No one’s insurance rates are immune to climate change » Yale Climate Nexus

Asheville, North Carolina was once widely considered a climate paradise due to its higher inland location and cooler temperatures than much of the Southeast. Then, in September 2024, Hurricane Helen caused catastrophic flooding.

It's a stark reminder that no place is safe from the extreme weather risks of worsening climate: hurricanes from the Gulf of Mexico and Atlantic coasts. Hail in the Midwest. Flooding occurred in the east. Coastal sea level rise. Wildfires across the West, most recently the devastating and costly fires around Los Angeles.

Worsening extreme weather results in more expensive property damage, increasing insurance claims and rising insurance rates. Someone has to pay to repair, rebuild and replace damaged homes and vehicles, but as insurance companies raise rates and reduce customers, the situation could soon trigger an insurance crisis.

Home insurance markets posted losses in 18 states in 2023 despite rapidly rising policy rates. ”.

And the problem isn't limited to policy costs.

“If home prices go down, the government will have less tax revenue. That means less funding for schools and less money for the police,” New York Times climate change reporter Christopher Flavell said on the Daily Podcast. “Maybe climate change won’t disrupt communities in the form of major storms, wildfires, or floods. Maybe even before these things happen, climate change will disrupt communities through something as seemingly mundane or even boring as insurance.”

There are no easy solutions to this problem, but there are steps individuals and governments can take to reduce risk and try to avoid a widespread insurance crisis.

Insurance rates are rising everywhere, especially in high-risk areas

Insurance usually works by sharing risk. Most homeowners purchase home and vehicle insurance, and within this large group of customers, insurance companies only have to pay out to the few who suffer costly losses. When climate change increases the frequency and intensity of disasters, insurers will spread the costs across their entire customer base in the form of higher rates.

So even if you're not directly harmed by extreme weather, you're paying some of the cost of these climate-enhancing disasters. According to realtor.com, average U.S. home insurance rates increased by nearly 34% from 2018 to 2023, and by more than 11% in 2023 alone.

Some of these price increases are linked to rising inflation as it becomes more expensive to repair damaged homes. But over the past 15 years, home and auto insurance rates have been rising much faster than inflation.

This is largely due to climate change. For example, scientists estimate that climate change doubled the destructiveness of Hurricane Helene and increased rainfall by more than 50% in some areas. Automotive data company CARFAX estimated that the storm flooded as many as 138,000 vehicles in six states and caused tens of billions of dollars in property damage.

Insurers buy their own reinsurance to ensure they can cover huge losses, and reinsurance prices are rising rapidly in response to climate change. Munich Re, the world's largest reinsurer, recently pointed out that 2024 will be one of the costliest years in history for weather disaster losses, with global losses reaching US$320 billion, of which approximately US$140 billion has been insured.

A recent paper by economists Benjamin Case and Philip Mulder found that extreme weather risks have significantly increased insurance premiums over the past five years, and that rising reinsurance prices can explain more than half of the risk-based growth. The study concluded that “increased disaster risk will result in climate-impacted households facing annual premium increases of $700 by 2053.”

Someone has to foot the bill

Eventually, someone has to pay the price for the rising property damage caused by climate-worsening extreme weather. When insurance companies pass these costs on to customers, or waive some policy coverage altogether, homeowners are left with suboptimal options to ease their financial burden.

Individuals can reduce coverage under their insurance plans, making them more financially vulnerable when a disaster strikes. They could move to parametric insurance, which pays out based on how much certain parameters, such as wind speed or rainfall, exceed a given threshold, rather than the amount of damage caused. Payments are relatively quick, but these parametric plans run a significant risk of not providing enough to cover actual losses.

Homeowners can also try turning to a government-run insurance program if one is available, such as many states’ Fair Access to Insurance Requirements (FAIR) programs for high-risk homes (which covers nearly $60 worth of insurance in Pacific Palisades, California alone). billion of property)) and the National Flood Insurance Program (NFIP). But taxpayers are paying ever-increasing amounts for NFIP, spreading the flood risks and damage costs of climate change across a broad swath of Americans.

