How Does Extreme Weather Affect the Insurance Industry?
You can debate climate change over the Thanksgiving table all you want, but there’s no debate that extreme weather is having a profound impact on the insurance industry from rising premiums to the ability of homeowners in some areas to get coverage.
“From devastating hurricanes and wildfires to catastrophic floods and tornadoes, natural disasters are increasing in frequency and cost,” wrote Shannon Martin for Bankrate in June 2023. “With climate change increasing the frequency and severity of catastrophic losses, reinsurance companies have drastically increased the rate they charge to insurance companies, which gets passed back down to policyholders.”
Texas One of the Hardest States to Seek Property Insurance
Texas homeowners know this all too well as Axios reported in August that Lone Star State home insurance premiums have increased between 20 and 30 percent since January 2022 with the state having been in the crosshairs of extreme weather events such as Hurricane Harvey in 2017 ($125 billion damage) and the Great Texas Freeze in 2021 ($80 to $130 billion damage).
Axios said that the states where it is most difficult to get property insurance are, in order:
“Double-digit premium hikes. Higher deductibles. New coverage limits. Drones to check the state of roofs and yards. Home insurers are insuring less and charging more as they try to claw their way back to profitability after losing money in five of the past six years, analysts and insurance agents say,” reported the Wall Street Journal in July. “Storms, natural disasters, inflation, and supply-chain snafus have sent claims spiraling, leaving many insurers still in the red despite sharp increases to premiums.”
According to an analysis by S&P Global Market Intelligence for The Wall Street Journal, the states with the biggest total of approved insurance premium increases were:
Texans may be paying more but at least they can get coverage while property owners in some areas such as California, Florida, and Louisiana are having trouble finding coverage.
“American homeowners already coping with extreme weather now face a new risk: disappearing property insurance. Private companies have increasingly reduced coverage, concluding that the risks—and potential losses—threatened by climate change outweigh probable profits,” wrote Alice C. Hill for the Council of Foreign Relations in August. “As of now, this primarily affects a handful of coastal U.S. states, including California. In other states, insurers have substantially increased the price of property insurance.”
Billion-Dollar Weather and Climate Disasters Hit U.S.
Extreme weather and its cost to the U.S. economy continue an upward trend with 371 total weather and climate disasters since 1980 where the overall damages/costs reached or exceeded $1 billion (including CPI adjustment to 2023).
The National Centers for Environmental Information says the total costs of all these events exceed a staggering $2.615 trillion.
The reality is that while there was an average of 8.1 extreme weather events in the U.S. per year between 1980 and 2022, the average for the last five years is more than double that at 18.0 events per year, and even more concerning, 2023 through September 11 had already seen 23 confirmed weather/climate disaster events with losses exceeding $1 billion:
All told the weather disaster types occurring in the U.S. since 1980 that cost $1 billion+ in damage include:
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“Severe storms have caused the highest number of billion-dollar disaster events (185), while the average event cost is the lowest ($2.4 billion, CPI-adjusted). Tropical cyclones and flooding represent the second and third most frequent event types (61 and 42), respectively. Tropical cyclones are responsible for the highest number of deaths (6,895), followed by drought/heat wave events (4,275) and severe storms (2,094),” reported NOAA
How Extreme Weather Impacts Insurance Premiums: It's About the Risk
So, what is the link between extreme weather and insurance premiums? It’s all about risk and those companies that back those policies are passing more of the risk onto the policyholders as the increasing big-dollar weather events put a dent in their bottom line.
“Since insurance is a shared risk pool, you are sharing in the claims and profitability of your insurance company, good or bad. When an insurance company has to pay out for natural disasters in one area, it can impact the insurance rate of all of its policyholders, especially those in states likely to experience more catastrophic losses in the future,” writes Martin.
How Extreme Weather in 2023 Will Affect Commercial Property Owners as well as Homeowners
CoStar reported in August that the increasing frequency of severe weather events, especially in the past five years, is now accelerating the pullout of major insurance companies from states including Florida, Louisiana, and more recently California.
“The effects of skyrocketing premiums with coverage that's hard to find are expected to spread from the hardest-hit homeowners to commercial property owners and tenants,” wrote Lou Hirsh in the article. “Climate change and its financial costs are increasingly becoming an issue well beyond the nation’s coastal states. Just in the past few weeks, Vermont and Pennsylvania were inundated with catastrophic floods, and triple-digit temperatures spanning more than two weeks endangered an estimated 100 million residents in several states, including Arizona, Texas, and Florida.”
Analysts told CoStar that future insurance cost hikes could be passed onto commercial tenants that lease space under “triple-net” arrangements (where tenants agree to take on expenses such as insurance, taxes, and maintenance in addition to paying rent).
“Such situations are already surfacing not only in California but also in coastal and inland areas of states such as Rhode Island, Florida, and Texas,” wrote Hirsh. “Insurance companies have been pulling out of Florida for decades, but the pace and intensity is increasing, after several destructive hurricanes, driving up costs for residential and commercial insurance.”
How bad is it? State Farm, the largest private insurer in California, announced in May it would stop issuing new home and business property-casualty policies. Allstate had already made a similar announcement.
“Weather catastrophes nationwide have caused rapid increases in the cost of reinsurance, essentially coverage that insurance companies themselves purchase from third-party providers to protect against their losses from unforeseen events that damage commercial and residential property,” wrote Hirsh. “According to insurance brokerage firm Gallagher Re, U.S. property catastrophe reinsurance rates, as of July 1, were as much as 50 percent higher than a year earlier, largely due to escalating claims in states including California and Florida.”
Contact Houston-based Dean & Draper Insurance to help you find the right insurance coverage to protect your home and other valuable assets against unforeseen events such as extreme weather.
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