A Perfect Storm: Insurers Need To Step Up To Drive Climate Action

One only needs to glance at the headlines to see the huge potential liabilities facing the insurance industry: wildfires in Hawaii, a hurricane threatening California (the first in 84 years), and record flooding in New England. As of August 8^th, according to NOAA, there were 15 billion-dollar disasters in the US so far this year – and hurricane season is just beginning. Expand the scope outside of the US, and you can easily see where this is going.

I have long advocated that the insurance industry is the one industry that could legitimately push for broad climate action by pricing climate risk into its underwriting process. How is it that such a financially conservative industry has basically stuck its collective head in the sand for years as claims related to climate events continue to rise?

Well, insurers are finally starting to feel the pressure of a climate change-impacted world. Reinsurers, many of which are based in Europe, are raising the rates they charge insurers in an effort to address the increased climate-related event risk. According to Reuters, many of those premiums have risen by as much as 50% this year. Those expenses will, of course, be passed down to the policyholders – businesses and individuals.

A recent Axios article highlights how some insurers are taking even more drastic steps in areas with greater risk, such as California and Florida. State Farm and Allstate
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have both announced that they will no longer be accepting new insurance applications in California, while Farmers is taking the same route in Florida. This will leave businesses and individuals with fewer choices that are going to be more expensive but also more in line with the actual risk associated with those locations.

This will likely lead to even more problems for homeowners. A recent article in The Wall Street Journal details how some Americans are choosing to forego home insurance because of the rising costs. The reality, however, is that most homeowners do not have adequate liquidity to recover from a disaster event without insurance.

And this situation is not going to get any better. Insurance rates are going to continue to increase as more climate-related disasters happen and insurers integrate that climate risk into their underwriting practices. No pun intended, but it is turning into a perfect storm.

At some point, the federal and state governments are going to have to step in and give home and business owners a choice. Move from high-risk areas, or you’re on your own. We can no longer afford to subsidize those who intentionally choose to live in these risky areas. A one-time moving subsidy would be much cheaper in the long term than continuously building back from disaster after disaster.

Daniel Schwarcz, a professor at the University of Minnesota Law School, recently said in The New York Times
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that he believes that insurance price regulation should be eliminated and that insurers should be allowed to charge whatever they want to in disaster-prone areas. This would eventually lead to fewer homes and businesses being built in those areas, and “would actually result in a more resilient infrastructure, more adaptive to climate change.” Basically, we should let the market, and the folks who price risk at the insurance companies, drive behavior. By doing so, we can see real change.