The Never-ending Catastrophe Movie

As we witness the devastation in California from the wildfire catastrophe, the insurance industry faces a recurring disaster scenario movie, marked by daily clashes of conflict, competence, and incompetence. Those overwhelmed by the situation may fall prey to public adjusters and lawyers seeking to resolve or combine claims, even if invalid. Politicians and the media will search for a villain, often targeting insurers who have attempted to price risk prudently. With election campaign funds to raise, some insurance regulators may resist modifying guidelines to support a functioning market. Elites will discuss private-public partnerships at the World Economic Forum but lack the will to implement them. Meanwhile, the California FAIR Plan will face claims exceeding its assets, jeopardizing its financial stability. If the FAIR Plan cannot meet its obligations, it may trigger assessments of other insurers in California, increasing costs for policyholders and potentially leading to insurers' departures from the market. Amidst all this, families and small business owners, already devastated, will suffer in a ruthless game that is all too real.

The devastation in California highlights the urgency of these issues. The December 2024 Senate Budget Committee Report on the Climate-Driven Insurance Crisis noted three key takeaways:

1.?????? Climate change is driving increasing insurance-renewal rates.

2.?????? Insurance non-renewals are not exclusively a problem for communities typically seen as being on the front lines of climate change.

3.?????? Across the United States, there is a clear positive correlation between rising non-renewal rates and rising premiums.

Though the report mentions that mortgages could be impacted, it fails to emphasize what is truly needed from the financial markets in the face of these ongoing catastrophes — incorporating the physical risk associated with them into the mortgage-backed and municipal bond markets. During the 2008 financial crisis, municipal bond issuers experienced adverse effects due to indirect exposure to mortgage risk through insurance companies. Unlike the indirect risk incurred in 2008, the current market risk is directly linked to the viability of communities affected by catastrophes.

As depicted in the “Big Short” movie about the 2008 financial collapse, the winning long-term trade was with those who had priced risk accurately. Even without the movie, we know who the losers were. Before these catastrophic events devastate our economy again, it may be time to shift the focus away from the alleged near-term villains (e.g., the insurers who priced catastrophe risk) to the markets that do not. Otherwise, this catastrophe movie will continue to play on a never-ending loop.

The views expressed in this column are solely those of the author and do not reflect the views of Sharer Consulting LLC, LineSlip Solutions, or any of their affiliates. This material is provided for informational purposes only. It is based in part on information from third-party sources that we believe to be reliable, but which has not been independently verified by us. As such, we do not represent that the information is accurate or complete. You should obtain relevant and specific professional advice before making any decision. Sharer Consulting and LineSlip are not responsible for any cost, claim, or loss associated with your use of this material.