Insurance Companies Are Pulling Out of Climate-Stricken Markets. How to Fix It. - Barron's
Insurance Companies Are Pulling Out of Climate-Stricken Markets. How to Fix It. | Barron's
Climate Disasters Are Pushing Insurance Markets to the Breaking Point
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An aerial view of some of the 20 hillside homes destroyed by the Coastal Fire as cleanup work continues on June 17, 2022 in Laguna Niguel, Calif. Climate-driven disasters are threatening the functioning of insurance markets, writes Dave Jones. Mario Tama/Getty Images
About the author: Dave Jones is the director of the Climate Risk Initiative at the University of California Berkeley Law School’s Center for Law, Energy and Environment. From 2011 to 2018 he served as California’s insurance commissioner.
No one should be surprised at the news that major insurers are declining to write or renew home insurance policies in California and Florida or that 11 Louisiana insurers recently became insolvent. Drought, extreme heat, river and coastal flooding, hurricanes, and wildfires are increasingly more frequent and severe due to climate change. Just look at the recent flooding in the Northeast or the ongoing heat wave in the Southwest. Due to the failure to substantially reduce greenhouse-gas emissions in the U.S. and globally, we are marching steadily to an uninsurable future.
Insurers are responding rationally to more severe and frequent climate-change-driven losses. They are raising prices, declining to write new or renew existing insurance policies, and excluding coverage for climate-driven risks because the risk of loss is too great. For example, even though rates in Florida are three times the national average and Florida created a reinsurance program for home insurers and limited lawsuits against them, Farmers Insurance recently announced that it will not write new home, auto, or umbrella policies in Florida under the Farmer’s brand. The growing risk of losses from climate-change-driven hurricanes is simply too high.
How do we stop the march and ensure that private insurance markets can continue to function?
We need to reduce the underlying driver of risk: climate change. Without faster and more comprehensive action to reduce greenhouse-gas emissions, insurance will become even more unaffordable or unavailable for too many Americans. Despite progress in some states and through the federal Inflation Reduction Act, we simply are not moving fast enough to transition from the use of fossil fuels and other greenhouse-gas emitting industries. We need all states, not just a few, to set meaningful deadlines by which all new car and truck sales must be electric vehicles, to require that 100% of electricity generation come from renewable energy instead of fossil fuels, to require new buildings and homes to be heated and cooled by electricity and to retrofit existing ones, and we need investors and financial regulators to address the financial risks of climate change and to invest, underwrite, and lend accordingly. This is a partial list of the well-defined policies and actions we need now to substantially reduce greenhouse-gas emissions.
We also need a substantial increase in federal, state, and local funding for proven, nature-based approaches to reduce climate-driven risks and losses. Examples include ecological forestry to reduce fuels in forests contributing to more severe wildfires, levy setbacks and “bypasses” like the Yolo Bypass around Sacramento to divert floodwaters around the city, regenerative agriculture practices that reduce water demand, soil erosion, and improve agriculture sustainability, and re-establishing coastal salt marshes that reduce coastal flooding.
We need to stop putting more people and businesses into areas where we know there will be more severe and frequent climate-driven impacts and losses, or, at a minimum, reduce sprawl into areas where there are substantial risks of loss due to climate change. For example, Phoenix recently issued a moratorium on new development entitlements in recognition of projected declines in the supply of water due to climate change.
We need more insurers to link insurance availability and pricing to proven mitigation measures to reduce climate-driven risks. Examples include Alabama’s insurance discount for homes that meet the Fortified homes standard for wind protection. Or California’s required insurance-price discount for homes that are “hardened” against wildfire risk, including defensible space, using fire-resistant roofing materials, and protecting eaves from embers. Or Boulder’s program where some insurers agree to make insurance available to homeowners who meet verifiable home hardening standards. Insurers should, in both their underwriting and pricing models, account for the risk reduction benefits of ecological forestry, levy setbacks, replanting salt marshes, home and community hardening, and other proven mitigation measures.
Another partial solution is state-created plans that make insurance available when homeowners, renters, and businesses can’t find private-market insurance. California’s nonprofit FAIR plan provides fire insurance as a last resort. Many other states have similar plans, which cover risks the private sector won’t. That said, the increasing use of these state plans is a worrisome trend line.
A bad idea that will only accelerate the march to an uninsurable future is to prevent insurers from considering certain risks, like Texas did recently and other states are considering. If state laws are passed to preclude insurers from considering risks in underwriting or pricing, the safest course for the insurer is to simply not write the insurance.
Taking these constructive steps will extend the life of private insurance markets, but the benefits will be overwhelmed eventually by climate-change-driven risks and losses. Stopping the march to an uninsurable future requires that we substantially reduce greenhouse-gas emissions. Anything short of that means the private market insurance for homes, businesses, cars, and other assets facing climate-change-driven risks simply becomes unavailable.
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Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”