Sep 11, 2023·edited Sep 11, 2023Liked by Andrew Dessler
There may also be the risk that with shrinking property values, the value of collateral on banks' balance sheets (heavily residential and commercial real estate via mortgages) also shrink, creating systemic challenges in the banking sector.
Well said. Nobody pays much attention until it hits one's pocketbook. Without a cover of insurance for our poor decisions on building in flood and fire prone areas and on denial of climate change predictions, the reality of real personal loss rears its monstrous head. The exit of private insurance companies and the personal financial pain it will cause might be the two-by-four whack in the forehead we have needed for decades now to focus our collective attention. Without insurance, the mortage loan industry exits as well toppling all the other dominoes in the chain.
What this points to is the need to actually price in the risk using forward-looking climate models. These models will need to be based not only on location of insured properties but how they are constructed. Yes, maybe some FL beachfront or CA forest adjacent properties or midwestern river would have premia so high no one would be willing to pay, but for others it means hurricane/fire/flood hardening. Helping property owners adapt to (not endless compensation for) climate change should be one good use of the revenues from a tax on net emissions of CO2
"As insurance gets more expensive and harder to get, property values will begin to decline. This, in turn, erodes the property tax base that local governments rely on to fund essential public services like schools and emergency response."
Twp comments: 1. as people move away from high risk areas, they will move into lower risk and hence higher value areas where they will have to pay higher taxes, so the net tax difference will be close to nil.
2. People should not be living in floodplains nor within coastal zones affected by storm surge so the sooner they move the better.
This post is unworthy of a scientist, or a journalist.
"They’ve crunched the numbers and concluded that the increasing frequency and intensity of extreme weather events—driven by climate change—have made some places effectively uninsurable."
There is no evidence presented that insurers are withdrawing from Florida because of climate change. As noted in stories Andrew has previously linked, insurers are withdrawing from Florida because of a bad legal environment that encourages and rewards fraudulent claims.
In California, there is increased damage from wildfires; this is probably exacerbated by climate change, but also land use changes, and poor forest management. In the linked article, USAA says that some properties are "unprofitable" - this claim deserves more explanation than given. Any property could be profitable if the premium charged is high enough. Apparently, insurers are prevented from raising rates sufficiently to cover these losses. The legal process required to raise rates due to wildfire prevents insurers from raising rates adequately (https://www.policygenius.com/homeowners-insurance/news/california-wildfires-insurance-crisis/). This is exacerbated by remaining insurers' unlimited liability to backstop California's FAIR program if the program charges premiums that are too low to cover losses, which is the case. See testimony by Ms. Nancy Watkins at 1:22:47 in https://www.budget.senate.gov/hearings/risky-business-how-climate-change-is-changing-insurance-markets. So, insurers in California aren't allowed to increase premiums to cover their expected losses, and are also facing the prospect of covering losses under California's FAIR plan for properties they don't insure.
So, insurers are leaving Florida because "pro-consumer" legislation exposes insurers to liability for fraudulent claims. Insurers are leaving California because a "pro-consumer" Proposition prevents insurers from charging adequate premiums, while leaving remaining insurers liable for the state's inadequately funded public program.
If there's a policy solution, it lies in allowing insurers to adequately price risk. This could be combined with restricting development in especially risky areas, such as the Florida coast, or adjacent to California wooded areas. It's certainly time to heed the alarm bells.
I certainly appreciate the autonomic response to yell “it’s not climate change“, but you have to admit it’s weird that this is mainly happening in states that are being hammered by climate change.
From your column, I thought the issue was "insurers abandoning markets". If that's the issue, the cause is not climate change (at least for Florida and California), but unfriendly legal environments.
Edit: I should be clearer. In the case of Florida, the primary noted climate change is increase in hurricanes. There certainly has been an increase in hurricanes since the 1970s. I expect this has caught insurers by surprise, leading to unexpected losses. However, the frequency and severity of storms making landfall has had no long-term trend since 1900 (Ref. IPCC AR6, para 11.7.1.2, https://www.ipcc.ch/report/ar6/wg1/chapter/chapter-11/). The increase in frequency of hurricanes is certainly a climate change over the past 50 years, but there's no evidence that it has anthropogenic causes; if someone wants to claim that, they should explain the decrease from the 1930s through the 1960s.
