Climate change tests the insurance industry and could lead to the 'next big economic shock for the U.S. economy'

For Diane Wolf and many of her neighbors in the quaint, wooded hills of Berkeley, Calif., a climate change reckoning is underway.

“We’ve been here 26 years, and had car/home umbrella insurance with AAA,” Wolf, faculty assistant to the vice provost of academic affairs at the University of California, Davis, told Yahoo News. “We got a notice last spring that we wouldn’t be renewed because we didn’t have fire insurance.”

Wolf and her husband acted quickly, securing additional fire insurance coverage for roughly $7,000 a year, but AAA then embarked on a full policy review that required an inspection of the property. This has been a common occurrence in California, a state that has endured 16 of the 19 wildfires in U.S. history that have resulted in losses over $1 billion.

“As opposed to just renewing us as old clients, they cited all kinds of problems — a wire hanging, the age of the roof, a bump in the sidewalk caused by the roots of a tree, a lopsided gate, a lack of outdoor hand-railings — and then threatened to decline coverage,” she said.

Wolf approached California’s insurer of last resort, the FAIR Plan, which offers subsidized coverage when private companies won’t, but it responded with a similar list of required upgrades. Faced with losing coverage at a time when insurers are either not writing new California policies or have been raising rates dramatically to account for the increased risks posed by climate change, Wolf went ahead with the repairs, which she said cost $60,000.

“That’s a big chunk of change for us,” Wolf, 70, said, adding, “We have minimal coverage now, but we were lucky. My neighbors were dropped without any warning.”

‘Cascades’

Earlier this month, Senate Budget Committee Chairman Sheldon Whitehouse of Rhode Island held a series of meetings in Florida on the topic of skyrocketing insurance rates. At a panel discussion in Hollywood, he issued a dire warning about what he called "the next big economic shock that is going to clobber the U.S. economy."

With insurance becoming unaffordable or unavailable, Whitehouse said, the next shoe to drop is “the mortgage market going into crisis, because if a property is uninsurable, that property is unmortgageable. And then that mortgage crisis cascades into a property values crash.”

No state has been hit harder by the unfolding insurance crisis than Florida, a peninsular bullseye consisting of 8,436 miles of heavily developed coastline that each year tempts hurricanes and tropical storms. Residents in Florida pay four times the national average for homeowners insurance, and the cost of premiums has risen there by more than 40% over the past year and a half. That's no real surprise given that in 2022, a single storm, Hurricane Ian, killed 150 people and caused a record $112 billion in damages when it made landfall on the Gulf Coast.

For Steve Swanson, a 57-year-old trial lawyer, the soaring insurance rates that followed the disaster caused him to recalibrate his long-term plan of selling his 3-bedroom single family home in suburban Chicago and buying a condo on Sanibel Island, which had been ravaged by Hurricane Ian. Instead, in 2023, he purchased a 400-square-foot tiny home, placing it on a lot in a Sanibel mobile home park. He then parked the leftover proceeds from the sale in a money market account.

“I thought, OK, I’ll take my chances. If it’s once every 20 years — say another hurricane hits when I’m 75 years old — well, OK, I’ve self-insured,” Swanson said. “If I’m alive, I can use my money market account to buy another relatively inexpensive home.”

A recent study by the Insurance Information Institute, a nonprofit that seeks to educate consumers, found that the number of people foregoing insurance coverage is rising sharply.

"Twelve percent of homeowners are now voluntarily not purchasing home insurance versus 5% before the pandemic, so the rate has more than doubled," Mark Friedlander, the institute's director of corporate communications, told Yahoo News. That comes despite the finding in a survey by the financial adviser firm Bankrate that most Americans don't have $1,000 set aside for a family emergency.

“How realistic is it for an American family to say, ‘we’re just going to forego insurance and we’ll pay for a loss out of pocket’? Not very.” Friedlander said. “But that’s the kind of trend we’re seeing.”

‘Financial system repricing’

Susan Crawford, a senior fellow at the Carnegie Endowment for International Peace and a former science adviser to President Obama, has spent years researching and writing about the economic dangers posed by climate change.

“I think what we’re seeing is elements of our financial system repricing in acknowledgement of physical climate realities,” she said, adding that the first markets experiencing that adjustment “are based on risk assessment.”

