Title: The Future of Insurability Amid Climate Change
Header: The Increasing Difficulty of Insuring Homes in the US
As climate change becomes more prevalent, natural disasters such as wildfires, hurricanes, and flooding are increasing in frequency and severity, causing insurance companies to rethink their underwriting strategies. In California, State Farm and Allstate have announced that they will stop selling coverage to homeowners statewide due to the increasing risk of wildfires, with losses from fires reaching $69 billion globally between 2018 and 2022. Similarly, Florida, Texas, New York, and Louisiana are facing challenges related to climate change-related disasters that make it harder to insure properties. With the rise in residential building replacement costs across the nation, increased risk accumulation in disaster-prone areas, and insurance companies losing money from massive wildfire claims, the future of insurability remains uncertain.
Subheader: The Rise of Uninsurable States
As climate change becomes more pronounced, states such as Louisiana and Florida are becoming increasingly uninsurable. Between 2016 and 2020, Florida lost six insurers that offered homeowners coverage, and its remaining insurers have raised premiums by just under triple the national average. Meanwhile, Louisiana is now offering millions of dollars to lure insurers into the market, yet the price of flood insurance is projected to quadruple in eastern Kentucky. This phenomenon has caused demographic shifts, as the more vulnerable people become more susceptible to climate-related disasters.
Subheader: The Limitations of Federal Flood Insurance
The federal government has subsidized tragedy for decades through schemes like federal flood insurance, which has kept average premiums below half of what they could be if assessed properly. It has been doomed to fail, and the government has started phasing it out. Meanwhile, California has rules dating back to the 1980s that make it difficult for insurers to prospectively assess risk based on the rising cost of reinsurance and improved climate models. As a result, homeowners are left with high premiums, the rising cost of building replacement, and a lack of insurer support.
Subheader: Populous Coastal Cities at Risk
Miami and California hold two significant population centers along the US coastlines, contributing to nearly three-fourths of Florida’s population and over thirty-nine million residents in California. With climate change related disasters becoming widespread, the cost of insuring homes, and properties is becoming a more and more burdensome effort. Miami is one of those areas on the US coastline that is sinking, but its population has still sharply increased, with property agents selling new condos even when the signs are clear that the coast has an expiration date.
Header: The Future of Insurability Companies in the Face of Climate Change
Subheader: Moving from Detection to Prevention
Sean Kevelighan, the CEO of the Insurance Information Institute, believes that the insurance industry needs to move away from the detect-and-fix mindset to adopt a model of fix and prevent. The price to pay for natural disasters is significant, and insurance companies need to work more closely with developers and estate agents to publicize the potential risks and costs of insurance in vulnerable areas. They cannot backtrack as more states become more uninsurable due to climate change.
Subheader: Insurability Companies Need Further Proactivity
The insurance industry must become more proactive in the face of climate change and consider the future of insurability amid these rapidly changing conditions. It needs to consider factors affecting risk prevention, such as the rising cost of materials, increasing risk levels, and demographic changes resulting from the spread of natural disasters. Companies that prepare proactively in the face of climate change will be better equipped to provide quality insurance coverage and value to their clients.
Additional Piece:
Climate change is affecting the frequency, intensity, and distribution of natural disasters worldwide. As natural disasters increase in severity and frequency, so does the cost of insuring homes and properties. Insurance companies must rethink their underwriting strategies to prevent facing losses from massive wildfire claims, especially in the United States. Climate change is causing a decline in insurability, making it difficult for homeowners in several states to insure their homes. Florida, for instance, has lost six insurers that offered homeowners’ insurance due to increasing risk levels. Insurance companies are also losing money from massive wildfire claims that rank the country among the most dangerous places on the planet to breathe.
The rise of uninsurable states also indicates the waning of insurer support for vulnerable people who are most susceptible to climate-related disasters. As a result, homeowners are left with high premium rates, the rising cost of building replacement, and a lack of insurer support. Moreover, federal flood insurance has also subsidized risk for decades, leading to its gradual phase-out by the government. Similarly, California has rules that prevent insurers from prospectively assessing risk based on improved climate models or reinsurance costs.
Insurance companies must become more proactive in the face of climate change. They need to work with developers and estate agents in vulnerable areas to assess potential risks and costs of insurance. There is a need to consider the future of insurability as climate change ravages on. Companies that prepare proactively will be better equipped to offer valuable insurance coverage to their clients.
Subsequently, homeowners in high-risk areas will be much more vulnerable, exposing them to greater risk accumulation, and unwillingly removing less-wealthy people from areas that are becoming uninsurable. As prices rise, there will be significant demographic shifts as the only homeowners who can afford insurability remain at risk. The White House’s recent move to allocate $24 billion to increase climate resilience in at-risk communities may provide some help to homeowners. However, insurance companies need to collaborate with developers and estate agents to proactively assess risks and develop preventive measures.
