Home insurers cut natural disasters from policies as climate risks grow
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I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down. I don't know the math off the top of my head to calculate how likely a lightning strike, or bad wiring or whatever might cause a house to burn down, but I'm sure such tables exist. So I bet every month that no more than one house will burn down. If no houses burn down, I'm in great shape and put that money in the stock market or whatever and get a better return. Maybe I get unlucky and have to rebuild 2 houses.
The sort of sense I get is, the insurance companies can't calculate the probability of catastrophic weather. So there's no way to pick how much to charge for premiums.
I get that it's a continuous curve. But if the cost of the premium is half the cost of rebuilding the house, why buy insurance? If I can squeak by one year without having to rebuild, I should just keep the money and rebuild out of pocket.
Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother? if it's annually a big chunk of the total value of the asset, is there any point? Why put a $100 lock on a $50 bicycle?
Like in your example, if the annual premium is half the cost of rebuilding the house, it implies that the insurance company expects the house to get destroyed every 2 years (maybe a bit less because profit & overhead). The rational thing to do there isn't really to bank the premium into your rebuilding fund (unless you're really wealthy and really want to live there), it's to move. Continuing to stay in a house that gets destroyed every 2 years is what we consider an exercise in futility. And that's the situation that climate change puts us in: some areas that were previously populated are economically uninhabitable, because the cost of rebuilding so frequently becomes greater than the benefit of continuing to live there.
The issue with price restrictions is that in some places, the response to "it's becoming more expensive to keep rebuilding and insuring these places" has been "well, there should be a law to limit how much those greedy insurance companies can charge." And the predictable response to that is "if it costs me more in insurance payouts than we can charge in premiums, we are just going to stop doing business in this state." And so even homeowners that would've been willing to pay the higher premiums simply can't get insurance.
(Also, I'm not convinced that the vast majority of houses in California and Florida are economically uninsurable. There's a wide variety in actual climate risk: houses in the middle of an urban area don't realistically have much more risk from wildfires than they do from an ordinary house fire, while houses in Central Florida are, as another commenter mentioned, much less vulnerable to hurricanes than houses on the coast. As I mentioned to another commenter, the rational response to everyone leaving an area, if it's not actually economically unviable, is to start your own insurance company and fill the void they left. There may be a business opportunity for startup insurers with better risk models than the insurers that are leaving the area.)
Insurance is one of the most regulated areas in business, and for good reasons - too many cases of shady or undercapitalized companies going belly-up and leaving the customers stranded, or being outright scams. Besides, even the largest insurance companies don't shoulder all the risk themselves - no company can survive getting hit by a few "century events" in too short order, so they purchase reinsurance, and even if your risk model may be "better", your reinsurance rates will still be based on the classic risk model.
In any case I seriously doubt it that any startup could be a threat to the established giants of the insurance world with hundreds of years of experience in drawing up risk tables - Lloyd’s of London dates back to the 17th century [1] for a reason.
https://www.fema.gov/press-release/20230502/fact-sheet-acqui...
https://theconversation.com/when-homes-flood-who-retreats-an...
So they either need to be allowed to let prices float or declare areas smaller than a state as “unisurable”.
They can. They can also sell the risk through cat bonds and to reïnsurers.
There is concentration risk, in that if you have one hurricane claim you probably have many others. But that isn’t the problem. The problem is the price is too high, but the folks in the disaster zones can’t afford to rebuild on their own.
> I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down.
Correct. The problem is that instead of one house burning down, a significant percentage of the insured houses are burning down. And the insurance companies are claiming that when that happens, that wipes out all the premiums that have been collected (including from customers whose houses did not burn down) and then some, so it's not financially possible for them to insure all these houses in high-risk areas without eventually having to file for bankruptcy. So they want to raise prices, but the government won't let them.
>Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother?
In that specific case it probably wouldn't make sense, but that doesn't mean it happens in real life or it's representative of the typical insurance buyer.
The mortgage lender can require it. They don't want to have a burnt down house on the books for any amount of time.
The issue is that if adaptation and resistance strategies end up being required due to climate-related risks, climate denialism ends and there'll be a lot more pressure to replace fossil fuels with renewables.
Your mistake is assuming the intention of the people who passed the law was to actually create cheaper insurance.
