Stamato Opinion: Climate Change and the Insurance Industry

September 10, 2023

If we choose to ignore UN studies, formidably persuasive analyses, and the obvious rise in sea levels and temperatures–and what we see with our own eyes and feel, and breathe–how else might we be persuaded to accept the reality of the challenges facing our planet, and, not to put too fine a point on it, the threat to human survival?

Look no further than the insurance industry to get the picture. The industry is assessing risk on what it insures and it doesn’t like what it has experienced or what it sees coming.

As the planet warms, no place, or time, seems safe from climate-induced disaster. We continue to suffer from smothering heat, deadly wildfires, blankets of harmful smoke, floods caused by tropical storms, and weeks of stifling heat not only in Arizona and Texas but in the Midwest as well.   

It’s not even realistic, for example, to expect a reprieve as our hellish summer comes to an end: The Atlantic hurricane season is projected to have “above-normal level of activity” according to an updated forecast from the National Oceanic and Atmospheric Administration.  

There is but one certainty:  Dangerous weather events will become common as the planet continues to warm.   

The impacts will be consequential. Shallow water in the Panama Canal, for example, as a result of persistent drought, is slowing traffic as ships have to carry less cargo to lessen their weight, and the Mississippi River, a major route for shipping corn and wheat exports in the coming months, is drying out. Direct hits on the economy are coming. 

The insurance picture

U.S. insurers have disbursed $295.8 billion in natural disaster claims over the past three years–a record for a three-year period, according to the American Property Casualty Insurance Association. Indeed, the frequency of costly disasters brought on by climate change has already turned profits into losses. In 2022, property and casualty insurers recorded a $26.5 billion net underwriting loss.  Insurers have paid out more than $40 billion in damage claims, this year, on a pace for a record in yearly losses

It’s increasingly expensive and difficult to get homeowners insurance as losses increase from climate-driven disasters such as wildfires and hurricanes.

Consider a few recent developments:

  • Farmers Insurance has ended its coverage in Florida, a move that will affect about 100,000 existing policies. Thirteen others followed suit.   AAA has said that it will not renew a percentage of homeowners and auto insurance policies in the state, joining other insurers in limiting their exposure despite efforts by the state’s lawmakers to calm the volatile insurance market.
  • State Farm, Allstate and AIG have stopped taking on new policies in California due to what State Farm characterizes as “rapidly growing catastrophe exposure” and increases in construction costs.
  • Twelve insurers have abandoned hurricane-prone Louisiana in the last three years and eleven have been declared insolvent, while 50 carriers have stopped writing new policies in certain of the state’s parishes.
  • Travelers said catastrophe losses doubled in its most recent quarter, and the company, considered a bellwether for the insurance industry, lost money.
  • Insurers have yet to tally losses from Hurricane Idalia in Florida, Georgia, and the Carolinas.
  • Insurers are now revisiting risk after the wildfires in Hawaii.   What they decide to do could have a chilling effect on insurers across the country.

The re-insurance industry 

Re-insurers are taking the measure of climate change induced losses and reporting that the U.S. insured storm losses during the first half of this year produced an unprecedented level of financial damage in a short time.  

These losses are due to “climate change and the consequent frequency and severity of violent meteorological events.”   

No equivocation, no denial, in those quarters!   

Re-insurers, the insurance industry’s insurers, cover losses that could “upend” an individual company. If re-insurers are having doubts about coverage, it’s clear the entire insurance industry faces extraordinary challenges that could be catastrophic, particularly for disaster-prone areas, notably Florida, California and Texas.  

Prices for reinsurance rose as much as 40 percent on January 1st from a year earlier, according to a report by Gallagher Re, a brokerage firm that puts together reinsurance coverage deals. The price increases jolted insurers, which then made changes to where and for what they offered coverage

The response in the states

Too many state leaders, notably in Florida, Texas and Louisiana, instead of ensuring that their residents have safe homes, protected by insurance, go on about abortion, DEI, and banning books.  Fiddling, it seems, while their states burn or flood, and residents worry about paying higher prices for insurance, if they can get it.

In Florida, claims are rising and the state is refusing to allow insurers to raise rates to cover losses–not a good business climate in which to operate. The insurance industry is in retreat, as noted, and it’s not looking back.

New Jersey has less exposure but is still affected by what happens elsewhere and rising rates reflect it.  It’s stance, though, as one of the states at the forefront of the fight against climate change, is to adopt ambitious clean energy goals–100% clean electricity by 2035 among them–a roadmap to meet commitments to electrify buildings, vans, trucks, and buses and updated coastal rules to protect families and businesses.  

Others might try following its ambitious lead, admittedly, for some, too ambitious and unrealistic, but, still, heading in the right direction as the state reduces carbon pollution while positioning itself to create new jobs in growing green industries.  

We–all of us–are facing the menacing effects of a warming planet.  It’s an undeniable existential crisis. We can do better, of course, if we acknowledge our challenges, summon the political will to act and devote the resources to mitigation.  The need for broad national consensus is obvious.  We need a far more united nation behind the policy, and it’s clear we do not have that—yet.  The climate conspiracy mongers are claiming—even as we experience the warmest year ever recorded—that climate change is a hoax.  Seriously?  

Would the insurance industry, apolitical certainly in this context, assign risk to a hoax?  Of course it wouldn’t.   

Listen to what the insurance industry is telling us!

Linda Stamato is a policy fellow at the New Jersey State Policy Lab and co-director of the Center for Negotiation and Conflict Resolution at the Edward  J. Bloustein School of Planning and Public Policy at Rutgers University

New Jersey Globe, September 10, 2023

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