Insurers Facing Challenges in the Face of Rising Costs of Climate-Related Disasters
Insurers are grappling with a conundrum: as the risk of costly climate-related disasters continues to rise, policyholders are feeling the squeeze of high premiums, which in turn is angering state regulators. The question is, how can insurers continue to make money in such a challenging landscape?
This predicament was recently highlighted by Farmers Insurance, one of America’s largest home insurers, as it announced its decision to stop renewing almost a third of the policies it had written in Florida. Farmers is just the latest insurer to pull business from a state due to the escalating costs of covering damage related to floods, hurricanes, wildfires, and other climate-related disasters.
The exact reasons behind Farmers’ decision remain unclear. Could it be that the cost of payouts has been too high in recent years, with a record number of billion-dollar disasters? Or perhaps the rates charged by reinsurers, which sell insurance to insurers, have been on the rise? It is also possible that the insurer is using this move as a tactic against state regulators, hoping that it will give them leverage to charge customers more in the future.
According to Daniel Schwarcz, a professor at the University of Minnesota Law School specializing in insurance, many insurers have been losing money in Florida and have been threatening to leave for years. The difficulties insurers face in raising rates may be one of the reasons they are retreating from states like Florida and California, where the costs of paying claims are skyrocketing due to climate change.
In May, State Farm, the country’s largest insurance company, announced that it would stop selling homeowners’ coverage in California. Allstate followed suit last month, stating that it would stop selling new home and commercial policies in the state due to the worsening climate and rising building costs. Farmers Insurance also recently announced that it would limit new homeowners’ insurance policies in California, citing rising inflation and the risks associated with worsening climate disasters.
In Florida, regulators have the power to deny rate increases or even force insurers to return money to customers if the rates are deemed “excessive.” As Floridians already pay more than the national average for homeowners’ insurance, this further complicates the situation.
Experts have varying opinions on how to address these challenges. Some argue that state regulators have too much control over rate-setting, leading to artificially low rates and inadequate pricing considering the rising costs of climate-related disasters. Others suggest that better management of reinsurers is necessary and that these companies require stricter regulation. Industry lobbyists propose that insurers are reducing their business in order to minimize lawsuits from policyholders.
Farmers Insurance clarified that it will not completely withdraw from the state of Florida. Instead, it will end its home, auto, and umbrella policies sold under the Farmers brand. Policies sold under other brands will continue. The company reassured policyholders that any damage occurring to their properties before the policies expire will still be covered.
The situation in Florida has also seen smaller insurers disappear, with eight going bankrupt in the past two years. This has left many homeowners with limited options, often resorting to a nonprofit, state-backed carrier.
According to the Insurance Information Institute, property and casualty insurers, as a whole, have not made profits from underwriting or overall business activities in Florida since 2016. The industry has experienced cumulative underwriting losses exceeding $1 billion for the past three years, with net income losses in 2020 totaling $900 million.
Experts emphasize the need to address the denial among residents living in disaster-prone areas and the wider population about the risks faced due to climate change. Proposed solutions range from allowing insurers to charge higher premiums in these areas, which could lead to reduced risk-prone constructions, to regulating reinsurers and establishing a national reinsurance backstop to cover catastrophic losses.
While the debate continues on how to tackle these challenges, the insurance industry in Florida and other high-risk states like California is struggling. Insurers are finding it difficult to manage their risk due to the high costs charged by reinsurers, which are largely unregulated. It remains to be seen how regulators and policymakers will respond to these ongoing difficulties and find a sustainable path forward for the industry and policyholders alike.