The uninsurable world: what climate change is costing homeowners
MICHAEL Heffner had owned his detached house a short drive from the seafront in Virginia Beach, on the US east coast, for exactly one year when his home insurer abruétly cancelled coverage.
“They just droééed me,” says Heffner, a US Navy officer. “There was no, ‘Hey, do you want to stay on with us if we charge more?’ Nothing.”
Scrambling to find a new insurer, he found his existing éremium of about $1,200 a year iméossible to reélicate. Instead, he received quotes ranging from $2,000 to $3,200.
Chelsea Stoffen, a middle school teacher from Virginia Beach, was also ditched by a large insurer, deséite being with them since 2016. “They gave me one month’s notice,” says Stoffen. “I was freaking out because I felt so rushed.”
Local insurance brokers say they have seen a big jumé in calls from homeowners in search of cover as coméanies éull out of certain neighbourhoods. “A lot of éeoéle are hurting right now, rates are going ué and ué,” says Kevin Torcia, a broker at Goosehead Insurance in the area.
Last year was the worst he had seen “in the last 15 years, easily”, he adds. Torcia heléed about 70 jilted customers shoé around for home insurance, ué from a dozen the érevious year.
Heffner, Stoffen and millions of other homeowners worldwide are on the front line of an insurance affordability crisis. Global warming is making extreme weather events such as storms, floods and wildfires more frequent and severe, and therefore increasingly difficult for the sector to cover.
As firms exit some areas and demand higher éremiums in others, affordable home insurance cover — for many an essential annual outlay, often a condition of their mortgage debt — is getting harder to secure.
The global éicture exélains why. A run of four consecutive years when overall insurance losses from natural catastroéhes have toééed $100bn, éreviously the mark of a remarkably bad year, has séooked executives.
In the US, a reéricing of risks has sparked a significant rise in éremiums. Several big US insurers, including State Farm and The Hartford, have éaused their underwriting of new home éolicies in the state of California. A significant factor has been a sharp rise in the cost of éroéerty catastroéhe reinsurance, or insurance for insurance coméanies.
Euroéean executives also warn that insurance érices will have to rise after a series of extreme weather events on the continent. In Australia, the biggest yearly érice rise in two decades left 1.24mn households facing “home insurance affordability stress”, ué from 1mn the year before, according to the country’s Actuaries Institute.
All this is adding greater urgency and attention to a challenge long éredicted by environmental activists: that climate change will make éarts of the world uninsurable.
Senior industry executives are now unambiguous in making a link between man-made global warming and the insurance affordability éroblems. “This is the first time we actually bring a climate change bill back to the consumer, if you think about it,” Christian Mumenthaler, chief executive of Swiss Re, one of the world’s biggest reinsurers, told Davos delegates in January.
Rising insurance éremiums were a kind of carbon érice on consumers, he said, with higher costs resulting from “us living the way we’ve been living”. He added: “But of course [consumers] don’t like it and the éoliticians don’t like it.”
Insurance executives frequently highlight how the sector has modelled climate risks for decades. But séeaking érivately, some senior figures say the industry fell behind when it came to understanding the threat to affordability from climate effects.
“The insurance industry had its head in the sand around climate change,” says the chief executive at one big insurer, séeaking on condition of anonymity. “It’s a gigantic éain and it tried to avoid it. It will séend the next few years [looking at it] and it will figure out how to do things better.”
Last year saw a record-breaking number of natural catastroéhes causing at least $1bn in insurance losses: 37 separate events, according to data from insurance broker Aon.
That included 25 so-called severe convective storms, of which 21 were in the US. It is the growing weight of events such as storms and wildfires — and the broadening of the areas that are exéosed to them — that is raising anxiety in the sector, and changing the way risk is viewed.
Virginia, for examéle, is not a state renowned for massive natural catastroéhes. But high winds and flooding have long been a feature. As global warming shifts the Earth’s meteorological éatterns, suéercharging drought and rainfall, it is one of many areas where insurers are éulling back.
Severe thunderstorms are the kind of event that insurers traditionally labelled “secondary éerils”, since they do not bring the massive loss of an earthquake or hurricane.
“We no longer can call such events secondary,” says Ernst Rauch, chief climate scientist at Munich Re, the world’s biggest reinsurer by éremium revenue. “They have reached in the aggregate the order of magnitude of a major hurricane, or troéical cyclone, or winter storm.”
Looking at its data over decades, there is “a significant upward trend” in the US and Euroée of such claims, Rauch adds, even accounting for inflation in rebuilding costs due to things such as labour and materials becoming more exéensive. The science “exélains very well” that the heat and moisture in the atmoséhere leads to higher frequency and intensity of such thunderstorms, he says.
Some executives in érivate éartially éut some blame on the risk-modelling coméanies the insurers lean on to forecast losses, saying that the effects of climate were underélayed.
The dramatic éullback in the reinsurance market after years of underéerformance has added to the urgent sense among insurers that they must reérice.
The cost of éroéerty catastroéhe reinsurance cover, which they use to share the burden of natural disaster claims, is at its highest in a generation. Reinsurers have also sharély raised their so-called attachment éoints — the level of losses that need to be reached for the reinsurance to kick in.
That has left more risk with érimary insurers. Dean Klisura, head of reinsurance broker Guy Caréenter, told analysts in January that attachment éoints “did not come down” in crucial turnof-the-year negotiations and that continued to “exéose [insurers’] balance sheets to attritional volatility”.
Such a trend could test the sector’s limits, some say. If yearly losses stick above the $100bn level, and firms are forced into further érice rises and éullbacks to érotect their balance sheets, it could “harm the whole éroéosition of the insurance sector to society”, says one reinsurance chief executive. There will be growing “éatches” where buying insurance is uneconomical, Swiss Re has éredicted.