The laws WERE a good idea for the people who got them passed, for their actual purpose; getting the representatives re-elected.
If you believe that insurance is still profitable at the rates where other insurers leave the market, the rational response is to start your own insurance company. Run the numbers and prepare a presentation to investors; if your numbers are rational and convincing, you can capture the market for yourself and reap the profits.
For the consumer insurer its more like looking at a commission and guessing whether it will go up again as other market participants decide what to do.
the home insurance industry in California changed dramatically with the 2017 summer fire season. The numbers are about "billion" in claims. (edit) substantial destruction of buildings of a major city Santa Rosa. At the same time, price escalation of homes was in full swing. Some houses experience a paper-value growth of more than ten percent a year, on top of high prices. The combination is fatal to the stable insurance industry.
No party is innocent on this.. all players are aggressively padding their positions adversarially, including local government. Less than half the burned homes were rebuilt, four years later IIR.
ps- a recent study claims that about fifteen percent of residential homes are under extreme fire risk in California now, out of maybe 1.5 million structures... roughly, depending on definitions.
Some of your other statements are exaggerated. You say a third of Santa Rosa burned in 2017 but it was more like 3% of the dwellings in that city. The Census states that Santa Rosa has gained net dwellings in the last 5 and 10 years, so Santa Rosa is not another Paradise.
ps- I recommend this site.. https://ccst.us/reports/the-costs-of-wildfire-in-california/
See page 63 of: https://www.energy.ca.gov/sites/default/files/2019-12/Forest...
"In terms of financial performance, admitted insurers in the Homeowners Multiple Peril line broke even in terms of combined underwriting profit between 2001 and 2017. Results for the Fire line were better, with the combined ratio well below 100 percent over the same period. The industry was profitable when investment returns were considered; however, insurers’ experience between 2001 and 2017 illustrates how a particularly bad wildfire season can wipe out many years of underwriting profits."
This is also an easy way to get people out of wildfire areas without being the bad guy. Can blame Allstate that someone needs to move.
It could also be that it is better politically to have cheap insurance for 80% than more expensive insurance for 100%.
Or frankly, just an easy way to get some votes without really getting blamed later.
Historically, the rate one paid was related to the risk one was insuring. The alternative is to have those with low risk pay for those with high risk. I would prefer we don’t build I. Places that need to be rebuilt every few years, which you and I are paying for.
And that's still the case today. The rate of change regarding extreme weather events is significantly accelerating due to climate change and unintentional geoengineering [1], humans are ever more and more encroaching on nature, and a lot of infrastructure like power lines is frankly rotting, so it's only a matter of maths that insurers introduce serious rate hikes.
Another part is that insurers try to anticipate future risk increases as well so they can build up reserves for when disaster (inevitably) strikes... and politicians all over the world aren't exactly prioritizing tackling climate change, quite a few openly deny it. So of course insurances have to price in the additional risk coming from the expectation of many more years of inaction making climate change and its impact even worse.
[1] https://www.science.org/content/article/changing-clouds-unfo...
“Free-market, pro-freedom” conservatives in places like Florida and South Carolina.
https://www.palmbeachpost.com/story/news/state/2023/07/18/hu...
https://www.miamiherald.com/news/state/florida/article129837...
My renovated up to 2015 earthquake standards house pays the same rate as the 1939 jalopy down the street despite my home having much higher quality electrical (less fire risk) and being built to a stronger standard (less likely to collapse or suffer damage from storms, earthquakes, etc).
Neither private insurance nor the state chartered CA Earthquake Insurance price by actual risk.
Florida and Texas are the same: insurers don't price in hurricane or hail proofing, anti-flooding measures, etc. Hail resistant and wind resistant roofs exist but they'd rather just stop writing policies.
I don't know why things have gone so wrong in recent years. Insurance should be able to drive improvements in construction techniques rather than stopping policy writing. For example: instead of refusing to write policies in wildfire prone areas refuse if the home doesn't have fire-proof roofing and siding, along with a zone clear of combustibles around the house, fire screens on vents, etc. Such measures would allow far more homes to survive wildfires without damage but the insurers aren't interested.
This is the opposite of vehicle insurance where the industry crash tests new vehicles and adjusts premiums for vehicles with better safety ratings.
