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From boardrooms to bedrooms

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By Praveen Gupta

· 8 min read

The climate crisis has begun to hurt American homeowners. Praveen Gupta, during his recent visit, tracked the flurry of stories appearing in the American press on the state of homeowners’ insurance portfolios.

The US continues to see spiraling insured and economic losses as a result of the climate crisis. A billion-dollar loss now occurs less than every 20 days. It could be a hurricane, wildfire, flooding, heatwave, or drought. Let’s look at some of the lessons and outcomes courtesy, of what’s happening on the homeowners’ front.

Home insurance hogs the most limelight. Damages, rising insurance costs and supply-side challenges have not only made it an emotive issue but have brought climate change debate to people’s bedrooms. California has become the flashpoint for an insurance crisis fuelled by wildfires.

State Farm and Allstate Insurance recently stopped writing new property and casualty coverage for homeowners in the state. The California Department of Insurance, the state’s regulator, is being lobbied by carriers to allow increases in premiums. The state's consumer protection laws forbid carriers from using catastrophe models to determine the risk of wildfire, and therefore how that can factor into premium rates.

According to Bankrate, the national average for home insurance based on an annual policy that offers dwelling coverage of up to $250,000 soared 20% this year to $1,428. The higher premiums – which have been blamed on factors ranging from inflation spiking the cost of materials and labor to climate change – are at the root of why some 12% of US homeowners decline to buy insurance, according to the Wall Street Journal.

“The report shows that actuarially sound pricing is going to make it unaffordable to live in certain places as climate impacts emerge,” according to David Russell, a professor of insurance and finance at California State University Northridge, quoted by Grist. When insurance costs soar, First Street shows, it severely undermines home values – and in some cases erodes them entirely. “There’s this climate insurance bubble out there,” says Jeremy Porter, head of climate implications at First Street. First Street also believes premiums don’t always accurately reflect risk, especially as climate change exacerbates natural disasters.

The nonprofit climate research firm First Street Foundation found that, while about 6.8 million properties nationwide already rely on expensive public insurance programmes, that’s only a fraction of 39 million across the country that face similar conditions.

The report found that insurance for the average California home could nearly quadruple if future risk is factored in, with those extra costs causing a roughly 39% drop in value. The situation is even worse in Florida and Louisiana, where flood insurance in Plaquemines Parish near New Orleans could go from $824 annually to $11,296, and a property could effectively become worthless.

And there is a potential barrier to adaptation and resilience. The structural codes meant to cope with wind speeds of 90mph are no longer adequate, says Steve Bowen, chief science officer at Gallagher Re. He cites instances of wind speeds topping 100mph into Iowa and Illinois. Moreover, there are known engineering methods to improve the structural integrity of homes. His take: give severe convective storms (SCS) the respect they deserve. This peril continues to affect a lot of people, he says and leads to more pressure on the insurance industry to accurately price the risk. Let's get our buildings better prepared, is Bowen’s advice. This doesn't even begin to touch how hail is the dominant annual driver of SCS losses. In any given year, hail can account for 50%-80% of insured SCS losses, explains Bowen.

Climate-tech: bane or boon?

Concerns have also been raised about carriers’ use of technology in building wildfire risk models, sourcing data on the risks and feeding that data into models. A public risk model, supposedly more transparent, has been proposed. Insurers are expected to explain their risk models in a manner that most people can understand and evaluate.

The second part of the regulation equation is the type of data being used and how it's being collected. Property intelligence technology has become a big source, writes Digital Insurance’s Michael Shashoua, of a large amount of the data relevant to wildfire risk modeling. The data can be about the characteristics of a property itself or the areas surrounding that property, and what risks the characteristics of those areas present for the property.

What should be homeowners’ responsibility for the condition of their property? Does this genuinely raise their risk of wildfire damage? If surrounding property or land has a substantial risk, to what extent should carriers be allowed to raise the premium for that property owner? Can the property owner mitigate the risk with their own maintenance enough to keep their coverage costs reasonable?

As homeowners continue piling into the state-backed Citizens Property Insurance Corporation, regulators have approved proposals that could lead to private insurers pulling 184,000 policies from Citizens, starting in October, according to News Service Florida.

