks of heavy rain, tornadic and straight-line winds uprooted untold thousands of big trees, many crashing onto homes and businesses.
We queried Harris about this. He responded that multiple insurers are now using satellite imagery to assign “tree scores” or “tree overhang” rating factors to adjust property insurance rates. He also warned that some insurers may simply refuse to cover structures with large trees close by.
Ozarks at Large transcripts are created on a rush deadline by reporters. This text may not be in its final form and may be updated or revised in the future. The authoritative record of KUAF programming is the audio record.