Janet Yellen sees a ‘protection gap’ between insurance and climate change—just 60% of 2020’s $165 billion in losses got covered
Treasury Secretary Janet Yellen said the weather-related havoc playing out across the US is exposing a “protection gap” for Americans seeking insurance against property losses. Yellen, who also chairs the Financial Stability Oversight Council, said that a spate of extreme weather events is causing insurers to raise rates on homeowners. Some firms have withdrawn entirely from offering coverage in areas deemed to be high risk, she added. Heat waves have been especially widespread and persistent in the US this summer, with some 170 million Americans under excessive heat warnings and advisories as of Thursday. Wildfires have also plagued western states and parts of eastern Canada, while floods caused severe damage in Vermont. “American households are already seeing the impacts even if their own homes have not been damaged,” Yellen said Friday at an FSOC meeting in Washington. “As a result, more households are turning to residual markets for coverage or are foregoing insurance entirely.” In 2020, Yellen added, just 60% of the $165 billion in total economic losses from climate-related disasters were covered by insurance. Yellen said it’s necessary for FSOC to examine how these shifts may affect the wider financial system. “In addition to challenges to households, we must also better understand the implications of changes in property insurance for real estate markets and financial institutions that rely on insurers to help manage risks,” she said. FSOC, established after the global financial crisis to identify and address systemic vulnerabilities in the US financial system, includes the heads of the Treasury Department, Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission, among other regulators. Sign up today.
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.”