Yet even with the increased risk of extreme weather, wildfires and the higher insurance premiums that follow them, Florida continues to be one of the fastest-growing U.S. states by population in the country, adding 365,205 residents in 2023.

“It’s bananas, isn’t it?” Crawford said.

Crawford, Friedlander and Whitehouse all agree that blaming the insurance industry for rising rates is misplaced.

“It has to price the risk in order to not go out of business and it has fiduciary responsibilities to do that accurately,” Whitehouse told Yahoo News.

The real culprit, he said, was “the free-to-pollute business model of the fossil fuel industry that causes emissions to continue to rise.”

Last resort

One of the ironies of climate change is that as it is making insurance unavailable or unaffordable for millions of Americans, many homeowners are forced to turn to last-resort insurers who are subsidized by the very insurance companies who denied coverage in the first place.

“The California FAIR Plan has been growing at a record level. That’s never a good thing. You never want your state insurer of last resort to grow so fast,” Friedlander said. “In Florida, Citizens Insurance is the largest market for home insurance in the state, which is really a bad scenario. Citizens stands at over 1.2 million policies and 18.5% market share, double the market share of any private company in the state.”

What happens if the state sees another catastrophic loss on the order of the Camp Fire, which in 2018 resulted in $16.5 billion in damages and killed 85 people? Private insurers will hit up their customers.

“In California, just as in Florida, ordinary homeowners who have car insurance policies, life insurance, will be on the hook for the failures of the insurance in that state,” Crawford said.

If that fails to balance the books, she added, “the likelihood is that the state will then turn to the federal government for a bailout.“

It’s that contagion aspect that worries Whitehouse, who emphasizes that rising global temperatures aren’t a localized problem.

“While Florida is first and worst for the destruction of its insurance industry by climate change, it’s not only other coastal states that are behind Florida in the same lane of risk, but it’s coastal flooding’s evil twin, wildfire risk, that is popping up with the identical risk profile but in different geographical areas,” he said.

‘Bill is coming due’

When Hurricane Francine, a relatively minor (Category 2) storm, made landfall in Louisiana on Sept. 11, it left behind an estimated $1.5 billion in damages. Five days later, an unnamed tropical rainstorm dumped 20 inches of rain on coastal North Carolina in a single day, racking up another $7 billion in estimated damages. These events are part of a discouraging trendline.

“Last year, NOAA measured 28 billion dollar loss events, the most ever on record,” Friedlander said. So far this year as of [Sept. 23], there have been 22.

In part, those statistics are born of the continued migration to high risk areas, higher rebuilding costs and labor shortages, Friedlander said, but underlying it all is the fact that warmer average temperatures are wreaking havoc on the planet. And short of a scientific breakthrough that allows the removal of carbon from the atmosphere on a massive scale, we're left with the question of how best to adapt to the problem.

“That means incentivizing state and local officials to change building codes, change zoning, accelerate building in relatively safer areas, provide people incentives to shift to those safer areas, buy them out of places that are inevitably going to flood or burn down,” Crawford said, adding, “It will be painful. It will take a long time, but it’s essential to keep our economy going in the long term.”

It remains to be seen, however, whether there is a political or a free-market solution when it comes to steering people into choosing safer places to live.

“No one has an incentive to change the status quo,” Crawford said. “Local officials need the property tax being paid by current homeowners and commercial properties. It is not in their interest to ring an alarm bell and say we need to be living differently. Developers need to make money building buildings.”

For some, however, the insurance industry’s climate change wake-up call may serve as a corrective.

“It’s really made me think about leaving Berkeley,” Wolf said. “It’s getting more and more expensive to live here and I don’t think we’re done with this craziness. They could say, ‘We won’t insure a house with wooden shingles.’ I think it’s about climate change, but the whole reason you have insurance is because of those problems and when you make claims, you’re screwed. So what is the point?”

And while many Americans have been venting about the hoops insurance companies are making them jump through now, others seem resigned to a new normal.

“We’ve been getting all of these things from industrialization,” Swanson said. “Now it has come time to pay. The bill is coming due for what we’ve done over the last 150 years to change the climate.”