Insurance companies are in the business of predicting future loss, and so must ensure that they reserve for such events. What happens when the history they have is no longer a reliable guide for predicting the future? And then, what happens when those insurance companies begin to use forward-looking extreme weather models to price policies.
This is critical because the future, and even the present, no longer looks like the past. Large hurricanes that used to be infrequent are getting more common. The hottest days are often beyond what anyone has ever experienced. Evidence that in June, we recorded the highest single-day temperature the world has ever experienced and, in July, the hottest week.
America has only recently begun factoring in those accelerated risks as more frequent floods, droughts, wildfires and hurricanes, as well as precipitation and sea level rise, become the inevitable consequences of a warming planet.
As a result insurance companies nationwide are leaving homeowners in the lurch. We are observing this in Florida, North Carolina, Louisiana, Colorado, Oregon and California which have all seen insurers fold, cancel policies, cease writing new policies or leave the state altogether after repeated floods, hurricanes and wildfires. AIG is even focusing on affluent ZIP codes to reduce sales in New York, Delaware, Montana, Idaho, Wyoming and Colorado.
In May 2023, two federal science agencies, the National Oceanic and Atmospheric Administration (NOAA) and the National Science Foundation (NSF) responded, announcing that they were creating a research center to bring climate change data to the insurance industry so they can use climate science to look into the future.
On September 20, 2023 First Street Foundation, a nonprofit that works to define and communicate risks posed by climate change, published its most recent report and devastating is an understatement. Tens of millions of properties around the country are insured at prices that haven’t caught up with the danger of hurricanes, wildfires, and floods. First Street estimates that 39 million US homes are insured at artificially suppressed prices compared to the risk they actually face.
THE ECONOMIC CONSEQUENCES OF CLIMATE, SO FAR…
NOAA reports, on its website, that the U.S. has sustained 360 weather and climate disasters since 1980 in which damages/costs reached or exceeded $1 billion for a total of $2.575 trillion.
The 2019 share was $53.1 billion; 2020 was $115.4 billion; 2021 was $157 billion; 2022 was $175.2 billion.
Through June 2023, with twelve events, the U.S. already reached $32.4 billion in damages (and 100 deaths) which is more than any total year prior to 1992. These events were all caused by tornadoes, severe hail, high winds, extreme flooding, record snowfall and copious rainfall.
The impact of these extreme weather events on everything from housing to food production is as far-reaching as it is frightening. Already in 2019, Rostin Behnam of the Commodity Futures Trading Commission told the NYT, “It is abundantly clear that climate change poses financial risk to the stability of the financial system.”
David Keys was driven to title his Opinion piece for The New York Times in May, 2023: Your Homeowners’ Insurance Bill is the Canary in the Climate Coal Mine.
HOW ARE INSURERS RESPONDING TO EXTREME WEATHER EVENTS?
They are raising their rates. They are reducing the number of homes they’ll insure. They are lobbying states for more freedom to increase rates. The ramifications are huge. Across the U.S., premiums jumped 12% from 2021 to 2022. By 2023, more and more insurers are pulling back from vulnerable areas. Without insurance, banks won’t issue mortgages, making homes harder to buy or sell. While insurers can choose to stop offering insurance, the homeowners and governments they leave behind will still have to deal with the risks. And as the costs go up, more households may decide to reduce their coverage or may choose to go without insurance entirely.
As some private insurers retreat from higher-risk areas, state-backed “insurer of last resort” plans are stepping into the void. The number of enrollees in these state-backed plans rose by 29 percent between 2018 and 2021. These plans are often more expensive, they offer less coverage than private insurance options, and they face the same concerns as private insurers about their ability to pay out in the event of a crisis without burdening policyholders statewide.
WILDFIRES ARE DECIMATING THE INSURANCE MARKET IN THE WEST
In 2019, Pacific Gas and Electric, facing some $30 billion liability for damages from two years of California wildfires — a tab exceeding its insurance and assets — had little choice but to declare bankruptcy.
By 2020, insurers, facing huge losses, began pulling back from fire-prone areas across California. “The marketplace has largely collapsed,” an advocate for counties in the state said. The financial damage of the disasters themselves “have already started to affect home prices, the mortgage industry and the bond market.”
By May, 2023, both State Farm and Allstate had stopped selling new home insurance policies there and, as of July 3, Farmers is limiting them as well, potentially worsening what the FAIR Plan, California’s mandated insurance pool, called an “impending insurance unavailability crisis.”