With respect to California, there has certainly been an increase in wildfire damage. Some studies have found that climate change is a contributing cause; other contributing causes are changes in land use and forest management practices.
Whether the increased damages in Florida or California are caused 0%, 50%, or 80% by climate change, the appropriate insurance response is to appropriately price risk in insurance premiums. It would certainly be good to halt climate warming, but that won't happen any time soon. Legislators, in trying to protect consumers, have made insurance markets unviable. Climate change by itself didn't.
Brian: opinions / viewpoint on anthropogenic climate change aside... your assertion that legislation is also contributing insurers to leave FL / CA may be true. But consider that insurers are future facing, and what they see is simply more weather / fire conditions that will likely get worse. Legislation can be changed. And those insurance companies have money to lobby, so where is their lobbying effort to change the laws in FL and CA?
"what they see is simply more weather / fire conditions that will likely get worse." This may be true. But I haven't heard any insurers saying it. And even if it's true, it needn't lead insurers to stop doing business, if they can price the risk appropriately. Which they can't in California.
Reform of insurance markets to ensure that companies can charge premia based on forward-looking models of risk is needed whatever else besides climate change goes into the models. There is no point in arguing about how much climate change is driving t he need for reform. This will have knock-on effect of citizens demanding for example, better forest management, seawalls ins come places, better flood protection. to prevent premia from being even higher.
Great article Andrew, thanks. I would love to see a more global analysis, because the reinsurance market is going to be hammered by the current floods, and prices will rise.
How do insurance companies invest, in order to have reserves to pay out claims from? A bit like how I am more concerned about how wealthy people invest and run their businesses than their personal lifestyle choices I would like to see evidence insurance companies preferentially invest in clean energy and are divesting from fossil fuels.
This would be the case for mispriced insurance, insurance that did not properly judge the actual risks taking account of measures the insured take to mitigate the risk. Otherwise, it’s just an unfortunate consequent of not having cost effective policies to avoid past CO2 emissions.
There may also be the risk that with shrinking property values, the value of collateral on banks' balance sheets (heavily residential and commercial real estate via mortgages) also shrink, creating systemic challenges in the banking sector.
100% agree. Insurance and it's affect on property values could be a contagion that sweeps through the economy.
Well said. Nobody pays much attention until it hits one's pocketbook. Without a cover of insurance for our poor decisions on building in flood and fire prone areas and on denial of climate change predictions, the reality of real personal loss rears its monstrous head. The exit of private insurance companies and the personal financial pain it will cause might be the two-by-four whack in the forehead we have needed for decades now to focus our collective attention. Without insurance, the mortage loan industry exits as well toppling all the other dominoes in the chain.
Great write up. Florida is one of the canaries in the proverbial coal mine.
Great post, thought provoking. Worth a deeper exploration
What this points to is the need to actually price in the risk using forward-looking climate models. These models will need to be based not only on location of insured properties but how they are constructed. Yes, maybe some FL beachfront or CA forest adjacent properties or midwestern river would have premia so high no one would be willing to pay, but for others it means hurricane/fire/flood hardening. Helping property owners adapt to (not endless compensation for) climate change should be one good use of the revenues from a tax on net emissions of CO2
"As insurance gets more expensive and harder to get, property values will begin to decline. This, in turn, erodes the property tax base that local governments rely on to fund essential public services like schools and emergency response."
Twp comments: 1. as people move away from high risk areas, they will move into lower risk and hence higher value areas where they will have to pay higher taxes, so the net tax difference will be close to nil.
2. People should not be living in floodplains nor within coastal zones affected by storm surge so the sooner they move the better.
This post is unworthy of a scientist, or a journalist.
"They’ve crunched the numbers and concluded that the increasing frequency and intensity of extreme weather events—driven by climate change—have made some places effectively uninsurable."
There is no evidence presented that insurers are withdrawing from Florida because of climate change. As noted in stories Andrew has previously linked, insurers are withdrawing from Florida because of a bad legal environment that encourages and rewards fraudulent claims.