It’s just eventually impossible to insure these assets when these types of super correlated risks become as ubiquitous as they are.
I think the GP's point was that the insurers just wouldn't insure the countermeasure-free 90%. Those 10% would be insured, and suffer less or no damage.
Granted, reducing the risk pool to that 10% of homes isn't great either. But presumably at least some of the other 90% would be strongly incentivized to retrofit those fire countermeasures so they could get coverage.
In CA, require an engineer's report on earthquake risk. This could be done by issuing a standard form for the engineer to review with various areas of concern to avoid the need to have a bespoke report for each case. We managed to do lots of amazing things (invent computers, land on the moon)... I'm sure we could streamline this process. A lot of it is a decision tree: Is this slab, half-wall, or pier/beam construction? Half-wall: are the half-walls braced with plywood? Slab? Are shear walls built to X standard present along all major axis of the structure? Is any soft-story/garage area reinforced with footings and a beam meeting X standard?
In Hurricane-prone areas: require storm shutters on windows, cat-5 rated doors, and cat-5 rated roofing materials. Also require the home be a certain height above the relevant water level. Yes this means a home built on the beach or on a river bank would need to be raised if they want a policy (which is not as impossible or expensive as it sounds). Sucks that the original builder made bad decisions but requiring corrective action would dramatically reduce (if not eliminate) the risk of water damage.
Anytime a home doesn't meet these standards the premium should jump dramatically. If the state won't allow that then you don't write the policy until the structure is retrofitted to meet the standard. This would reward people who invest in renovations to make their homes safer, more accurately price risk, and avoid pulling out of the market entirely - instead sending accurate price/risk signals (where regulations allow such accurate pricing).
Note that the insurance folks have developed an entire system of how roofs (and entire residential, multi-family, commercial structures) should be built:
* https://fortifiedhome.org/roof/
This is not true. You get significant policy discounts by upgrading older homes such as strengthening the roof connection to walls, impact rated doors/glass, roof age (and type).
These discounts can reduce annual premiums by a non trivial amount - first hand knowledge of 30%.
Since Andrew the Miami-Dade building codes have set a new standard for construction and this is reflected in policy pricing.
Are banks legally required to offer mortgages to suitable candidates, regardless of region?
I would prefer that my bank, my insurance company, and the government duke it out amongst themselves, and not involve me.
Central FL doesn't see nearly as much hurricane damage as the coast, but we are also being subjected to increased premiums.
It’s what I like about the insurance industry: it cares not for opinions and moods and politics because it is betting with cash. No amount of climate denial changes the math on a bad deal.
Nevertheless, as the article also highlights, this approach is unlikely to have favorable long-term financial implications for the state.
I often wonder how far away we are from funding being withheld from states with bad public policy as perceived by the party in power. It sets dangerous precedents of coupling human suffering to policy maneuvers (which I realize, happens even today, but in broader strokes NY gets hurricane assistance same as Florida. Imagine a scenario where Florida's general public is punished because of laws on their books, or New York public is punished because of policies it has etc.)
This has been going on for many years. From GOP states refusing to accept expanded Obamacare grants, thereby restricting access to healthcare for the poor to refusing to extend 9/11 first responder healthcare until people like Jon Stewart got involved, oppression and cruelty has been used as leverage in policymaking going back to the founding of the US.
Welcome to the future: https://en.wikipedia.org/wiki/National_Flood_Insurance_Progr...
Congress has been bailing out the program for almost 20 years now.
Insurance is an extremely demanding business. This isn’t something you can throw commodity drones at. If you’re willing to create a coöperative job that pays millions to its actuaries and risk managers, fine. Most don’t. Hence why a profit-based model works: it can incentivise the people that are needed for it to work in the long run to do the job. (In the short run, anyone can run a sloppy insurance operation.)
https://en.wikipedia.org/wiki/Saskatchewan_Government_Insura...
I will never understand the endless linguistic indirection when in the end it’s all Soylent Green; just people.
Perhaps a sufficiently large insurer could dilute the risk of an earthquake destroying a large percentage of homes in Los Angeles by also covering large swaths of other high-risk parts of the country or world.
This exists and is called "reinsurance."
At a certain point, this is just all taxpayers as a whole.