FLOODING AND HURRICANES HAVE CLAIMED THE REST OF THE COUNTRY
It is not just wildfires that insurers are worried about. Scientists are confident that climate change is fueling hurricanes capable of whipping up more dangerous storm surges, as well as increasing the odds of extreme rainfall events (20% of the country can now expect a 1-in-100-year storm every 25 years) that can and are triggering inland flooding. In fact, unless you live in the 1% of U.S. counties that were not impacted by flooding between 1996 and 2019, your property may be at risk for flood damage.
In 2021, CNN reported that flooding is the most common and costly natural disaster in the U.S., that in the previous decade, floods caused more than $155 billion worth of damage, according to the Federal Emergency Management Agency (FEMA) and that there are nearly 4.3 million residential properties around the country with a substantial risk of financial loss due to flooding. It’s estimated that only one-third of households in flood zones have flood insurance — with many risking financial ruin if the “big one” hits.
Imagine the costs if a category 5 hurricane hits New York. Already, Superstorm Sandy, in 2012, dealt a devastating blow to New York City, parts of New Jersey, and much of Long Island. Owing only to Sandy’s last-minute turn away from the South Fork, the storied Hamptons, where multi-million-dollar properties were too often developed practically to the ocean’s edge, escaped the worst of it. Nonetheless, it was immediately clear that higher, and perhaps much higher, insurance premiums would follow.
In Florida, no stranger to flooding and hurricanes, Hurricane Ian killed more than 100 people in 2022 and caused an estimated $67 billion in private market insured losses, according to RMS. Losses, rate price controls and litigation costs have all prompted big insurers to pull back. As the state lost insurers (Farmers was the 4th major insurer to step back on July 3, 2023), more than 1 million Floridians have joined the state-backed Citizens plan, which is backed up by taxpayers and homeowners. The Florida exodus is the latest sign that climate change, exacerbated by the use of fossil fuels, is destabilizing the U.S. insurance market. Already, homeowners in the state pay about three times as much for insurance coverage as the national average, and rates this year are expected to soar about 40%. Meanwhile, warmer air and water are making hurricanes stronger and more damaging.
SURELY, THERE IS FEDERAL FLOOD INSURANCE
Flood damage (storm surges, hurricanes, torrential rains) is generally excluded under standard homeowners and renters insurance policies but available as a separate policy from the National Flood Insurance Program (NFIP), administered by FEMA, and some private insurers (but limited to $250,000). FEMA is responsible for flagging high-risk zones where property owners with federally backed mortgages must purchase flood insurance but they rarely account for risks from intense rainfall. The National Flood Insurance Program, billions in debt due to years of disproportionate rates and repeated disasters, only recently enacted the so-called Risk Rating 2.0 restructuring.
IS THE CLIMATE ALSO AFFECTING CROP INSURANCE?
Crop insurance is heavily subsidized by the Federal Crop Insurance Program (created in 1938 following the Great Depression) paying farmers when their crop yields or revenues decline and expensing billions of taxpayer dollars each year (taxpayers pick up about 60% of premiums). It is a huge safety net. Payments have risen rapidly from just over 41.5 billion in 1995 to $8.5 billion in 2020, as the climate crisis fueled extreme weather events across the country. Higher prices, and consequently higher premiums (and subsidies), will inevitably follow. Though much depends on the future escalations of greenhouse gas emissions and the resulting severity of future warming, climate change is expected to decrease domestic production of corn, soybeans, and wheat and have an outsize impact in the future.
In January, 2022, the headline at Reuters was ‘U.S. crop insurance payouts rise sharply as climate change worsens droughts, floods”.
ANY GOOD NEWS?
If there is a bright spot in the insurance sector, it is to be found in the industry’s growing recognition that climate change poses a significant threat to its long-established business model. Some companies’ practices are evolving as they simultaneously encourage policyholders to adapt and mitigate, and claimants to rebuild according to green standards.
Insurers have also begun looking at the dangers posed by companies without sufficient environmental concerns. Chubb will, for example, in 2022 cease underwriting new risks for companies that generate more than 30% of their energy production from coal. The two largest reinsurance companies in the world, Munich Re and Swiss Re, are both no longer insuring new oil and gas projects as of Spring, 2023.
The next step for environmentalists will be to push more companies to shed their coverage of existing coal projects as well as all oil and gas.
CREDIT: THE ECONOMIST