The climate crisis is turning into a financial crisis.
This month, California’s largest homeowner insurance company, State Farm, announced that it would stop selling homeowners insurance. That’s not just happening in bushfire areas but everywhere in the state.
Insurers, tired of losing money, are raising prices, limiting coverage or pulling out of some areas entirely – making it more expensive for people to live in their homes.
“Ris is always there,” said Roy Wright, a former insurance official at the Federal Emergency Management Agency and now head of a research group at the Family Safety and Business Insurance Institute. its price. “We’ve only seen it now.”
In parts of eastern Kentucky devastated by last summer’s hurricanes, flood insurance prices will quadruple. In Louisiana, the top insurance official said the market is in crisis and is providing millions of dollars in subsidies to try to attract insurers to the state.
And in much of Florida, homeowners are increasingly struggling to afford hurricane insurance. Most major insurers have pulled out of the state, sending homeowners to smaller private companies trying to stay in business — a glimpse into California’s future if more jobs come. The big insurance company left.
Increased ‘catastrophic exposure’
State Farm, which insures more California homeowners than any other, says it will stop accepting orders for most new types of insurance policies in the state because “catastrophic exposures are increasing rapidly.”
The company said that while it recognizes the work of California officials in mitigating wildfire damage, it must stop writing new policies “to improve the financial strength of the company.” A State Farm spokeswoman did not respond to a request for comment.
Insurance rates in California skyrocketed after wildfires became more devastating than anyone predicted. A series of fires broke out in 2017, many caused by sparks from broken utilities, which have exploded on a large scale due to the effects of climate change. Some homeowners lose coverage entirely because insurance companies refuse to cover homes in vulnerable areas.
Michael Soller, a spokesman for the California Department of Insurance, said the agency is working to address the underlying factors that have caused disruption in the insurance industry nationally and around the world, including weak Biggest factor: climate change.
He highlighted the department’s Bushfire Safer initiative, a fire recovery program, and noted that state legislators are also working to development control in areas with the highest fire risk.
But Tom Corringham, a research economist with the Scripps Institute of Oceanography at the University of California San Diego who has studied the costs of natural disasters, says that allowing people to live in homes is getting worse. becoming uninsured or insuring too expensive is unsustainable. .
He said policymakers must seriously consider buying the most at-risk properties, or moving residents away from the most dangerous communities.
Dr Corringham said: “If we let the market sort itself out, we would have insurers refusing to write new policies in certain areas. “We’re not sure that’s in the best interest of anyone but the insurers.”
A broken model
California’s woes are like a slow-motion version of what Florida experienced after Hurricane Andrew devastated Miami in 1992. The losses have bankrupted several insurers and brought most carriers to the table. National load must withdraw from the state.
In response, Florida establish a complex system: a marketplace based on small insurers, backed by the Citizen Property Insurance Corporation, a state-mandated company that will provide hurricane insurance to homeowners who cannot find coverage private.
For a while, it mostly worked. Then came Hurricane Irma.
The 2017 hurricane, which made landfall in the Florida Keys as a Category 4 hurricane before moving toward the coast, did not cause particularly great damage. But this is the first in a series of storms, which culminated in Hurricane Ian last October, disrupting the model insurers have relied 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 have difficulty paying their claims; Some have gone out of business. The survivors increased their odds dramatically.
More and more people are leaving the private market for Citizens, which recently became the state’s largest insurance provider, said spokesman Michael Peltier. But Citizens won’t cover homes with replacement costs of more than $700,000, or $1 million, in Miami-Dade County and the Florida Keys.
That leaves those homeowners with no choice but to have private insurance — and in parts of the state, that insurance is getting harder and harder to find, says Peltier.
‘Just not enough wealth’
Florida, despite its challenges, has one key advantage: A steady stream of residents remain, willing and able to afford the growing cost of living there. In Louisiana, the rising cost of insurance has, for some communities, become a threat to their very existence.
Like Florida after Andrew, Louisiana’s insurance market started to struggle after insurance companies started leaving after Hurricane Katrina in 2005. Then it started with Hurricane Laura in 2020, a series of storms hit the state. Nine insurance companies went bankrupt; People started flocking to the state’s own version of the Florida Citizenship plan.
James J. Donelon, Louisiana’s insurance commissioner, said in an interview that the state’s insurance market is “in crisis.”
In December, Louisiana had to increase premiums for coverage offered by its Citizens program by 63 percent, to an average of $4,700 a year. Mr. Donelon said in March it borrowed $500 million from the bond market to pay off the claims of homeowners who were abandoned when their private insurance company went bankrupt. The state recently agreed to new subsidies for private insurers, essentially paying them to do business in the state.
Mr. Donelon said he hoped that the subsidies would stabilize the market. But 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. High insurance costs are already starting to affect home prices, he said.
In the past, some communities – those whose homes were passed down from generation to generation, didn’t require a mortgage and didn’t require insurance banks – could be completely uninsured. But as climate change makes hurricanes more intense, that’s no longer an option.
“There is not enough wealth in those low-income communities to keep rebuilding, storm after storm,” Dr. Keenan said.
Switch to risk-based pricing
Even as homeowners in coastal states face rising costs of wind insurance, they are being squeezed from another direction: Flood insurance.
In 1968, Congress established the National Flood Insurance Program, which provides taxpayer-supported insurance to homeowners. Like the wildfires in California and hurricanes in Florida, the flood program arose from what economists call a market failure: Private insurers would not provide flood insurance, leaving the homeowner with no other choice.
The program achieved its primary goal of providing widespread flood insurance at a price homeowners could afford. But as the storms became more severe, the program faced growing losses.
In 2021, FEMA, the agency that administers the program, has begun setting rates by actual flood risk facing home owners – an attempt to better communicate the real danger to various properties, and also to prevent losses to the government.
Those increases, which are being made gradually over many years, have in some cases led to huge jumps in price. The current cost of flood insurance for single-family homes nationwide is $888 a year, according to FEMA. Under the new, risk-based pricing, that average cost would be $1,808.
And at a time when existing policyholders actually have to pay premiums that fully reflect that risk, the impacts of climate change could drive premiums much higher.
David Maurstad, head of flood insurance, said in a statement: “Properties located in high-risk areas should plan and expect to cover that risk.
Carolyn Kousky, the Environmental Defense Fund’s vice president of economics and policy, says the best way for policymakers to help maintain the right price of insurance is to reduce the risk that people encountered. For example, officials may impose tougher building standards in vulnerable areas.
Government-mandated programs, such as flood insurance plans, or Citizens in Florida and Louisiana, are seen as stops for the private market. But as climate shocks worsen, she said, “we’re at a point where that’s starting to crack.”
