In many states, the climate crisis is fueling an insurance crisis, leaving homeowners struggling to find affordable coverage.
In June, The Hill reports, Farmers Insurance announced in a company memo it will no longer write new property insurance policies in Florida, citing “catastrophe costs … at historically high levels.”
And earlier this month, AIG stopped issuing policies along the Sunshine State’s hurricane-vulnerable coastline.
These insurers are following State Farm Insurance, California’s largest single homeowners’ insurer, which announced in May it had stopped accepting new applications for business and personal lines and casualty insurance in California,
Like State Farm, Allstate, the state’s fourth-largest property and casualty insurance provider, has stopped selling new homes, condominiums, or commercial insurance policies in California, according to the New York Times on June 4.
Meanwhile, in Louisiana, at least seven insurance companies have failed in the months since Hurricane Ida hit in 2021, sending homeowners into a panic.
“This isn’t just a story about Florida and California — all over the country, there are insurers who are less willing to take risks,” from those along major rivers to areas vulnerable to tornadoes, said Benjamin Keys, an assistant professor of real estate at the University of Pennsylvania’s Wharton School.
In testimony before the Senate Budget Committee in March, Eric Andersen, CEO of consulting firm Aon PLC, said that reinsurance companies, the firms that help insurers pay out costs, have also stepped back from high-risk areas, particularly those vulnerable to flooding and wildfires.
“Just as the U.S. economy was overexposed to mortgage risk in 2008, the economy today is overexposed to climate risk,” he said.
A new federal report released today by the Treasury Department’s Federal Insurance Office reinforces this conclusion.
While the report offers 20 recommendations for state insurance regulators, it acknowledges that the Biden administration has limited authority to compel these changes, a Treasury official said on a call with reporters yesterday.
What can policymakers do to make it easier — and cheaper — for folks to get insurance? Here are three possible solutions, although they do have challenges, reports the Washington Post.:
Update California’s wildfire models
In 1988, California voters passed Proposition 103, which requires insurance companies to get approval from the state Department of Insurance before charging new rates.
Prop 103 says when insurance companies try to justify higher rates, they aren’t allowed to cite the increased risk of wildfires due to climate change. However, we are now a long way from 1988.
Insurance industry officials say this policy makes no sense today, and they’re calling on the state to update it.
Mark Friedlander, a spokesman for the Insurance Information Institute, an industry group, argues that “In Florida, they’re modeling for hurricanes, and in the Tornado Alley states, they’re modeling for tornadoes. So in California, they obviously should be modeling for wildfires.”
About a week-and-a-half after State Farm announced it would stop offering new coverage in California, the state’s insurance department said it would hold a public workshop on the use of fire models before considering potential regulations. The workshop is scheduled for July 13.
Subsidize policies for low-income people.
California is one of 35 states and the District of Columbia to offer FAIR plans, which are intended as public insurers of last resort.
FAIR plans were created in the 1960s to make sure that people who lived in areas with abnormally high exposure to uncontrollable risks still had the chance to purchase some insurance coverage.
A FAIR plan is considered a last resort and they often don’t provide as much coverage as the standard, voluntary markets.
Most FAIR plans have coverage limits of around $500,000 to $600,000 for dwelling coverage. Some states, such as New Jersey, have added optional coverage for personal property (up to $200,000), while others, like Ohio, provide two types of basic coverage – fire coverage and a comprehensive homeowners’ policy, which also protects contents.
The cost of the FAIR insurance plans varies from state to state. FAIR plans often cost more than private insurance. They cannot be described as programs to help low-income earners to purchase insurance.
Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund and vice chair of the California Climate Insurance Working Group, says the high price of the FAIR plans should be sending a signal about the dangers of living in high-risk areas.
It illustrates “where areas are becoming uneconomic to continue to inhabit because the risks are getting so great,” Kousky said.
Encourage ‘managed retreat’
The third and final solution is one that might face the thorniest obstacles: the concept of “managed retreat.” The whole idea behind this is to get people to voluntarily move someplace else that’s safer.
Oftentimes, the place has become too difficult or expensive to live in because of rising seas, stronger storms, or other impacts of a warming world. One form of managed retreat is voluntary buyout programs for properties that are repeatedly flooded.
Then there are restrictions on the construction of new homes, such as in Arizona’s new limits on housing in the fast-growing Phoenix suburbs that lack an adequate groundwater supply.
“It’s not that [insurers] don’t want to do business in your state, it’s that [they] don’t want to do business at the current premiums [they] can charge,” Keys said. In the meantime, however, none of the climate risks and natural disasters in question show any signs of letting up.
