Climate Change and Insurance in the United States: Preparing for a Riskier Future

Climate change is no longer a distant threat, but a harsh reality that's already affecting the United States. Rising temperatures and extreme weather events are causing unprecedented damage to homes, businesses, and infrastructure.

The National Oceanic and Atmospheric Administration (NOAA) reports that 2020 was the third consecutive year that the US experienced 10 or more billion-dollar disasters, with a total of 22 such events.

The increasing frequency and severity of natural disasters are putting a strain on the US insurance industry. In 2020, the industry paid out over $100 billion in claims related to disasters, with the majority being due to hurricanes and wildfires.

Insurance companies are struggling to keep up with the rising costs of claims, which is leading to higher premiums for policyholders.

Congressional oversight is needed to examine the climate-driven insurance crisis and propose solutions, working alongside state regulators.

Senator Sheldon Whitehouse and the Senate budget committee are holding a hearing on December 18 to discuss the issue, with Dr. Benjamin Keys as a witness. His research shows a stark correlation between places exposed to climate risks and increased insurance premiums.

Low- and moderate-income households are more likely to be underinsured, with 30 percent of natural disaster losses not being insured in 2023, according to the Congressional Budget Office.

Policymakers are exploring ways to increase insurance affordability, including parametric insurance, microinsurance programs, and community-based insurance.

Governments have stepped in to fill the gap when private insurance companies stop offering coverage, often due to natural disasters. This has led to the creation of government-run insurance programs.

In the US, the National Flood Insurance Program was established after private insurers stopped offering flood protection along the Mississippi River over 50 years ago. The program has struggled with debt, but has become the primary provider of residential flood insurance.

State governments have also created backstop property insurance programs, often in response to shrinking access to private insurance. These programs have seen their rolls swell in recent years as extreme weather events drive up claims.

The aggregate value of all insurance in force in FAIR Plans almost doubled between 2013 and 2022, according to the Insurance Information Institute. This growth is a result of worsening extremes driving higher claims.

In Louisiana, the number of homeowner policies issued by the state-run program more than tripled after hurricanes pummeled the state in 2020 and 2021. This prompted the state's insurance commissioner to call the situation a "crisis."

California has temporarily banned insurance companies from refusing to renew policies in areas near those recently burned.

The government needs to step up and take action to address the insurance crisis caused by climate change. Congressional oversight is crucial in examining the problem and proposing solutions.

Senator Sheldon Whitehouse and the Senate budget committee are holding a hearing on December 18 to discuss the climate-driven insurance crisis. Dr. Benjamin Keys will be a witness, sharing his research on the correlation between climate risks and insurance premium increases.

Homeowners in the US saw their annual insurance premiums increase by an average of 33% or $500 between 2020 and 2023. This is a significant burden on many families.

The Congressional Budget Office has pointed out that many people are underinsured, with 30 percent of losses attributable to natural disasters not being insured in 2023. This gap in insurance will likely increase as insurance premiums become increasingly unaffordable.

Policymakers have several options to tackle insurance affordability, including increasing access to parametric insurance, microinsurance programs, and community-based insurance.

Insurance companies are taking steps to address climate-related risks, but it's a complex challenge. They face the dual challenge of addressing escalating climate change risks and shifting industry regulations.

Some insurers are raising prices on premiums, which can reduce insurance affordability for homeowners. Since 2015, climate-worsened wildfires have spurred insurers to seek rate increases amounting to $8.5 billion.

Others are declining to offer insurance altogether. The two largest homeowners insurance companies in the United States, State Farm and Allstate, announced they would take a break from issuing new policies in California. Farmers Insurance has also decided to cap new policies in California.

To become more resilient to climate-related risks, insurers should focus on five key areas: fortifying their assessment of climate-related risks, using a holistic approach toward managing climate-related risks, taking steps to better demonstrate their climate readiness, and more.

Here are some specific actions insurers can take:

Insurance companies are facing a significant challenge in preparing for climate-related risks, and regulators are taking notice. According to a survey by Deloitte, one-third of responding regulators said they didn't know how well insurers are prepared to deal with the potential impacts of climate-related risks on financial stability.

Regulators are likely to require more disclosure from insurers, including stress tests of climate-change scenarios and details on how climate data is used in risk modeling. Insurers can help alleviate these concerns by disclosing their efforts to assess and mitigate climate-related risks.

A survey by Deloitte found that only up to four respondents said insurers were largely or fully prepared to deal with climate-related risks, and one-third of regulators didn't know whether current insurer risk models were up to the task. This suggests that there's room for insurers to improve their preparedness and disclosure.

