Florida, Louisiana, Colorado, Texas, California. Call out these names in a game of Bingo and you would have struck off an entire row of hotspots. Hotspots for what? No, not for tourism but for climate change. If the world was a venn diagram and two of the circles in it are insurance of properties and climate change, you would have assumed that they would be mutually exclusive. However, times have changed. With it, so has the climate. So much so that insurance companies in the aforementioned hotspots are canceling home insurance policies this summer. What started as a one-off thing has now become a crisis where the U.S. is in trouble.
The property insurance crisis rocks the U.S.A, not in a good way
Amidst the hotspots mentioned, Florida has had it the worst since a long time ago. This is because Florida is often caught in the cross hairs of mother nature’s wrath. It is a victim of the most turbulent storms and hurricanes that America has ever been struck by. Ensuing the unfathomable losses from the 2004-2005 hurricanes, insurance companies such as State Farm withdrew from offering property insurance and the other big names followed suit. Despite bouncing back after a few years, Florida is seeing a repetition of the occurrences in the recent years as well. An article written by Jedidajah Otte for ‘The Guardian’ captures the current state of this catastrophe when it discusses the situation in the state of Florida.
In Florida, the third most popular US state, residents have been contending with an ongoing property insurance crisis that is rendering homeownership increasingly unaffordable. With at least six insurers declaring insolvency in Florida last year, ‘Farmers’ recently joined the list by withdrawing from the state, citing elevated risk exposure due to its vulnerability to hurricanes.
This is because insurers are facing a conundrum: as the threat of expensive disasters grows, pushing up premium risks alienating policyholders and provoking regulatory backlash. This dilemma underscores the recent move by Farmers Insurance to cease renewing one-third of its policies in Florida. The decision reflects a broader trend in the industry, as insurers grapple with escalating expenses tied to climate-related disasters such as floods, hurricanes, wildfires, and their impact on covering damages.
The impact of climate change is amplifying the threat to certain areas of Florida, with its effects already causing financial strain for residents. By the close of 2022, the annual average property insurance premiums had surged over $4,200 in Florida- a figure three times higher than the national average.
Even though Florida is hit the hardest, if you just claimed ownership of a house in any of the other hotspots, you will have first hand experience of how difficult it is for many Americans to get home insurance. Apart from the woes with regards to the abrupt halt in insuring companies offering home insurance, the cost of insuring the houses are rising nationwide. This will make it harder for the general public to get mortgages or to repair their homes post-disasters. Even California is going through a plight as similar as that of Florida’s.
In July 2023, major insurers like State Farm (a recurring name), Allstate, Farmers (another recurring name), and AIG have shaken California’s insurance sector by revealing their intention to halt the issuance of new policies. A decision that was taken as a response to the challenges posed by severe weather events, inflation, and economic factors that have created unfavorable conditions.
As if things weren’t bad enough, California is also grappling with the additional insurance challenges as recent reports highlight a trend of limited availability for new auto insurance policies. As per Mike Pangilinan’s article on ‘Are auto insurers pulling back from California?’, across the U.S., insurance companies have been compelled to raise auto insurance premiums in response to inflation and a surge in claims. In California, these difficulties are exacerbated by the regulatory requirement for rate adjustments to gain approval, a process that has been hindered due to a rate freeze instated by the California Department of Insurance during the pandemic.
These delays have resulted in insurers resorting to measures such as “terminating agency appointments and restricting business submissions”, as outlined by the American Agents Alliance, a representative body for independent insurance agents and brokers.
Is there a solution in the foreseeable future?
No. At least not ones that come easy. And this is because the property insurance crisis is spreading like wildfire in the states. While locations such as California and Florida are the worst victims of this issue, one does not have to be clairvoyant to tell that this is eventually going to penetrate other states as well. Recent statistics and data drawn by real estate experts say that states may have to shed blood, sweat and tears to address possible homeowner insurance crises.
A recap of the current status of the country will tell that it is not an exaggeration to suggest that the U.S. could be standing at the edge of a property (especially homeowners) insurance crisis, mainly in coastal regions. Major insurers, including State Farm and Allstate, have halted the sale of property insurance to new clients in California. Farmers has declared an end to new property coverage in Florida. American International Group (AIG) has also announced it will no longer insure houses along the Florida coastline. Homeowner insurance rates are quadrupling which has resulted in regional and local insurers, ones that are often financially precarious, being left to provide coverage. A 2023 Louisiana survey conducted by the Reilly Center for Media and Public Affairs at the LSU Manship School of Mass Communication reveals that one fifth of the homeowners insurance policyholders in Louisiana have had their coverage canceled by their providers. It also states that 19% of state residents tried to get a policy last year and more than half of that percentage failed to secure one. Therefore, the state of property insurance in the U.S is disastrous to say the least. But this is not a crisis that materialized overnight, it was in the making for quite some time. However, the most recent drastic changes in climate change seemed to have been the nail on the coffin.
While there are measures being taken, all of them seem like temporary clogs to prevent a water leak. As insurers withdraw from regulated state markets, many homeowners are left with no option but to resort to state-required plans, offering coverage to those unable to secure insurance elsewhere. Colorado, for instance, established its own insurer as a last resort this year. However, these policies tend to be costlier and provide limited coverage. While state-mandated plans are appreciated, they always come with a higher price tag.
According to an article posted on NPR about ‘How climate change could cause a home insurance meltdown’, it shows that certain states are adapting their insurance regulations in response to rising temperatures. States like New York and Connecticut are urging insurers to devise strategies that consider both present and future climate-related risks. The article quotes the Treasury Department who believe that these new measures are signaling a shift from the U.S. property insurers’ usual (and dated) approach which relies heavily on historical data, despite its decreasing relevance in the face of an evolving future shaped by global warming.
However, a consensus that most have arrived at is that the entire landscape of insurance will have to adapt to these new conditions, which means moving away from models that they were comfortable with. There are solutions, undoubtedly, but they are not easy and will not guarantee a 100% recovery.
(Sandunlekha Ekanayake)