UPC, the ninth property insurer in Florida to go insolvent since 2021, and the largest to do so in 15 years, left many of its Florida customers in a similar nightmare, facing what is predicted to be a powerful hurricane season with still unfixed, hazardous homes, drained life savings and, in some cases, no insurance to protect them, according to The Washington Post.

Melinda Huspen of Digital Insurance reports that recently, the state of Georgia pushed back against Farmers Insurance Co when it announced that it would drop homeowners with older roofs. This development highlights a key aspect of these decisions – whether an insurer is allowed or should be allowed to claw back coverage from those who already have it.

More insurers are relying on AI for climate risk underwriting decisions, knowing very well that AI can easily propagate biases and discrimination. The National Association of Insurance Commissioners recently issued a bulletin with recommendations for insurers about their use of AI, writes Penny Crossman of Digital Insurance. How respective state regulators or Congress respond to carriers dropping or stopping home insurance coverage, remains to be seen.

Corporate farms are more worrisome

While the media focus is on homes threatened by fires and storms, taxpayer bailouts for corporate farms are growing exponentially as climate change damages crops, observes environmentalist Tim Goncharoff.

Georgina Gustin of Inside Climate News reports: “The country’s farmers took in a record $19bn in insurance payments in 2022, many because of weather-related disasters, according to a new analysis that suggests climate change could stoke the cost of insuring the nation’s farmers and ranchers to unsustainable levels.”

Critics of the program, she says, worry that it will incentivize more carbon-intensive farming. Already, US farms are responsible for 11% of the country’s greenhouse gas emissions. A recent analysis suggests that the percentage could rise to about 30% of the total by 2050 – more than any other sector of the economy – if farms and ranches don’t shrink their carbon impact.

Protection gap 

“American households are already seeing the impacts even if their own homes have not been damaged,” said Treasury Secretary Janet Yellen recently. “As a result, more households are turning to residual markets for coverage or are foregoing insurance entirely.” In 2020, Yellen added, just 60% of the $165bn in total economic losses from climate-related disasters were covered by insurance. She believes it is necessary for the Financial Stability Oversight Council to examine how these shifts may affect the wider financial system.

Wildfires are the fastest-growing natural disaster risk, reports First Street. During the next 30 years, it estimates the number of acres burned will balloon from about four million per year to nine million, and the number of structures destroyed is on track to double to 34,000 annually. Wildfires are also the predominant threat for 4.4 million of the 39 million properties that First Street identified as at risk of insurance upheaval.

Proximate cause

Coal, oil and gas companies are now directly linked to worsening forest fires across the western US. A peer-reviewed study from the Union of Concerned Scientists found that 19.8 million acres of burned forest land – 37% of the total area scorched by forest fires in the western US and southwestern Canada since 1986 – can be attributed to heat-trapping emissions traced to the world’s 88 largest fossil fuel producers and cement manufacturers.

Emissions from these companies and their products also contributed to nearly half of the increase in drought- and fire-danger conditions across the region since 1901. The study – and other attribution studies like it – offers policymakers, elected officials and legal experts a scientific basis for holding fossil fuel companies accountable for the impacts of their products and their decades-long deception efforts.

Rather than making legitimate changes to their products and processes, some of these businesses have relied on exaggerated, misleading, or false claims about their environmental, social and governance credentials. “But how many of these can withstand scrutiny from regulators, activist groups or opportunistic customers?” asks Reuters.

This is a story that spans from bedrooms to boardrooms and into the global arena. The heads of Europe’s largest insurers have warned that a growing political backlash in the US has jeopardised their ability to join forces to combat climate change, writes Ian Smith for the Financial Times.

As the pendulum swings from homes to responsible boards, to finger-pointing for the dissolution of the Net-Zero Insurance Alliance, the climate change debate ‘wildfire’ is all set to intensify in the US.

This article is also published on The Journal. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.

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About the author

Praveen Gupta was the second most-read author in the environment and sustainability space for illuminem in 2022, and the third most read in climate change during 2023. A former insurance CEO and a Chartered Insurer, he researches, writes, and speaks on diverse subjects. His blog captures much of the work.

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