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Insurance

INSURANCE

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

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.

  • July, 2023 had 55 million people in the Northeast under flood threats and 14 million under a tornado watch as Vermont, New York, and Pennsylvania experienced catastrophic rainfall.

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.

In June, 2023, Forbes created a very useful guide to flood insurance here and another explaining how FEMA’s National Flood Insurance Program works here.

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.

Can you insure against climate change?

CURRENT NEWS

Pacific States Warn Insurers of Wildfire-Size Losses on Oil Risk

By Eliyahu Kamisher and Maxwell Adler 02/07/24
US insurers face potential portfolio losses comparable in size to claims from catastrophic wildfires if they delay selling off investments tied to fossil fuels, according to a study by West Coast insurance regulators.
Read more

Another home insurer withdraws — thousands of Californians will need to seek new coverage

By Clare Fonstein 12/22/23
An insurance company that covers more than 2,000 policyholders in the state is discontinuing its homeowners business, adding another name to the list of insurers that have left California.
Read more

‘A Beautiful Place That Has a Dragon’: Where Hurricane Risk Meets Booming Growth

By Aatish Bhatia 11/19/23
The hurricanes keep coming, and the people, too: The fastest-growing places along the Atlantic coast this century are also among the most hurricane-prone. Between 2016 and 2022, the five hurricanes that hit the Carolinas cost…
Read more

As Climate Shocks Grow, Lawmakers Investigate Insurers Fleeing Risky Areas

By Christopher Flavelle 11/01/23
Faced with growing losses from hurricanes, floods and wildfires, major insurance companies are pulling out of California, Florida and Louisiana — a shift that threatens to undermine the economies of those states.
Read more

Climate change is driving insurance rates up, forcing developers to add weather-proofing

By Rebecca Picciotto 10/31/23
Along East Boston’s waterfront sits The Eddy, a two-building property with over 250 luxury apartments. Its harbor-side location provides unobstructed views of the Boston skyline. It also leaves the building particularly vulnerable to sea surges…
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Dramatic plan to expand flood areas could force millions to buy insurance

By Thomas Frank 10/27/23
It’s a glaring weak spot in climate protection: Millions of U.S. residents don’t have flood insurance and face financial ruin if their home is inundated. But the nation’s insurance gap would shrink under a dramatic…
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Feeling the pinch of high home insurance rates? It’s not getting better anytime soon

By Greg Allen 10/26/23
Gregg Weiss lives in an older neighborhood in West Palm Beach. His home and many others are nearly a century old. It's a great place to live he says, except when it comes to buying…
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Global insured disaster losses in 2023 to top $100B

By Andrew Freedman 10/19/23
Global insured natural catastrophe losses in 2023 are expected to eclipse $100 billion for the sixth time since 2017, according to a new report from Gallagher Re, a reinsurance company.
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The hypocrisy at the heart of the insurance industry

By Zoe Schlanger 10/18/23
Cameron Parish, Louisiana, used to be a nice collection of little coastal towns where the shrimping was good and the stars at night were better, James Hiatt told me. Hiatt lives just up the river,…
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The insurance world is flirting with its climate doom loop

By Helen Thomas 10/11/23
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to…
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As climate risks mount, the insurance safety net is collapsing

By Lois Parshley 10/10/23
“We’ve got ourselves a little monster out there,” anchorman Jim Cantore warned, facing the camera in the Weather Channel’s newsroom on a sultry August weekend in 1992. At first, few in Florida were paying attention.…
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Climate change is causing more damaging ‘mid-size’ storms. Insurers are taking notice

By Susan Phillips 10/05/23
On a Monday in early August, thunderstorms tore across the Philadelphia region. Nothing unusual, a typical summer storm.
Read more

KEY RESOURCES

National Flood Insurance Program Borrowing Authority

10/11/23
This Insight evaluates the National Flood Insurance Program (NFIP) borrowing authority to receive loans

The 9th National Risk Assessment: The Insurance Issue

09/20/23
Wildfire risk across the United States has been increasing in recent years, as described by a number of studies of the observed increased wildfire incidence, and relatedly, the increasing threat to forests and communities (Burke…

