Uninsurable America: Climate change hits the insurance industry
Decisions by two major insurers to stop offering new homeowner's policies in California highlight the growing portion of America that's becoming close to uninsurable.
Why it matters: The threat of climate change-related disasters is a large factor driving up consumer costs and putting insurers out of business in parts of California, Florida, Louisiana and elsewhere.
- It is also bedeviling regulators. "I never thought I would see in my lifetime houses that are flat-out uninsurable," says Robb Lanham, chief sales officer for insurance brokerage HUB Private Client, which works with about 500 insurers.
Driving the news: The recent moves by State Farm and Allstate to stop offering new homeowner insurance policies in California have kicked off a national conversation on insuring risk in an increasingly perilous climate.
- State Farm said in late May it was done accepting new applications for California property insurance — including homes and commercial property — "due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market."
- An Allstate spokesperson confirmed to Axios that it quietly did the same thing in California in 2022 for the same reasons.
The big picture: Disastrous wildfires have plagued California in recent years, while multiple hurricanes have hit Florida and Louisiana, racking up losses for insurers at the same time that home replacement costs have skyrocketed.
- Studies show that climate change is leading to larger, more frequent wildfires in much of the West.
- Human-caused climate change is also making hurricanes more prone to rapid intensification and capable of delivering greater amounts of rainfall.
- At the same time, sea level rise from climate change is causing more frequent sunny day flooding, and more damaging storm surge events in coastal areas.
Zoom in: The regulatory environment is also contributing to insurance flight.
- In California, regulators have blocked insurers from raising rates above a certain threshold, which insurers say has prevented them from covering the costs of their policies.
- At an average of about $1,300 per year, home insurance rates there "have been artificially low for decades," Insurance Information Institute (III) spokesman Mark Friedlander tells Axios.
- "This means insurers have been writing business there for this very high risk. And they've been losing money."
Threat level: Lanham said many of his clients can't get insurance for their homes.
- The hardest states to insure homes, in order, are California, Florida, Texas, Colorado, Louisiana and New York, Lanham says.
- But this is a 50-state problem as insurers are being forced to re-assess their risk tolerance as climate change leads to more common and severe extreme weather events, says Steve Bowen, chief science officer at Gallagher Re.
- Unless investments are made in hardening infrastructure, more insurance companies will have to pull out of markets, he said.
- "We really need to fundamentally change how we're viewing risk and accept that the risk that we assumed was normal 20 years ago is not the same risk today. And it's definitely not going to be the same risk 10, 20 years from today," Bowen said.
State of play: In many areas, homes are insurable, but costs are mushrooming.
- In Florida, average annual rates are expected to rise about 43% to nearly $6,000 in 2023, according to the institute.
- Friedlander and Nyce agreed that average Florida rates could hit $10,000 within a few years. In some areas, that amount has already been surpassed.
- "There's a cost associated with living in paradise," Charles Nyce, a Florida State University professor and expert in catastrophic risk financing, tells Axios.
The impact: Some two dozen Florida-based insurers are on a regulator's watchlist due to their financial predicaments.
- "We're not sure how many of those are going to survive," Friedlander says. "We expect more to fail."
- In some parts of Florida, residents must now turn to the state-backed Citizens Property Insurance for coverage, whose rate increases are restricted by lawmakers.
- It has become the largest insurer in the state with more than 1.2 million customers.
- In the event of more extreme weather events, "we all could be on the hook to help replenish their funds," says Friedlander, a Florida resident.
Between the lines: Home replacement costs have risen 55.4% since 2019, according to the institute, as wages and material costs escalated.
- Another problem is that the cost of reinsurance — essentially insurance for insurers — has also risen to prohibitive levels for companies operating in areas prone to escalating climate risks.
Worth noting: When homes become uninsurable, it makes it difficult to get a mortgage on the property.
- In some cases, insurers are revising the types of policies they offer by including deductibles that are a percentage of the home’s value, instead of a flat amount.
- Lanham says the risk of rising rates is that it'll make areas unaffordable for certain residents and will trigger migration, causing coastal residents to move inland, for example.
Go deeper: Listen to the Axios Today podcast, where host Niala Boodhoo and Andrew Freedman talk about the growing portion of America that's becoming close to uninsurable, in part because of climate risks.