Shocking Revelation: Insurance Costs Skyrocket, Posing Dire Threat to Hurricane-Prone American States!

Welcome back. In today’s newsletter I investigated the intersection of insurance and global warming where the two are increasingly in tension: in the southeastern United States.

The situation I detail below highlights that global warming is inflationary. For decades we have enjoyed cheap gasoline and plastic. We saved money on these items. But now the costs of climate change are starting to emerge in other areas of the family budget.

Insurance is not the flashiest economic sector. We all prefer to talk about electric vehicles or hydrogen technology. But the insurance industry is on the front lines of the battle against climate change, and the outlook certainly isn’t getting any better. Last month was the hottest September ever and 2023 is firmly set to become the warmest year on record, according to the World Meteorological Organization said last week.

In the United States we don’t have a formal carbon tax because Republicans would never allow it. But there certainly is a de facto carbon tax in this country – and it’s coming through the insurance market. — Patrick Temple-West

Homeowners are forced to absorb the costs as insurers flee southeastern states

Farmers Insurance, one of the largest property and casualty providers in the United States, found itself under attack this year for political “insomnia.” In July, farmers quietly pulled out of Florida amid exploding costs, prompting the state’s chief financial officer to accuse the insurer of “virtue signaling” on environmental, social and governance (ESG) issues.

“Farmers Insurance is on track to become the Bud Light of insurance,” said Florida CFO Jimmy Patronis She saidrefering to the culture wars controversy involving brewing company Anheuser-Busch InBev earlier this year.

Sarcasm aside, the CFO’s outburst underscores the reality of the Sunshine State: It’s teetering toward a financial crisis. Insurance companies are fleeing Florida as the costs of insuring properties have risen dramatically. Although Governor Ron DeSantis and Florida lawmakers in 2022 tried to stem the loss of insurance coverage, the threat of hurricanes has insurance companies racing for the exit. Six property and casualty insurers became insolvent in 2022, according to the state.

As a result, Florida’s state insurance program, which is supposed to be an insurer of last resort, instead became the state’s largest insurer. If the program does not have sufficient funds to cover insurance claims due to hurricanes, Florida taxpayers will have to cover the balance.

For example, if Hurricane Idalia — which hit a relatively unpopulated part of Florida in August — had it hit the Tampa Bay area, the state insurer would likely not have enough funds to cover the claims, according to a September report from the nonprofit First Street Foundation.

“Hurricane Idalia’s intensification prior to landfall was fueled by climate-related increases in water temperatures in the Gulf [of Mexico]” said First Street. “As the climate continues to change, intensifying hurricanes over the Gulf will become the norm and a landfall in a populated area could spell disaster for the Citizens Insurance program,” which is the insurance company state of Florida.

While the insurance problem is particularly acute in Florida, insurers’ costs have also steadily increased around the world. Swiss Re estimates that inflation-adjusted annual insured losses from natural catastrophes have topped $100 billion five times since 1970, and three of those have occurred in the past six years, Moody’s said in a September report.

But putting a price on insurance costs due to climate change is tricky, as it’s nearly impossible to “extricate” yourself from rising temperatures and other factors, said Marc Ragin, a professor at the University of Georgia’s business school.

“While climate change almost certainly plays a role in rising insurance costs, including government-provided insurance, I would be skeptical of anyone who thinks they have a number to attribute to that,” Ragin told me.

Patronis’s punchy phrase drew attention, but the seeds of his anxiety — also felt by Florida’s 22 million residents — were on stark display in a monotonous insurance meeting with regulators in the state capital in June. Citizens officials presented a troubling picture of the state’s insurance situation and called for an average premium increase of 13%.

Citizens estimated that two Category 5 hurricanes in one year could result in $23.9 billion in costs. Maximum losses from a once-in-100-year storm continued to “increase dramatically,” the organization said.

“I don’t say this lightly: No one wants to pay more for insurance,” said Tim Cerio, president of Citizens.

The problem is not isolated to Florida. In October 2022, Louisiana approved a 63% rate increase. on its residential property insurance policies starting this year. Louisiana, which in 2020 was hit by the most storms of any hurricane season on record, has also lost private insurance companies in recent years.

The United States also provides a federal flood insurance program. This insurance does not cover vacation homes but helps approximately 1.7 million Floridians. Today, the National Flood Insurance Program exists approximately $20 billion in debt. Its losses were amplified by flooding “influenced by climate change and sea level rise,” but also by more people living in flood-prone neighborhoods, Firas Saleh, director of Moody’s RMS, told me.

To mitigate these losses, the Federal Emergency Management Agency, which manages the U.S. Flood Insurance Program, has established standards to withstand climate change-driven flooding and avoid building in floodplains where possible, said Hannah Perls, senior attorney from Harvard Law School. Me. But these standards have become political: They were established by Democratic President Barack Obama, revoked by the Donald Trump administration, and reinstated by President Joe Biden.

But some Floridians have another idea: cutting some insurance altogether. At a Florida insurance hearing this year, Mel Montagne, an insurance salesman in the Florida Keys, said the federal government requires both flood and wind insurance. But historically, the real damage from hurricanes has come from wind, not flooding, he said.

“We vehemently oppose the requirement for flood insurance,” Montagne said, adding that wind insurance should be the government’s only requirement.

Florida and other states in June sued the Biden administration discussing government insurance coverage requirements has made protection unaffordable. In oral arguments in September, states supported people would leave their homes and businesses if federal insurance rates went into effect. The case is ongoing.

Arguing about calculating insurance costs is a distraction. What the Farmers are fighting and the court battle highlights is that global warming is an inflation problem, which falls on ordinary taxpayers. (Patrick Temple-West)

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