In the wake of increased frequency, complexity, and cost of natural disasters, companies in the insurance industry need to rethink their underwriting strategies and consider the future of insurability amid rapidly changing conditions. They must adopt more proactive approaches to prepare for the future of insurability, particularly in disaster-prone areas. In doing so, they will create value for their clients while mitigating losses from climate-related Natural disasters.
Summary:
Climate change-related natural disasters are making it more difficult to insure homes and commercial properties in several parts of the United States. Insurance companies such as State Farm and Allstate are withdrawing their services in regions prone to natural disasters, causing demographic shifts. Additionally, prosperous parts of the country, such as California, have become uninsurable due to insurance regulations and rising replacement costs. Therefore, insurance companies must rethink their underwriting strategies and become more proactive to prevent losses from natural disasters and consider the impact of climate change on insurability. Collaboration with developers and estate agents while taking preventive measures is a viable solution.
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I thought we were done with the masks. Hand. New Yorkers were wearing them again last week, at least those of us who dared to go out on the streets, as the city was blanketed in thick plumes of smoke from the Canadian wildfires that had been burning for more than a month. School and outdoor events were canceled and residents were warned to stay indoors as air quality reached its worst level on record. New York has become, albeit briefly, one of the most dangerous places on the planet to breathe.
As bizarre as it was to see the city covered in a Delhi-like haze, this was no black swan event. Wildfires have raged in California, southeast Australia, Canada and parts of the Mediterranean in recent years, thanks to warmer temperatures and longer dry seasons. According to reinsurer Munich Re, global losses from fires between 2018 and 2022 reached $69 billion, with insurers paying $39 billion in claims.
Four of the five most economically costly wildfires of the last decade have occurred in California. That’s one of the main reasons State Farm, one of the largest insurance companies in the country, announced late last month that it would stop selling coverage to California homeowners, not just those in wildfire areas but everywhere statewide.
Allstate, California’s fourth-largest real estate insurer, is also holding back on signing new policies. Between wildfires, sea level rise, and non-climate-related issues like high home replacement costs, California has become, by some measures, the least insurable state in the United States.
Florida, Texas, Colorado, Louisiana and New York are not far behind, however, as climate change-related natural disasters make it much more difficult – in some cases even impossible – to insure homes and commercial properties even there. In hurricane-prone Florida, also notorious for insurance fraud, many large providers have pulled out, leaving the market to a handful of smaller players who are struggling to survive. Premiums for homeowners in the state were just under triple the national average last year, according to the Insurance Information Institute.
But surprisingly, that hasn’t stopped people from building or moving to Florida: The state’s population (more than three-quarters of which lives in a coastal area) has increased 15 percent since 2010-20, even as places like Miami are clearly sinking. Last year, while on my way to a conference in South Beach, I noticed the water rising on the street. When my taxi arrived at the venue I had to roll up my jeans to cross the road to the beach hotel. Despite clear indications that the coast has an expiration date, new condos were springing up around me. I asked the driver, a lifelong resident, what he thought. “The weather is definitely getting worse,” she said. “But the people who buy these things have so much money they don’t care if the buildings are blown up in 20 years.”
Certainly this is true in parts of Miami and California. This is less true, for example, in Louisiana, a poor state now offering millions of dollars in subsidies to lure insurers into the market, or in eastern Kentucky, where the price of flood insurance is projected to quadruple. But insurance companies can hardly be blamed for their reluctance to be present in these markets given the increase in risk accumulation in disaster-prone areas. There’s also the overall jump in residential building replacement costs nationwide, which have risen more than 55% since 2019 thanks to labor and materials inflation.
Indeed, there is a strong argument to be made that America has recklessly subsidized risk for decades through things like federal flood insurance, which is slowly but surely being phased out by the government. Federal flood insurance has kept average premiums below half of what they could be if risk were appropriately assessed. Meanwhile, states like California have rules dating back to the 1980s that prevent insurers from prospectively assessing risk based on new and improved climate models, or by incorporating the (also rising) cost of reinsurance.
As prices rise, we will certainly see some demographic shifts from the uninsurable parts of America. Those who remain in place are likely to be wealthy enough to afford the rising premiums or become much more vulnerable. The White House is offering help on the latter front, with $24 billion earmarked for increasing climate resilience in at-risk communities.
But the insurance industry also needs to become more proactive. “We need to move from a detect and fix mindset to a fix and prevent model,” says Sean Kevelighan, chief executive officer of the Insure Information Institute. He wants the industry to work more closely with developers and estate agents to better publicize the potential risks and costs of insurance in vulnerable areas.
This is not a trend that is likely to be limited to the United States. A recent Munich Re report examining America’s fire problems finds that “similar developments can be observed in many parts of the world, including the European Mediterranean region or parts of Australia. Given the high values exposed in these areas, risk management needs to keep a close eye on these developments”.
https://www.ft.com/content/a801a8e0-c977-449a-af26-a19500820007
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