Unnatural Disasters
A Wall Street Journal article in October 2018 reported that some areas may become uninsurable due to disaster risk probabilities, or the cost may become so high as to make insurance prohibitively expensive. Five years later this prediction has come to pass: insurance companies, in contrast to some businesses and numerous individuals and politicians, acknowledge climate change is causing unusually frequent and fierce flooding, fires, hurricanes, heat waves, and drought.
Between 2020 and 2022 U.S. insurers paid out nearly $300 billion to cover losses from natural disasters, three times the total for the three years from 2013-2015. To sustain their business model, insurers are forced to either significantly raise premiums or cease providing coverage for these events. Major property insurers, including Allstate, American Family, Farmer’s, Nationwide, and State Farm, have announced they will stop providing coverage in some regions.
Some states have filled the void left by property insurers by providing state-run non-profit insurance coverage for high-risk homeowners, funded by customers’ premiums. In Florida, the Citizens Property Insurance Corporation insures one out of every eight homeowners, with an average annual premium of $6,000. Before Hurricane Idalia struck Florida the state reported significantly depleted reserves and faced imposing a surcharge on millions of policyholders. California’s plan, with a much lower premium of $1,300, has accumulated a deficit of over $300 million.
If property owners cannot obtain coverage, or balk at paying large premiums, they face covering costs for any property damages out of pocket. Many choose to go uninsured. That introduces a new set of critical problems. Homes that are damaged may become abandoned. Homes that cannot be insured may be impossible to sell, or have reduced value. Clusters of abandoned houses following a disaster depress real estate markets and can cause schools and businesses to close.
Going forward, commercial property insurance cannot be expected to take on unpredictable environmental risks. Responsibility falls to governments to prevent damage rather than recover from it. Land use restrictions, which control where to build, and building codes, which control how to build, are designed to avoid property damage due to floods, hail, fire, wind, etc. State and local governments have been lax in adopting and enforcing such codes. With disasters now occurring in areas not previously subject to extreme climate events, governments must adapt codes to the new realities of climate change or risk a reduced tax base.
An article titled Climate Change and U.S. Property Insurance concluded, “No state has yet developed a comprehensive plan to tackle the issue of building and land-use practices in a warming world. Nor has the federal government developed a strategy.” The insurance industry has signaled that the old way of protecting property is no more.