Here are some key areas where insurers can boost their climate readiness:

Insurance companies are facing a significant challenge in responding to growing climate risk. Some insurers have sought to raise prices on premiums, reducing insurance affordability for homeowners.

Since 2015, climate-worsened wildfires have spurred insurers to seek rate increases amounting to $8.5 billion. This has led to double-digit rate increases in thirty-one states since January 2022.

Some insurance companies have simply declined to offer insurance in certain areas. For example, the two largest homeowners insurance companies in the United States, State Farm and Allstate, announced earlier this year that they would take a break from issuing new policies in California.

This has left some homeowners without insurance, forcing them to bear the entire loss should disaster strike. In Louisiana, insurance companies have declined to write policies in hurricane-prone areas.

To stay ahead of the curve, insurers should focus on fortifying their assessment of climate-related risks while taking long-term actions to alleviate and mitigate such exposures. This can be achieved by integrating climate-related risks into their enterprise risk management efforts.

Here are some key actions insurers can take to demonstrate their climate readiness:

By taking these steps, insurers can create a more level playing field and a stable market for all stakeholders involved.

There's a pressing need for data transparency in the insurance industry, particularly when it comes to climate-related risks. A lack of publicly available data on where and how much premiums are increasing and why is a major issue.

Regulators are trying to fill this gap, but it's not easy. The US Department of the Treasury's Federal Insurance Office (FIO) and the National Association of Insurance Commissioners (NAIC) conducted a voluntary data call to assess how climate risks were affecting the insurance market.

Some states, like Florida, Texas, and Louisiana, have already signaled they won't participate in the data call. This is a problem because these states have experienced sky-rocketing rate increases and insurers dropping policies or exiting the market entirely.

According to the Financial Stability Oversight Council (FSOC), the data call required participating insurers to submit ZIP Code-level data on premiums, policies, claims, losses, limits, deductibles, non-renewals, and coverage types for the ZIP Codes in which they operate nationwide.

Here's a breakdown of the data points requested by state insurance regulators:

Despite the data call, none of the collected data has been shared publicly. This lack of transparency creates an information asymmetry that can prevent people from making informed decisions and prevent the market from functioning well.

Private insurers are holding a lot of proprietary data that regulators and the general public don't have access to. This lack of freely available, localized information about climate risks and projections is also a challenge for many communities and homeowners.

Insurance companies' preparedness to deal with climate-related risks is a major concern for regulators. Many regulators are unsure if insurers are prepared to handle these risks, and some even lack confidence in carriers' preparedness.

According to the Insurance Regulator State of Climate Risks Survey, one-third of responding regulators said they didn't know how well insurers are prepared to deal with climate-related risks. This lack of knowledge highlights the need for better disclosure and transparency from insurers.

Regulators are looking for insurers to demonstrate their climate readiness through various means, including disclosure and stress tests of plausible climate-change scenarios. This could help reassure regulators about insurers' ability to withstand extreme weather events.

A Deloitte survey found that only up to four regulators out of those surveyed were aware that insurers were largely or fully prepared to deal with climate-related risks. This lack of preparedness is a concern, as it may lead to more onerous mandatory disclosures down the road.

Here are some key statistics on insurer preparedness:

Insurers need to take proactive steps to demonstrate their climate readiness to regulators, analysts, and customers. This includes fortifying their assessment of climate-related risks, using a holistic approach to managing these risks, and taking steps to alleviate and mitigate such exposures.

Land-use choices are adding to the challenge of climate change, with U.S. communities failing to require building and land-use practices that reduce the risk.

State and local governments have not adopted codes that account for climate change, meaning houses built to code may still encounter stresses from climate change that exceed what the code anticipates. For example, higher wind speeds or more rainfall that overwhelms drainage systems.

Over two-thirds of states have weak disaster codes or none at all, including states like Alabama, Mississippi, and Texas, which face growing threats from worsening storms and sea-level rise.

40 percent of Americans live in coastal counties, which make up just 10 percent of U.S. land mass, and the populations of southern states vulnerable to hurricanes and sea-level rise are increasing.

Government programs encouraging people to move away from risky areas cannot keep up, with a study by researchers at the University of North Carolina showing that for every property removed from the floodplain, ten new homes are constructed in the floodplain.

The Wildland-Urban Interface (WUI) is at increasing risk of climate-fueled wildfires, with nearly thirteen million new homes added to the WUI between 1990 and 2010, and the population living in the WUI reaching ninety-nine million people by 2010.

No state has developed a comprehensive plan to tackle the issue of building and land-use practices in a warming world, and the federal government has not developed a strategy to address this issue.