Climate change and more frequent natural disasters have been wreaking havoc on communities worldwide and the insurance industry as a whole. As the frequency and severity of natural disasters and other severe weather risks increases, the CAT models insurance carriers have long used to determine pricing and their risk appetite are proving less effective and predictive than they used to be.
Certain regions are also consistently being hit more frequently by severe natural disasters- most notably wildfires across California and the Pacific Northwest and hurricanes throughout Florida and the Southeast. Underwriters are also now confronted by climate linked issues and natural disasters in geographic areas never anticipated such as the Northeast and Midwest. After delivering sizable payouts in CAT zones and other “lower-risk” areas, insurers are taking necessary corrective action by increasing rates and tightening underwriting requirements, especially in higher-risk areas.
Driven by climate change, the property insurance market remains tight as property underwriters race to transform underwriting property risks to newer, still unproven, CAT models. In preparation for this new normal, brokers, and property owners must pay closer attention to the changing landscape and do everything in their control to manage risks, mitigate losses and prepare for the worst.
Carrier capacity is rapidly running out in wildfire-prone areas as many insurers have exited these areas entirely, viewing the risk as too high and too unpredictable. In contrast, there is not yet a capacity issue in hurricane-prone zones as carriers are able to use the annual renewal cycle to shift their exposure and rearrange portfolios allowing them to more easily adapt to some of the annual climate events.
Premiums and rates in these areas remain high, but coverage is available. In fact, the higher pricing has started to attract new carrier entries to the space, further increasing capacity in select territories. Increased competition has not yet suppressed pricing, however. Time will tell whether climate-linked events will lead to consistently large payouts that prompt insurers to restrict property insurance in hurricane-prone regions.
In an already challenging environment, inflation is exacerbating climate change’s effects on the insurance industry leading to increased construction costs for goods and labor expenses making it more expensive to rebuild after a disaster. Additionally, insuring properties to value with rising inflation is leading many homes and businesses to not be properly insured for their true replacement cost values. In some cases, this has led to many property owners to be significantly underinsured. Some industry experts are actually calling for property owners to increase the insured property value by 18-22% year-over-year to keep pace with inflation and the increased costs.
Also, to protect themselves from having to pay far over the insured value of a property when loss estimates are based on inflation-influenced costs, many insurers in the commercial insurance space are starting to limit when they will offer “blanket limits” and beginning to use a property insurance margin clause or, in other instances, capping losses at 110% of a reported value.
Knowing this, it is important that property owners work with their brokers, appraisal firms and underwriters to determine accurate replacement cost values of their property and secure insurance coverage at full valuation.
Escalating climate change has made risk management and loss control more important than ever. Property owners must work to make themselves a better risk. Steps include:
It is also important for property owners to prepare in advance for any type of a natural disaster. We are now working with many of our clients to connect them with disaster recovery firms and forensic accountants on the front end, before an incident occurs, to build relationships in advance and support necessary preparations. It is also critically important to assess your property insurance policy to make sure many of these costs are reimbursed by the insurance carrier post-loss as part of insurance policy.
Climate change has created unique challenges for the insurance industry. We also don’t know when the insurance market will settle or how or when or where CAT zones will grow. For now, the best path forward for property owners is to work closely with their insurance broker to understand the shifting landscape and the best techniques available, whether it is a diverse set of insurance coverages or risk mitigating strategies, for protecting their assets.
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