Federal Crop Insurance Program (FCIP) participation

05/03/23
Since its inception in the 1930s, the Federal Crop Insurance Program evolved into a key Federal support program for agriculture in the United States. The USDA, Risk Management Agency (RMA) oversees FCIP and offers agricultural…

NFIP Debt

11/04/22
Since Hurricane Katrina devastated the Gulf Coast in 2005, the National Flood Insurance Program’s (NFIP) debt to the U.S. Treasury has remained steep; it currently is $20.5 billion. In 2022 alone, the program will pay…

The Cost of Climate: America’s Growing Flood Risk

02/22/21
New research from First Street Foundation analyzes the economic impact of underestimated flood risk to properties throughout the United States. Current understandings of expected flood risk and its potential damage continue to underestimate the full…

Insure Our Future, Not Fossil Fuels

12/23/19
Insure Our Future holds the insurance industry accountable for its role supporting the drivers of climate change. The campaign is calling on insurers to stop insuring and investing in coal and tar sands projects and…

Seeking Higher Ground: How to Break the Cycle of Repeated Flooding with Climate-Smart Flood Insurance Reforms

07/25/17
The National Flood Insurance Program (NFIP) was designed to help Americans recover from flood disasters, but it can also unintentionally trap homeowners who would prefer to move somewhere safer. Instead of moving, many policyholders find…

MORE NEWS

Andy Hoffman: Insurance Industry as Change Agent on Climate

By Peter Sinclair   10/06/20  
More from University of Michigan Ross School of Business professor Andy Hoffman – this time on the insurance industry’s response to climate change, and industry’s role as change agent.
Read more

Insurance for when FEMA fails

By Zak Coleman   07/16/20  
The towns and cities dotting the Mississippi River have been a commercial spine of the American heartland for years, and for just as long have had to reckon with the sometimes violent ups and downs…
Read more

Millions of Homeowners Who Need Flood Insurance Don’t Know It — Thanks to FEMA

By Lisa Song and Tony Briscoe   06/30/20  
When Michael Wilson was in the process of buying a brick bungalow on Chicago’s South Side in October 2018, he thought he had been diligent in researching the flood risk.
Read more

Borrowed time: Climate change threatens U.S. mortgage market

By Zack Colman   06/08/20  
“Where catastrophe happens and physical climate really manifests itself, the public tab will end up carrying this,” said Ivan Frishberg, vice president for sustainability banking with Amalgamated Bank. “Everyone is exposed in this. I’ve had…
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The insurance industry needs to end its investments in fossil fuel companies

By Arthur Helmus   05/21/20  
But sadly, insurers are tongue-tied. I should know: I spent much of my career in the insurance industry and had the opportunity to sit on climate change committees within two of the largest property and…
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Climate change and soaring flood insurance premiums could trigger another mortgage crisis

By Jie Jenny Zou   02/25/20  
Flood insurance is sold as protection from climate change. As costs rise, it could push people from their homes instead.
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Boulder County Wants Insurance Companies To Ditch Their Fossil Fuel Investments

By Grace Hood   02/14/20  
Boulder County Commissioners have made the decision to start to move away from insurance companies that invest in oil, gas, coal and other fossil fuels — becoming the first county in the U.S. to do…
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California Bans Insurers From Dropping Policies Made Riskier by Climate Change

By Christopher Flavelle and Brad Plumer   12/05/19  
California’s wildfires have grown so costly and damaging that insurance companies — a homeowner’s last hope when disaster strikes — have increasingly been canceling people’s policies in fire-prone parts of the state.
Read more

FEMA bought 40,000 flood-prone homes. They may have to buy millions more.