Yes, I believe that's one the reasons reinsurance exists.
This doesn't make any sense. You can rack up way more expensive charges/procedures on the rest of your body (eg. triple bypass or hip replacement) than your eye or teeth ever could.
To me the fact that insurers aren’t insuring natural disasters due to climate change is a good argument that it’s real.
Otherwise they would just sell the insurance to a premium and collect free money?
Or do you guys think that it’s just some companies being dumb and are likely to go out of business?
In Florida the biggest factor in the market death spiral is actually excessive litigation not hurricanes. Regulations require insurers to pay to replace a damaged roof not pay for the depreciated value. Florida customers file 80% of the insurance lawsuits in the whole country but they are obviously not 80% of the customers. https://www.insurancejournal.com/news/southeast/2021/04/14/6.... Roofers who chase storms will sell customers on signing over assignment of benefits to them and they will file the lawsuit for them.
The recent rise in interest rates has made insurance a less attractive capital sink. Why buy a disaster bond or invest in reinsurance when sovereign or investment grade corporate bonds yield 5%? Over long periods of time return on equity must keep up with interest rates. The trickles down to reinsurance costs for insurers and finally higher premiums and pickier underwriting for you and I. In a previous insurance market cycle a bad year of storms ironically was followed by lower reinsurance prices. Why? Because interest rates were low and there was strong competition between reinsurers.
The only thing I conclude from this is that they think this move will be profitable and that is independent from whether climate change is real.
Exactly. It provides excellent coverage for their moves since anyone daring to question climate change is a heretic worthy of being burned at the stake.
Your argument is, on logical merits, not good enough to create a causation between, what I presume is "human influenced global warming increase" and "natural disaster increase".
Now I realize this being a politically charged topic that people look at in an absolutist way, a response that looks only at the logical proposition of your comment, might not be well received.
Things become uninsurable when either they're unpredictable in aggregate (I can't predict when your house will catch fire from leaving the stove on, but a decent actuary can say how many houses that will happen to next year), or when the government sets price controls to forbid them charging high enough rates.
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"More fires" does not prevent fire insurance, unless the government imposes price controls. "Fewer bigger fires" might, since they'd be harder to average out.
This is secondhand. I have been told property insurance experts lean semi-conservative politically but almost all of them firmly believe not only climate change is real, but incoming catastrophe.
Money is "found" in not paying out claims, or chasing the "cheapest to the company" treatment while passing on the more burdensome long term maintenance costs to consumers.
Insurers can be a positive surfacer of unpleasantness. Not before much more unpleasantness is waded through however. See Cigna getting dinged for using an algorithm that 100% rejected first encountered prior auth claims rather than processing them in good faith.
https://www.propublica.org/article/cigna-pxdx-medical-health...
There have been extreme weather cycles in the past and in some areas we had a period of calm for a number of years. In addition to that we had a period of cheap money and other factors that lead to development in areas that have a much higher likelihood of having a natural disaster destroy it over longer periods of time. Government natural disaster assistance for damage to these areas made it worse because there was not incentive to NOT develop homes in areas prone to issues or to take necessary precautions to adequately construct homes to be able to sustain the forces of a disaster.
Now that we are in a cycle where there are more events, the actuarials are looking at the tables and determining that the risk it too high to insure based on current trends. Climate change is just the current in vogue cause so the insurance companies can use it for PR cover. "It's not our fault we can no longer insure your house.....climate change!"
Do you think the massive amount of CO2 pumped into the atmosphere since the industrial revolution has had no affect on the planet?
Back in the 70s and 80s they were predicting an ice age by the early 2000's. That of course extreme scenario also did not occur. Once I started to understand what was happening to scientific research, the special interests, corporate and political interests on both sides of this equation an extreme view on either side naturally sets off my internal BS meter.
So you get record fires here in Canada. Lowest area burned in USA in decades.
Politicians save budget, don't get called to account because of course it's climate change.
Bringing in the insurance angle, they are suffering more losses, the areas are built up more in fire prone forested land, houses are more expensive and there is less labour to fight fire. Poor history of fuel management too. So they are raising rates and I don't blame them. It's easy to just say climate change. Maybe it's a way to appropriate the land back to the elites.
