Just over 65 percent of Americans own a home, and until recently, most of them did not need to worry about whether insurance was available to cover natural disaster risks. However, the frequency with which such calamities are occurring is making obtaining such coverage both more expensive and increasingly difficult to obtain. More and more US insurers are refusing to write coverage against natural disasters because of rising claim costs related to climate change, whether these are in the form of hurricanes, wildfires, floods, etc.
A 2023 survey of 2,000 American adults noted that 32 percent had been impacted by weather events in the previous 5 years. It makes sense, then, that between January 2022 and July 2023, 31 states experienced double-digit insurance rate increases. As a result of hurricanes, nearly a dozen insurers have gone bankrupt in Florida, and many others have restricted coverage. In Louisiana, numerous insurers have refused to issue hurricane coverage at all. With nearly 40 percent of Americans living in coastal communities, the problem has already become acute.
Claims from a single natural disaster can erase decades worth of insurer profits from having provided such coverage. Premium caps imposed on insurers by state regulators have made it difficult for them to agree to continue to provide coverage as claims and costs continue to rise. The result is that, in natural-disaster-prone states in America, it is becoming more difficult to find coverage against these perils. And, when coverage can be found, it is so expensive that getting coverage is increasingly the domain of the wealthy.
Although about 35 states offer such coverage, most have no real plans for how to address what will happen when a truly catastrophic event occurs. In California, a catastrophic earthquake could cause hundreds of billions of dollars in damage. In Florida, the state reckons that a direct hit by a Category 5 hurricane in Miami could result in as much as $1.3 trillion in damage, resulting in an assessment of $60,000 per person in the state, regardless of who was impacted. Such a catastrophic event could lead to a federal bailout. What if multiple events were to happen in a single year?
If the National Flood Insurance Program (NFIP) is any guide, the federal government could quickly rack up hundreds of billions of dollars in taxpayer-funded liabilities. About 95 percent of flood insurance is already provided by the federal government through the NFIP, which had already incurred a deficit of more than $20 billion by the end of 2022.
The NFIP pays for homeowners to rebuild in exactly the same location and at taxpayer expense. If that example is any guide, future plans to address other perils in a similar manner will undoubtedly result in the same fiscal predicament.
What Are the Options?
Clearly, something fundamental needs to change. City and state governments need to rewrite building codes and implement strict guidelines about if, where, and when rebuilding can occur, as well as the federal government should limit funding to states and cities that do not adhere to such codes and guidelines.
More should also be done to engage in public-private partnerships designed to bring codes and standards up to date, since neither the public nor private sectors can bear this burden on their own. Insureds are going to have to get used to the idea that they bear more of the costs associated with obtaining coverage. And higher deductibles and lower indemnity levels are likely to become part of the coverage mosaic in the future.
Making real progress in tackling this challenge is part of the greater need for climate action, which is not a multibillion-dollar proposition but a multitrillion-dollar endeavor globally. Although global climate finance almost doubled between 2011 and 2020 to a cumulative $4.8 trillion, current finance levels continue to fall short of the amount necessary to avoid the worst impacts of climate change by bringing adaptation and resilience measures to a meaningful level.
Insurers should create new forms of risk transfer solutions, providing an extra incentive for investors and lenders to commit funds for environmentally friendly transactions that build resilience against climate change. Providing parametric coverages at scale by enhancing risk modeling techniques and developing more standardized approaches to coverage could go a long way toward moving the needle on climate finance.
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