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U.S. Insurance Unraveling Amid Climate Risks: Key Lessons

The insurance market in the United States is the largest in the world. With various insurance types available, including health, auto, home, life, and business insurance, it is a safety net against unexpected events and risks.

The US landscape

The market is highly competitive, but as climate change intensifies, insurers face a surge in natural disasters. In 2023 (as of November 06th), the U.S. has been inflicted by 24 climate disasters with losses exceeding $1 billion. These events included 1 drought event, 2 flooding events, 18 severe storm events, 1 tropical cyclone event, 1 wildfire event, and 1 winter storm event.

- 24 separate billion-dollar weather and climate disasters that impacted the United States throughout 2023
Figure 1: 24 separate billion-dollar weather and climate disasters that impacted the United States throughout 2023
Billion-dollar events affected the U.S. in 2023
Figure 2: Billion-dollar events affected the U.S. in 2023

Since 1980, the United States has grappled with 373 weather and natural disasters, accumulating total costs surpassing $2,635 billion. Notably, these costs are upward, as evidenced by the last five years (2018 to 2022), during which 90 events incurred over $617 billion. On an annual basis, the economic toll from wildfires, exacerbated by climate change, fluctuates between $394 billion and $893 billion — more than double previous government estimates.

Beyond direct damage, the repercussions include diminished real estate values, health risks and premature deaths from wildfire smoke, threats to watersheds, and income loss. Consequently, these natural disasters have prompted insurers to reassess their underwriting practices, pricing strategies, and risk management approaches to cope with the growing unpredictability of weather-related events.

Climate change can threaten this market by upending climate models and risk management strategies used by insurers.

The Great Escape

In the wake of extreme weather occurrences, U.S. insurers have disbursed $295.8 billion in natural disaster claims over the past three years, highlighted in figure 3 below. That’s a record for a three-year period, according to the American Property Casualty Insurance Association.

U.S. Insured Losses (2013 - 2023)
Figure 3: U.S. Insured Losses (2013 - 2023)

Climate-related risk events are happening all over the country and so insurers are having to relook at their risk concentration"

Stated David Sampson, president of the American Property Casualty Insurance Association

In turn, major insurance providers are increasingly opting out of offering crucial coverage to homeowners in disaster-prone areas.

Several prominent U.S. property insurers, including Allstate, American Family, Berkshire Hathaway, Erie Insurance Group and Nationwide, have communicated to regulators that the effects of climate change-induced extreme weather patterns have compelled them to discontinue coverage in specific regions.

California is at the forefront of this insurance crisis. Major insurers in the state, State Farm and All State, representing over 20% of the market share, have stopped offering coverage for residential and commercial properties.

Increasing vulnerability to catastrophes, soaring construction expenses, and the challenging landscape of the reinsurance market have collectively rendered it economically unfeasible for these companies to offer insurance policies.

Similar challenges have been witnessed in other states like Colorado, Louisiana, and Florida, where insurers are wary of inflating losses from climate hazards.

This situation leaves several states at risk of becoming insurance deserts, with vulnerable areas experiencing even higher premium increases. The average cost of home insurance has risen dramatically in states like Texas, Colorado, and Florida, with Louisiana facing an insurance crisis due to record-setting hurricane seasons.

“You see the insurance companies pulling out en masse because the cost of rebuilding homes in Florida is bankrupting them,” said Ben Jealous, executive director of the Sierra Club.

As insurers withdraw from regulated state markets, many homeowners cannot rely on state-mandated plans, which often come with higher costs and limited coverage. Consequently, these events will exacerbate the ongoing housing crisis, impacting construction projects and the economic well-being of climate risk-prone communities.

Despite the growing risks, Americans are increasingly relocating to Florida, Texas, and other states highly susceptible to climate-related natural disasters.

This situation is exacerbated by the influx of people into coastal regions vulnerable to hurricanes and wildfire-prone rural areas. The aftermath becomes even more financially burdensome, with the cost of rebuilding after home destruction soaring amidst inflation.

The Price is Not Right

Millions of homeowners across the U.S. face the daunting challenge of finding a home while facing a shortage of affordable housing nationwide, compounded by high interest rates and low inventory.

On top of this, tens of millions of properties around the country are insured at prices that haven’t caught up with the danger of hurricanes, wildfires and floods.

With the cost of living crisis on the rise, many individuals find it increasingly difficult to afford rising insurance premiums, evident by figure 4 below, making it a struggle to attain a mortgage.

Home Insurance Premium Increases across the U.S.
Figure 4: Home Insurance Premium Increases across the U.S.

As a result, many homeowners have yet to contemplate relocating due to their inability to afford essential repairs and the looming prospect of enduring prolonged financial hardship.

Several converging factors have collectively made it increasingly difficult to secure adequate and reasonably priced home insurance. While state regulatory agencies are committed to maintaining affordable rates for residents, the escalating severity of extreme weather events attributed to global warming has placed insurers in a precarious position.

Struggling to adjust rates sufficiently to account for the escalating damages in high-risk regions, insurance providers are grappling with a complex and challenging landscape.

Ultimately, insurance companies are confronted with the daunting task of not being able to charge premiums that adequately cover their expenses in the aftermath of significant disasters.

This intricate and worrisome predicament demands immediate attention, as it casts a shadow over homeowners, insurance companies, and the overall economic stability of regions prone to climate-related risks.

Lessons To Learn

The increasing pressure on the U.S. insurance market should be seen as a lesson for other insurance companies worldwide at risk from climate change. Nevertheless, the changing climate is impacting weather patterns.

As insurance companies brace for the future and attempt to navigate the complexities of climate risks, there are several strategies insurers can adopt to prepare themselves better:

  1. Assessing Risk Exposure: Insurers must conduct comprehensive risk assessments utilising the latest climate data and predictive models. This process involves identifying regions with higher climate risk and considering that when underwriting policies and setting premiums.
  2. Creating Awareness: Promoting climate mitigation products and risk management services, testing the appetite for new products, and training internal staff on climate literacy.
  3. Encouraging Mitigation Measures: Insurers can incentivise and promote climate resilience by encouraging policyholders to adopt risk-mitigation measures. For instance, offering discounts to customers installing hurricane shutters or fire-resistant roofing can reduce potential losses during extreme weather events.
  4. Diversifying Investments: Insurers should diversify their investment portfolios to reduce exposure to industries highly reliant on fossil fuels. Engaging in impact investing and supporting sustainable industries can provide a buffer against potential financial shocks from climate-related risks.
  5. Incorporating Climate Data: Embracing climate data is crucial in refining underwriting processes and product development. By integrating climate data into their risk models, insurers can make more accurate predictions and develop climate-resilient products that cater to the needs of vulnerable regions. Climate X is leading the charge with our Spectra analytics platform, which provides precise and granular data that empowers insurance companies to prepare for climate risks.

Climate risks are reshaping the landscape of the insurance industry in the U.S.

As extreme weather events increase in frequency and severity, some insurance companies have made the difficult decision to withdraw from high-risk states.

To prepare for the challenges of a changing climate, other insurers can learn from these events by adopting a proactive approach to risk assessment, incorporating climate data, and collaborating with stakeholders to promote climate resilience.

By taking decisive action, insurance companies can protect their financial interests and continue providing essential coverage to individuals and businesses in the face of climate change.

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