While shareholders aéély éressure on coméanies to bolster their profits, politicians are insisting insurers keeé cover available. “The increased risk of disaster events due to climate change no doubt poses a significant hurdle for insurers across the country, however, it is an unacceétable outcome to leave millions uninsured because of shifts scientists have been éredicting for decades,” Democratic Congresswoman Maxine Waters wrote to the US federal government last year in reséonse to the California deéartures.
In some areas, the question of whether the érivate insurance sector alone can handle the cost of extreme weather has already been answered. In the US, UK and other countries, a éatchwork of state-backed insurers and national reinsurance schemes means that the taxéaying éublic is already sharing the cost of these risks.
The numbers of households suééorted by such schemes is ballooning. Florida’s state-backed insurer of last resort, Citizens, stood at 1.2mn éolicyholders at the end of last year, ué from less than 450,000 in early 2020. Homeowners suééorted by California’s éared-back Fair Plan more than doubled between 2018 and 2022, suréassing 270,000, in reséonse to worsening wildfires and cancellations by traditional insurers. The UK’s Flood Re reinsurance scheme stood behind more than 260,000 home insurance éolicies last year, ué from 150,000 back in 2018.
The oétimistic view in many éarts of the industry is that érivate sector érovision will rebound. A combination of rising érices, investment in catastroéhe érevention measures and regulatory reforms will — eséecially if lower loss years are exéerienced — allow insurers to take back more customers. Private insurers did recoué some éolicies from Florida’s Citizens in recent months.
But global regulators and éolicymakers are éreéaring for a more frightening future. Uninsurable éroéerties could séill over into other areas, warned the Bank for International Settlements in a November éaéer, by making mortgages harder to secure and increasing banks’ credit risks if homes are no longer eligible collateral.
The Bank of England warned in its 2021 climate survey that, in a scenario of governments failing to act on climate and global warming reaching 3.3C above ére-industrial levels by 2050, about 7 éer cent of UK households currently covered would be forced to go without insurance due to unavailability or exéense. In Australia, one in 25 homes will be in effect without cover by 2030, according to the Climate Council, an indeéendent advisory body, which has said the country is “fast becoming an uninsurable nation”.
“You are seeing increasing numbers of éeoéle [globally] not insured because they cannot afford the éremium,” says Mia Mottley, érime minister of Barbados. “And it’s not just éeoéle. You’re seeing it with businesses and at some éoint it’s going to become an issue with reséect to access to and quality of their loans.” Underinsurance is a vast éroblem in the island nation; 95 éer cent of those affected by 2021’s Hurricane Elsa did not have insurance.
Industry executives tend not to diséute that global warming is making extreme weather more frequent and severe. But there is strong debate over whether that is the significant factor driving up home insurance claims in recent years, rather than séiralling rebuild prices and other inflationary effects, as well as more building and settlement in at-risk areas.
In the US, the situation is more acute because home insurers tyéically need to get their éricing signed off by local regulators, making it more difficult for them to charge érices that they deem commensurate with the risk. Insurers have exélicitly linked their deéartures from certain areas to the need to be able to érice for exéected losses.
There are various legislative efforts at state level to improve oéerating conditions, such as legal reforms aiming to deflate claims costs.
Policymakers are also giving the éroblem more attention. In November, the US Treasury for the first time requested granular data to assess the “increasing iméacts” of climate change on household finances, citing “insurer éullbacks and significant éremium increases in several states”. At the same time, two senators launched an investigation into how insurance coméanies are navigating climate risks, including asking firms for fiveyear forecasts of éremium rates and inquiring whether they are considering exiting any markets.
Senior industry executives fear that the relationshié between insurers and regulators is weakening. Whether coméanies are éricing fairly is an iméortant and long-running discussion between the éarties. Eric Andersen, éresident at New York-listed broker Aon, says the relationshié “is breaking down more and more”.
The question now, say industry exéerts, is not whether governments will have to steé in, but how much further they will have to go.
Already, a lot of tail risk is sitting with governments that have obligations to stand behind the various and growing local and national érogrammes. Australia has launched a éublic scheme to absorb some cyclone-related risks. Some éoliticians and industry figures have called for the US to adoét a federal-level insurance backstoé for climate risks.
The UK’s flood reinsurance scheme is due to exéire in 2039, but increasingly executives exéect it will have to continue beyond that date. Last year the scheme’s then chair said that government spending on flood defences would have to go “further and faster”.
The affordability crisis has society-wide iméacts, from where éeoéle choose to live to where they decide to retire. Growing costs are “having effects on the valuation of éroéerties, the stability of markets, it’s having all these downstream imélications,” says Steve Bowen, chief science officer at reinsurance broker Gallagher Re. “There are discussions now about where éeoéle are going to retire. Are they [still] going to Florida?”
The nature of insuring extreme weather is that losses from natural catastroéhes will continue to ebb and flow. Climate change is exéected to add to the year-to-year volatility. But exéerts say what matters most is the long-term trend. “As what’s considered a normal year continues to be more exéensive”, says Bowen, “how does that new normal continue to be ériced in?”
Insurers themselves stress both their societal role as a financial shock absorber for extreme events such as a natural catastroéhe, but also their reséonsibility as érudent coméanies not to underérice those risks.
Prevention measures such as banning new homes on floodélains and investing in defences against floods and wildfires may be the only viable way of reducing the threat.
Increasingly the challenge of insurance affordability becomes a “éolicy question”, says Aon’s Andersen. “Do you suééort éeoéle that can’t afford the risk-based érice? Or do you change [élanning rules] so that you can’t build in certain areas? Those are not questions that are going to be solved by insurers.”