The climate crisis has become a financial crisis.
This month, California’s largest homeowner’s insurance company, State Farm, announced it will stop selling homeowners coverage. That’s not just in wildfire zones, but everywhere in the state.
Insurance companies, tired of losing money, are raising rates, restricting coverage or dropping some areas altogether – making it more expensive for people to live in their homes.
“Risk has a price,” said Roy Wright, the former chief of insurance at the Federal Emergency Management Agency, and now head of the Insurance Institute for Business and Home Safety, a research group. “We just saw it now.”
In parts of eastern Kentucky devastated by last summer’s hurricanes, flood insurance rates have quadrupled. In Louisiana, the top insurance official says the market is in crisis, and is offering millions of dollars in subsidies to try to attract insurers to the state.
And in much of Florida, homeowners are increasingly struggling to afford hurricane coverage. Most of the big insurers have left the state, sending homeowners to small private companies trying to stay in business — a possible glimpse of California’s future if more big insurers leave. .
Growing ‘disaster exposure’
State Farm, which insures more California homeowners than any other company, said it will stop accepting applications for most types of new insurance policies in the state because of “rapidly growing disaster exposure.”
The company said that although it recognized the work of California officials to reduce losses from fires, it had to stop writing new policies “to improve the financial strength of the company.” A State Farm spokeswoman did not respond to a request for comment.
Insurance rates in California have jumped after wildfires turned out to be more devastating than anyone expected. A series of fires that broke out in 2017, many ignited by sparks from failed utility equipment, exploded in size with the effects of climate change. Some homeowners have lost their insurance entirely because insurers refuse to cover homes in vulnerable areas.
Michael Soller, a spokesman for the California Department of Insurance, said the agency is working to address the root causes of the collapse of the insurance industry across the country and around the world, including the biggest: climate change.
He highlighted the department’s Safer From Wildfires initiative, a wildfire prevention program, and noted that state lawmakers are also working to control development in areas with the highest wildfire risk.
But Tom Corringham, a research economist at the Scripps Institution of Oceanography at the University of California San Diego who studies the costs of natural disasters, said allowing people to live in homes that have become uninsurable, or too expensive to insure, unsustainable. .
He said policymakers should seriously consider buying properties with the greatest risk, or else moving residents out of the most dangerous communities.
“If we let the market sort it out, we’ll have insurers refusing to write new policies in some areas,” said Dr. Corringham. “We’re not sure how that’s in anyone’s best interest other than the insurers.”
A broken model
California’s woes resemble a slow-motion version of what Florida experienced after Hurricane Andrew devastated Miami in 1992. The losses bankrupted some insurers and caused most national carriers to left the state.
In response, Florida established a complex system: a marketplace based on small insurance companies, backed by the Citizens Property Insurance Corporation, a company mandated by the state to provide wind coverage for property owners. belongs to the house that cannot find private insurance.
For a while, it usually worked. Then came Hurricane Irma.
The 2017 storm, which made landfall in the Florida Keys as a Category 4 storm before moving ashore, did not cause much damage. But it was the first of a series of storms, culminating in Hurricane Ian in October, that shattered the model insurers rely on: One bad year in claims, followed by several quiet years. to rebuild their reserves.
Since Irma, almost every year has been bad.
Private insurers began to struggle to pay their claims; others went out of business. Those who survived saw their rates increase significantly.
Many people have left the private market for Citizens, which recently became the state’s largest insurance provider, according to Michael Peltier, a spokesman. But Citizens will not cover homes with a replacement cost of more than $700,000, or $1 million in Miami-Dade County and the Florida Keys.
That leaves homeowners with no choice but to get private coverage — and in parts of the state, that coverage is harder to find, Mr. Peltier said.
‘Not enough wealth’
Florida, despite its challenges, has an important advantage: A steady influx of residents who remain, for now, willing and able to pay the rising cost of living there. In Louisiana, rising insurance costs have become, for some communities, a threat to their existence.
Like Florida after Andrew, Louisiana’s insurance market began to buckle after insurers began leaving after Hurricane Katrina in 2005. Then, starting with Hurricane Laura in 2020, a series of hurricanes hit the state. Nine insurance companies failed; people are starting to rush the state’s own version of the Florida citizens plan.
The state’s insurance market is “in crisis,” Louisiana’s insurance commissioner, James J. Donelon, said in an interview.
In December, Louisiana had to increase premiums for coverage provided by the Citizens plan by 63 percent, to an average of $4,700 a year. In March, it borrowed $500 million from the bond market to pay the claims of homeowners left behind when their private insurers failed, Mr. Donelon said. The state recently approved new subsidies for private insurers, essentially paying them to do business with the state.
Mr. Donelon said he hoped the subsidies would stabilize the market. But Jesse Keenan, a professor at Tulane University in New Orleans and an expert on climate adaptation and finance, said the state’s insurance market is difficult to restore. High insurance costs are starting to affect home prices, he said.
In the past, it was possible for some communities – those where houses were passed down from generation to generation, with no necessary mortgages and no banks asking for insurance – to have no insurance at all. But as climate change makes storms more intense, that’s no longer an option.
“There are not enough resources in low-income communities to continue to rebuild, storm after storm,” said Dr. Keenan.
A risk-based transfer pricing
Even as homeowners in coastal states face rising costs for wind coverage, they’re being squeezed from another direction: Flood insurance.
In 1968, Congress created the National Flood Insurance Program, which offered tax-backed insurance to homeowners. Like the wildfires in California and the hurricanes in Florida, the flood program arose from what economists call a market failure: Private insurers would not provide coverage for flooding, leaving property owners belongs to the house without choice.
The program achieved its primary goal, to make flood insurance widely available at a price that homeowners could afford. But as the storms worsened, the program faced mounting losses.
In 2021, FEMA, which runs the program, began setting rates that correspond to the actual flood risk homeowners face — an effort to better communicate the real risk faced by homeowners. various assets, and also to prevent government losses.
Those improvements, which have been gradual over the years, have in some cases accounted for large jumps in price. The current cost of flood insurance for single-family homes nationwide is $888 a year, according to FEMA. Under the new, risk-based pricing, that average cost would be $1,808.
And at a time when current policy holders must pay premiums that reflect that full risk, the effects of climate change will make them higher.
“Properties located in high-risk areas should plan and expect to pay for that risk,” David Maurstad, head of the flood insurance program, said in a statement.
The best way for policymakers to help keep insurance affordable is to reduce the risk people face, said Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund. For example, officials may impose stricter building standards in vulnerable areas.
Government-mandated programs, such as the flood insurance plan, or Citizens in Florida and Louisiana, are intended to be a backstop to the private market. But as climate shocks worsen, he said, “we’re now at the point where that’s starting to happen.”