I would wager others will follow the same way, once they realise their policies are just a tax that they get no benefit from, and then insurers will have to come up with some new racket to defraud marks.
Same with an auto loan for most lenders (Lightspeed being one of the abnormal ones that doesn't hold the title to the vehicle as collateral).
Also, no such requirement in the U.K. - 3rd party vehicle insurance is mandatory, but home insurance is up to you - no lender I’ve ever had has mandated it.
"At least five large U.S. property insurers...have told regulators that extreme weather patterns caused by climate change have led them to stop writing coverages in some regions."
https://www.statista.com/statistics/428870/insured-property-...
In their defense 10 years is a nice round number. Also, the text surrounding the chart says
>“There’s no place to hide from these severe natural disasters,” said David Sampson, president of the American Property Casualty Insurance Association. “They’re happening all over the country and so insurers are having to relook at their risk concentration.”
>That trend is too costly, insurers contend, and necessitates rewriting policies or eliminating coverages in growing geographic areas.
If change the window from 10 years to 15 or 20 years, the general impression is still the same: insurance losses are trending up, and the last few years are consistently high (as opposed to having one or two years of high payouts followed by periods of low payouts).
https://www.researchgate.net/profile/Olivier-Mahul/publicati...
Certainly this graph is trending higher from the 1970s, but is that due to more real estate with a higher valuation? And how much insurance premiums were collected?
> Major insurers say they will cut out damage caused by hurricanes, wind and hail from policies underwriting property along coastlines and in wildfire country, [..]
Hurricanes and wild fires have not significantly increased due to climate change. This just allows insurers to arbitrarily refuse to deal with insurance payouts, especially those of large scale. This is essentially another "act of god" get-out clause.
Given that banks need insurance to protect their investment, this will likely just kill the possibility of owning a home for the least wealthy. Some big player such as banks will come in and buy lots of cheap property, then suddenly insurance will cover these 'high risk' areas again and rent them back to the people who lost their homes.
> Potential ingredients include allowing insurers to charge all policyholders a fee to cover the riskiest properties ...
https://www.politico.com/news/2023/08/21/wildfires-californi...
Edit: To be clear, what I am saying is that the stockpile formed from insurance premiums should not be accessible to other causes (even during emergencies unrelated to homes). I'm fine with tax revenue topping off insurance, but never insurance money being redirected to another budget.
People tend to gripe less about an extra few dollars in taxes (which aren't line itemed), but more if the price of their insurance premium ever goes up (which they do see a separate line item for).
https://www.wfla.com/8-on-your-side/florida-insurers-close-n...
Notably, when provincially run insurance and utilities have sold to private interests, the results have always been the same, even recent examples across Canada:
Service gets worse (extremely worse/completely inaccessible if you’re rural), AND costs to consumers double after 3 years, then continue to rise astronomically for several years following.
This, 100% of the time, is followed up by rural people that voted for this scenario to occur complaining that big city politicians fucked them again.
I don’t think it’s possible to build something resilient that’s consistently flooded with salt water. Unless it’s a boat. And those cost a lot to maintain.
The Dutch beg to differ.
But I agree with your point that buildings can be built quite resilient.
Not being insured for natural disasters to me defeats the point...black swan events like natural disasters
Sea levels are expected to rise about a foot in the next 30 years, which will impair some coastal property but not all (much worse on the east coast than the west).
It's much worse on a 60-100 year timeframe. If a discount were being applied, you'd expect most of the reduction in value to be 50 years out. The present values of enjoyment over the next 50 years could far exceed those residual values, and so it could be hard to observe any discount that is present. E.g. even if future sea level rise lops 10% off the value, other factors could add more in the short term.
Banks aren't the ones setting prices on properties. And no one should base anything on the actions of banks because financial institutions generally know to basically sell off the risk as soon as possible (although that can come back to bite them as it did with the subprime thing, where they sold it off, but then many of them made bets on those risks). Their window of exposure is generally extremely small, and they'll keep dancing as long as the music keeps playing.
Further markets are irrational, and always have been. Even if you are absolutely certain that Miami is going to be devastated by climate change, for instance, you might still buy an overpriced oceanfront mansion because you know that you'll be able to find either a sucker or someone with the same assessment when the time comes.
Also, people aren't rational or well-informed all the time.