By Eric Roston   10/11/19  
As the climate crisis worsens, more Americans will be forced from their homes. Many won’t be able to afford it, and the U.S. isn’t prepared for a massive, government-subsidized migration away from flood-prone areas, according…
Read more

Millions Could Lose Insurance in Flood, Fire Areas

09/20/19  
Insurance Journal: By the time David Kaisel got back from selling his flour at a farmers’ market, a wildfire in California’s Capay Valley had burnt both his tractor and the shipping container where he kept…
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Changing weather could put insurance firms out of business

09/19/19  
The pilots of the Port of London Authority are the cabbies of the Thames estuary. Based in Gravesend, 33km from the capital, they navigate some 10,000 ships into London terminals every year. Dispatched offshore on…
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Money Is the Oxygen on Which the Fire of Global Warming Burns

By Bill McKibben   09/17/19  
What if the banking, asset-management, and insurance industries moved away from fossil fuels?
Read more

The Climate Crisis Is Poised to Make Huge Swaths of America Totally Uninsurable

By Thor Benson   09/15/19  
“People are going to be trapped because once it’s uninsurable, good luck selling the house,” one climate expert cautioned.
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Climate change poses major risk to flood insurance program, experts warn

By James Jarvis   09/12/19  
Environmental experts on Wednesday warned House lawmakers about risks to the National Flood Insurance Program (NFIP) posed by climate change, saying the situation is likely to worsen in the coming years.
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First major U.S. insurance company to stop insuring and investing in coal

By Elana Sulakshana   09/11/19  
We may not immediately consider insurance as a key driver of climate change, but insurance companies provide a crucial service to dangerous fossil fuel projects. But now, that may be changing. Earlier this summer, Chubb,…
Read more

On the Alabama Coast, the Unluckiest Island in America

BY Gilbert M. Gaul   09/05/19  
Dauphin Island has been battered by more than a dozen hurricanes and tropical storms in recent decades. But that hasn’t stopped homeowners on the beach resort from repeatedly getting federal aid and insurance payouts to…
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If Crop Insurance Rewarded Conservation Practices, Would More Farmers Go No-Till?

By Jessica McKenzie   07/30/19  
Crop insurance works too well for farmers who farm without regard for long-term soil health, and not well enough for the few who do. A new task force wants to change that.
Read more

Major insurer Suncorp vows to stop covering thermal coal projects

By Maani Truu   07/26/19  
The latest announcement means there are now no Australian insurers willing to underwrite new thermal coal projects, experts and advocates say....
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Chubb bans coverage for coal, a first for big U.S. insurance firms

By Oliver Ralph   07/01/19  
Chubb became the first of the big U.S. insurers to announce a ban on coverage for coal companies.
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How 2020 revamp of federal flood insurance rates could affect you

By Robert Brodsky   04/06/19  
Location and rebuild cost are driving the new rates, FEMA and industry experts said. The overhaul has both support and criticism.
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Not Trusting FEMA’s Flood Maps, More Hurricane-Hit Cities Set Their Own Rules

By James Bruggers   03/19/19  
A growing number of cities are looking beyond the usual 100-year floodplain and requiring more homes to be built higher for their own protection.
Read more

Climate Change Insurance: Buy Land Somewhere Else

By Alyson Krueger   11/30/18  
In case global warming makes their homes uninhabitable, some millennials have a Plan B: investing in places like the Catskills, Oregon and Vermont.
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Climate Change Is Forcing the Insurance Industry to Recalculate

By Bradley Hope and Nicole Friedman   10/02/18  
Insurers are at the vanguard of a movement to put a value today on the unpredictable future of a warming planet.
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Emerging Climate Crisis for Home Insurance

By Peter Sinclair   10/22/19  
A task force advising Gov. Gavin Newsom and the Legislature reported in June that homeowners’ insurance costs at least 50 percent more in wildfire zones than elsewhere.
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I am a diver who documents climate change in the Arctic. And I am running out of time

By Jill Heinerth   10/06/19  
I am grateful for the opportunity to preserve images of this endangered kingdom, but what will happen to the people and animals of the North?
Read more

Broken flood insurance should help people move, not rebuild

By Rob Moore and Joel Scata, Opinion Contributors   10/10/17  
Hurricanes Harvey, Irma and Maria, have exposed a major shortcoming of the National Flood Insurance Program: federal flood insurance is ill-prepared to handle the major flood events that are becoming all-too frequent.
Read more