In California, there is increased damage from wildfires; this is probably exacerbated by climate change, but also land use changes, and poor forest management. In the linked article, USAA says that some properties are "unprofitable" - this claim deserves more explanation than given. Any property could be profitable if the premium charged is high enough. Apparently, insurers are prevented from raising rates sufficiently to cover these losses. The legal process required to raise rates due to wildfire prevents insurers from raising rates adequately (https://www.policygenius.com/homeowners-insurance/news/california-wildfires-insurance-crisis/). This is exacerbated by remaining insurers' unlimited liability to backstop California's FAIR program if the program charges premiums that are too low to cover losses, which is the case. See testimony by Ms. Nancy Watkins at 1:22:47 in https://www.budget.senate.gov/hearings/risky-business-how-climate-change-is-changing-insurance-markets. So, insurers in California aren't allowed to increase premiums to cover their expected losses, and are also facing the prospect of covering losses under California's FAIR plan for properties they don't insure.
So, insurers are leaving Florida because "pro-consumer" legislation exposes insurers to liability for fraudulent claims. Insurers are leaving California because a "pro-consumer" Proposition prevents insurers from charging adequate premiums, while leaving remaining insurers liable for the state's inadequately funded public program.
If there's a policy solution, it lies in allowing insurers to adequately price risk. This could be combined with restricting development in especially risky areas, such as the Florida coast, or adjacent to California wooded areas. It's certainly time to heed the alarm bells.
I certainly appreciate the autonomic response to yell “it’s not climate change“, but you have to admit it’s weird that this is mainly happening in states that are being hammered by climate change.
From your column, I thought the issue was "insurers abandoning markets". If that's the issue, the cause is not climate change (at least for Florida and California), but unfriendly legal environments.
Edit: I should be clearer. In the case of Florida, the primary noted climate change is increase in hurricanes. There certainly has been an increase in hurricanes since the 1970s. I expect this has caught insurers by surprise, leading to unexpected losses. However, the frequency and severity of storms making landfall has had no long-term trend since 1900 (Ref. IPCC AR6, para 11.7.1.2, https://www.ipcc.ch/report/ar6/wg1/chapter/chapter-11/). The increase in frequency of hurricanes is certainly a climate change over the past 50 years, but there's no evidence that it has anthropogenic causes; if someone wants to claim that, they should explain the decrease from the 1930s through the 1960s.
With respect to California, there has certainly been an increase in wildfire damage. Some studies have found that climate change is a contributing cause; other contributing causes are changes in land use and forest management practices.
Whether the increased damages in Florida or California are caused 0%, 50%, or 80% by climate change, the appropriate insurance response is to appropriately price risk in insurance premiums. It would certainly be good to halt climate warming, but that won't happen any time soon. Legislators, in trying to protect consumers, have made insurance markets unviable. Climate change by itself didn't.
Brian: opinions / viewpoint on anthropogenic climate change aside... your assertion that legislation is also contributing insurers to leave FL / CA may be true. But consider that insurers are future facing, and what they see is simply more weather / fire conditions that will likely get worse. Legislation can be changed. And those insurance companies have money to lobby, so where is their lobbying effort to change the laws in FL and CA?
"what they see is simply more weather / fire conditions that will likely get worse." This may be true. But I haven't heard any insurers saying it. And even if it's true, it needn't lead insurers to stop doing business, if they can price the risk appropriately. Which they can't in California.
With respect to changing legislation, there are two different tracks: The California problems came from a law passed by initiative/referendum, which is extremely hard to change. If Florida, there were changes to the legal environment in 2021 and 2022. (https://www.bankrate.com/insurance/homeowners-insurance/florida-homeowners-insurance-crisis/#how-many-home-insurance-companies-have-left-florida) I haven't heard anyone claiming whether this has had an impact on insurers' viability.
Reform of insurance markets to ensure that companies can charge premia based on forward-looking models of risk is needed whatever else besides climate change goes into the models. There is no point in arguing about how much climate change is driving t he need for reform. This will have knock-on effect of citizens demanding for example, better forest management, seawalls ins come places, better flood protection. to prevent premia from being even higher.
Great article Andrew, thanks. I would love to see a more global analysis, because the reinsurance market is going to be hammered by the current floods, and prices will rise.
How do insurance companies invest, in order to have reserves to pay out claims from? A bit like how I am more concerned about how wealthy people invest and run their businesses than their personal lifestyle choices I would like to see evidence insurance companies preferentially invest in clean energy and are divesting from fossil fuels.
This would be the case for mispriced insurance, insurance that did not properly judge the actual risks taking account of measures the insured take to mitigate the risk. Otherwise, it’s just an unfortunate consequent of not having cost effective policies to avoid past CO2 emissions.