United States: climate crisis harms insurers – 05/31/2023 – Market

The climate crisis is turning into a financial crisis.

This month, California’s largest home insurer, State Farm, announced it would stop selling policies to homeowners. This is not just happening in wildfire zones, but across the state.

Insurers, tired of losing money, are raising premiums, restricting coverage or withdrawing from some areas — making it more expensive for people to continue living in their homes.

“Risk has a price,” said Roy Wright, former insurance commissioner at FEMA (Federal Emergency Management Agency) and now director of the Insurance Institute for Business and Home Safety, a research organization. “It’s something we’re starting to see.”

In certain areas of eastern Kentucky devastated by storms last summer, the price of flood insurance is expected to quadruple. In Louisiana, the top insurance industry official says the market is in crisis and is offering millions of dollars in subsidies to try to attract insurers to the state.

And in much of Florida, homeowners are increasingly scrambling to purchase storm insurance. Most of the big insurers have already left the state, prompting homeowners to work with smaller private companies struggling to stay in business — a possible glimpse of California’s future if more of the big insurers leave the state.

Growing ‘disaster exposure’

State Farm, which insures more homeowners in California than any other company, said it would stop accepting applications for most types of new insurance policies in the state because of “increasing exposure to catastrophes.”

The company said that while it recognized the work of California authorities to reduce losses from wildfires, it had stopped issuing new policies “to improve the company’s financial strength.” A State Farm spokesperson did not respond to a request for comment.

California insurance premiums rose after wildfires became more devastating than expected. A series of fires that started in 2017, many caused by sparks from faulty utility equipment, have grown in size under the effects of climate change. Some homeowners lost their insurance entirely because insurers refused to cover homes in vulnerable areas.

a broken model

California’s troubles resemble a slow-motion version of what Florida experienced after Hurricane Andrew devastated Miami in 1992. The losses drove some companies into bankruptcy and caused most national carriers to pull out of the state.

In response, Florida established a complicated system: a market based on small insurers, backed by Citizens Property Insurance Corp.

For some time, the system worked. Then came Hurricane Irma.

The 2017 hurricane, which made landfall in the Florida Keys as a Category 4 storm before moving up the coast, did not cause particularly great damage. But it was the first in a series of storms, culminating in Hurricane Ian last October, that broke the model insurers had come to rely on: A bad claims year, followed by a few quiet years to rebuild their reserves.

Since Irma, almost every year has been bad.

Private insurers began to struggle to pay their claims; some closed their doors. Those that survived significantly increased their premiums.

More people have switched from the private market to Citizens, which recently became the state’s largest insurance provider, according to Michael Peltier, a spokesman. But Citizens doesn’t cover homes with a replacement cost of more than $700,000 (R$3.5 million), or $1 million (R$5 million) in Miami-Dade County and the Florida Keys.

That leaves involved homeowners with no option but private coverage — and in some parts of the state, that coverage is getting harder to come by, Peltier said.

‘There just isn’t enough wealth’

Florida, despite its challenges, has one important advantage: A steady stream of residents who remain, for the time being, willing and able to pay for the rising cost of living in the state. In Louisiana, the rising cost of insurance has become, for some communities, a threat to their existence.

As in Florida after Hurricane Andrew, Louisiana’s insurance market began to tighten after insurers began to pull out due to Hurricane Katrina in 2005. Then, starting with Hurricane Laura in 2020, a series of storms hit the state. Nine insurers went bankrupt; people started flocking to the state version of the Florida Citizens plan.

The state’s insurance market “is in turmoil,” Louisiana Commissioner of Insurance James Donelon said in an interview.

In December, Louisiana had to increase premiums for coverage provided by its Citizens plan by 63%, to an average of $4,700 a year. In March, the state borrowed $500 million from the bond market to pay off claims from homeowners that had been abandoned when their private insurers failed, Donelon said. The state recently agreed to new subsidies for private insurers, essentially paying them to operate in the state.

Donelon said he hoped the subsidies would stabilize the market. However, Jesse Keenan, a professor at Tulane University in New Orleans and an expert on climate adaptation and finance, said the state’s insurance market would be difficult to turn around. The high cost of insurance has started to affect home prices, he said.

In the past, it would have been possible for some communities – those where homes are passed down from generation to generation, with no mortgage required and no banks requiring insurance – to go completely uninsured. But as climate change makes storms more intense, this is no longer an option.

“There just isn’t enough wealth in these low-income communities to continue to rebuild, storm after storm,” Keenan said.

The shift to risk-based pricing

Even as homeowners in coastal states face rising wind insurance costs, they are being pressured in another direction: flood insurance.

In 1968, Congress created the National Flood Insurance Program [programa nacional de seguro contra inundações], which offered taxpayer-supported coverage to homeowners. Like the California wildfires and the Florida hurricanes, the flood program arose from what economists call a market failure: Private insurers did not provide flood coverage, leaving homeowners with no choice.

The program achieved its primary goal of making flood insurance widely available at a price homeowners could afford. But as the storms became more severe, the program faced increasing losses.

In 2021, FEMA, which administers the program, began setting premiums that match the actual flood risk faced by homeowners – an effort to better communicate the true dangers different homes face, as well as to contain government damages. .

These increases, which are being implemented gradually over the years, in some cases amount to a huge jump in prices. The current cost of flood insurance for single-family homes nationwide is $888 per year, according to FEMA. Under the new risk-based pricing system, that average cost would be $1,808 (R$9,212).

The best way policymakers can help keep the cost of insurance affordable is to reduce the risk people face, said Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund. For example, authorities could impose stricter building standards in vulnerable areas.

Government mandated programs, such as the flood insurance plan, or Citizens in Florida and Louisiana, were designed to support the private market. But as climate shocks worsen, she said, “we’ve now reached the point where this is starting to crack.”

Translated by Paulo Migliacci