Climate change is dramatically changing the insurance market, shifting business realities for insurers and their customers. Every year, severe weather events cause frequent, significant losses nationwide. In 2022 alone, natural catastrophes brought $270 billion in total losses. Insured losses for the first six months of 2023 are estimated to be $53 billion with the bulk of these losses occurring in the U.S.
This trend is roiling the insurance world. Reinsurance rates — the price insurance carriers pay to reinsurance companies to backstop their losses — have gone up considerably: 30% this year alone. Rebuilding costs have also spiked due to inflation and supply chain constraints. Carriers, in turn, are passing those costs on to policyholders.
Swirled together, these factors are increasingly causing carriers to reassess their business. Last month, State Farm announced that it will no longer write new property policies in California. In Florida, Farmers Insurance recently announced that it is discontinuing various home, auto, and umbrella policies to manage risk exposure. This pullback from markets shrinks the overall pool, or capacity, of insurance available to customers.
Insurer capacity is not just shrinking on the coasts
We’ve seen non-renewals of policies across the Western United States, largely due to wildfires. Convective storm claims in the Midwest, hail claims in Minnesota, and freeze-related claims in Texas generated catastrophic losses in recent years. If similar storms were to hit those locations again, carriers would likely consider limiting their underwriting to protect against additional severe losses that would threaten business outcomes.
Climate events will continue, and rates are unlikely to go down anytime soon, according to Swiss Re Institute’s June U.S. Property-Casualty Outlook. Every policyholder should prepare to be affected by capacity constraints in the near future.
What is the way forward? What can businesses and individuals expect, and what can they do to mitigate risk in this environment?
The answers may lie in aggressive legislation, regulation, and creative approaches to insurance.
Insurance capacity and legislation
How Florida is working to keep insurers in the state and ensure coverage is available to meet the demand
Florida has the highest rate of insurer insolvency in the country. Insurers are declared insolvent when they do not have sufficient assets to cover policyholder claims. Frequent hurricane losses, on top of excessive litigation, forced 10 property insurance companies to close since 2019. Other carriers are pulling back — unwilling to take on the risk of insuring homes and businesses in Florida.
To bring capacity back to the marketplace, and to prevent additional liquidation of carriers, The Florida Insurance Guarantee Association (FIGA) is tapping into the municipal bond market.
FIGA sold $600 million dollars of bonds. The bond sale will provide reinsurance liquidity, a crucial backstop that allows a carrier to come in and take risks knowing they will have extra support with claims if they need it.
At the same time, Florida has used Federal and State funds to shore up wind pools and storm surge pools, to prepare for future storms and related claims.
Additionally, the state recently passed legislation that limits plaintiffs from filing lawsuits in the state and repeals one-way attorney fee statutes for litigated property claims. The new legislation takes significant cost risks for insurers out of the equation and should contribute to market stability.
Combined, Florida’s actions have potential to shore up the insurance market, to build reserves back up, and to strengthen the carriers’ positions. Once proven, these methods should attract more investment dollars to the insurance community.
As carriers exit or pull back underwriting in other parts of the country, states may look to Florida as an example of how to bring much-needed investment capacity back into the market.
Standardizing insurance carriers’ approach to wildfires
As wildfires become increasingly frequent, a lack of consistency in how carriers define and cover wildfire losses is fueling frustration.
Insurance companies in the admitted carrier space are currently limited by regulators in the way they can approach wildfires — unable to treat them as separate perils with separate deductibles. A standardized approach to naming wildfires, as we do with hurricanes, may allow carriers to offer more options in moderate-risk wildfire areas.
When the National Weather Service or U.S. National Hurricane Center names a hurricane or storm, it triggers different coverage restrictions and deductibles. Similarly, a standardized, independently managed, wildfire naming convention would give insurers needed coverage flexibility. Under certain criteria, a wildfire would be "named", which would carry weight in terms of insurance coverage, allowing clear coverage and/or exclusions.
This would require regulatory approval but could make it easier for carriers to provide more coverage solutions in wildfire-prone states.
Non-traditional insurance products and solutions
Traditional approaches to insurance won’t be able to accommodate individual and business owners’ needs in this age of climate change. We will all need to think outside the box and consider products and solutions that look at coverage differently.
Parametric insurance is one product getting attention in the marketplace, with potential to bring in capacity.
What is parametric insurance?
Unlike traditional insurance, parametric insurance is not based on the size of your loss. It's based on whether the event occurred. You could get money by betting that a wildfire is going to take place this year. If one does, the insurer pays out the limit that you purchased and does not require you to prove a loss. This eliminates the guessing games and battles over unexpected exclusions that are becoming commonplace with catastrophe losses.
Alternative solutions like this, along with captives, and non-traditional risk structuring will become much more prevalent in the coming years to alleviate market pressures.
Building resilience to mitigate risk
Facilities that adhere to new building codes have stood up to recent storms, while older or haphazardly built properties were flattened. As severe weather events increase in frequency, it’s more important than ever to make sure that your property is up to code and that those codes are up to the task.
We can minimize losses by building more resilient structures. Building codes and construction practices that reflect current best practices need to become standard, despite the potential cost. Regulators can help reduce devastation by stringently enforcing modern codes on new construction and renovations.
In addition, home and business owners should take the long view and invest in risk mitigation. This includes clearing brush in wildfire-prone areas, installing hurricane-resistant shutters and roofs, inviting a professional to assess exposures on your property, and more.
Moving ahead in an unstable insurance market
Capacity challenges are bigger than California. They’re bigger than Florida. They’re spreading across the country.
The way forward in this environment is a non-traditional path. Keep your finger on the pulse and prepare for regulatory shifts and the rise of alternative solutions. Build for resilience and consult with experts who can guide you.
The market is unlikely to stabilize anytime soon, but together, lawmakers and carriers can work to increase capacity and provide coverage for those who need it, wherever they live.