The FAIR program is designed to be a last resort option for residents who are unable to find private insurance. This means that these government-run programs effectively subsidize homeownership in risky areas by providing reasonably affordable policies in areas that private insurance companies deem too risky to offer similar policies.

And they're often partially funded by private insurance companies, meaning they can shift costs to other insurance customers. So when the state's FAIR program runs out of money and pulls money from private insurance companies to pay for homes affected by wildfires around Los Angeles, California residents could face higher home insurance premiums.

Some states, such as California, also strictly regulate insurance rates. That can help lower costs for consumers in those states, but it also shifts the problem of rising costs elsewhere and forces insurers to abandon customers in high-risk areas or leave the state entirely (hence California's recent relaxation of insurance rules).

A recent paper by three economists found that insurance companies are also compensating for this effect by raising rates in states with fewer regulations, such as Oklahoma, thus distorting insurance prices. The authors concluded that if insurance were regulated equally in all states, insurance rates in high-risk states would be 20 percentage points faster than in other states.

This distortion has led to an influx of Americans into high-risk areas like Florida and California, which face severe wildfire risks, because policy prices do not accurately reflect these dangers.

Choices to avoid insurance crises

Part of the solution to this problem involves doing the opposite—encouraging managed retreats from high-risk areas. This is a challenging and complex topic because people tend to have strong attachments to their homes. However, when a home is severely damaged by extreme weather and faces a high risk of such an event happening again in the future, tying insurance benefits to moving to a safer area is one possible solution. This is an approach adopted by the Canadian province of Quebec following devastating flooding events along the Ottawa River in 2017 and 2019.

Homeowners can also take steps to reduce risk, such as clearing brush around homes in wildfire-prone areas or installing metal roofs in areas prone to worsening conditions from hail. Insurers and governments rarely pay for these efforts, but that is starting to change as the importance of hardening homes against extreme weather risks becomes more widely recognized. Alabama, which is battered by hurricanes and tornadoes, is leading the way in this approach.

To mitigate wildfire risk in areas like California, governments can take steps to reduce the density of dry vegetation. These include prescribed burning – intentionally lighting a controlled fire to burn flammable materials. But this can be difficult and dangerous in housing areas, where goat herds can be introduced to consume the vegetation.

A new paper by Susan Crawford and Daevan Mangalmurti of the Carnegie Endowment for International Peace makes several recommendations for reducing flood risk. These include ensuring that the Federal Emergency Management Agency (FEMA) can complete its “Future of Flood Risk” initiative to more accurately reflect true flood hazards and requiring real estate agencies and financial institutions to inform potential homebuyers of expected public flood insurance premiums. , and obtaining flood insurance becoming an opt-out factor in getting a mortgage to expand the pool of National Flood Insurance Program policyholders.

Of course, like climate change, the insurance crisis is a global problem.

Tobias Grimm, chief climate scientist at Munich Re, said: “Everyone pays a price for worsening extreme weather, especially those who live in areas that lack insurance protection or public funding to help recover. “The international community must ultimately act to find ways to strengthen the resilience of all countries, especially those who are most vulnerable. “

Rising premiums have led to thousands of Australians breaching their mortgage contracts. The East African country of Malawi has adopted high-risk parametric insurance to combat an increasingly severe drought. Local governments in China have begun offering extreme weather insurance for entire cities and provinces, often using parametric insurance policies. Italy has made it mandatory for all its companies to purchase insurance to protect assets from extreme weather events. The UK has a flood reinsurance scheme called Flood Re to make coverage more affordable, but it is due to end in 2040, when many residents in areas at high risk of flooding may be told to move.

The ultimate solution must involve prevention: achieving net zero global climate pollution to stop global warming so these extreme weather events stop getting worse. Until then, significant efforts will be needed to avert potential insurance crises.