Who has the most power in America? Oil companies? Political parties? Elon Musk? Nope, nope, and nope. The correct answer is insurance companies. Insurance keeps the economy humming. Every new home, school, and commercial building, every airport, farm, or sports stadium is 100% dependent on being able to get insurance. Governments rely on insurance. Industry relies on insurance. Not to put too fine a point on it, but without insurance, commerce as we know it will come to a screeching halt.
State Farm is the largest home insurance company in California in terms of total premiums paid. Last week it announced it will no longer insure new homes in California due to the increased risk of catastrophes like wildfires and high construction costs. The decision, which won’t affect current policy holders, signals the growing threats to insurance availability and affordability in the face of disasters related to climate change, experts told the Washington Post.
“State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market,” the company said in a statement. “It’s necessary to take these actions now to improve the company’s financial strength. We will continue to evaluate our approach based on changing market conditions.”
Nearly 25,000 homes and other buildings across California have been destroyed by massive fires in the past five years. Thousands more have been badly damaged. A California Department of Insurance assessment predicted that by 2100, an average of 77% more acres will burn every year across the state. The Washington Post has previously reported that insurance companies “may withdraw from offering insurance” as conditions worsen.
Insurance Challenges
Insurance is getting harder to obtain throughout the Sierra Nevada region, according to Ryan Tompkins, a forester and natural resources adviser with the University of California. “Many of our communities in rural, forested areas of California are experiencing not only increasing wildfire and increasing wildfire severity, but also increasing insurance problems.They’re getting dropped. They’re getting non-renewed. We’re seeing a sort of insidious, quiet impact economically.”
The communities hit hardest “may already have a higher probability of being disadvantaged,” further amplifying their economic burdens, Tompkins added. “A lot of the communities that I serve are grappling with these problems firsthand. If you have a mortgage, you need an insurance as part of that agreement. If you can’t get insurance, it’s going to have cascading impacts.”
A large part of the problem is that after catastrophic events, the cost of building materials to repair the damage or build new homes to replace those destroyed skyrockets. In Florida today, roofing companies routinely charge $100 for a sheet of plywood — if they can get any at all. After Hurricane Ian last year, about a dozen firms that provide homeowners insurance in Florida became insolvent, leaving hundreds of thousands of property owners scrambling for coverage.
A Simple Business
The insurance business is quite simple. If a person wants to take out a mortgage to buy a home, or a state wants to borrow money to build a new airport, the people lending the money want to be sure they will be repaid if disaster strikes. No insurance, no money. The trick for insurance companies is to spread the risk across multiple loans so if one home or one airport gets destroyed by an earthquake, a flood, or a fire, the premiums from all the other properties that company insures will cover the loss with some left over.
There is an old expression that says the insurance business model is to sell coverage and then deny liability. Insurance companies often are their own worst enemies, as they force their policyholders to jump through hoops to get the benefits they are entitled to. No one holds onto a dollar bill tighter than an insurance company. But to be fair, they are in business to make money. If they pay out more than they bring in, that’s not a sustainable business model.
Climate Change & Insurance
The people who determine risk for property insurance companies are called underwriters. It’s their job to know how to assess risk accurately. Otherwise, the company loses money and they are out of a job. There are no climate deniers among underwriters. They are paid to recognize risk, not take political positions.
You would have to be living off-grid in a remote cabin not to know that wildfires are getting more intense and more frequent in the entire Pacific Northwest, as well as Australia and western Canada. Underwriters are not paid to be stupid and they know that risk cannot be controlled by posting libertarian rants on Twitter.
Behind the insurers there is a completely separate series of companies called reinsurers. They are the insurance companies who insure the insurance companies and ultimately it will be the reinsurance industry that determines where people can live as fires rage, floods happen, and sea levels continue to rise.
“Reinsurance is also getting more expensive due to the amount of losses, not just in California, but also in other states” that experience tornadoes, hurricanes and other disasters, Janet Ruiz, communications director with the Insurance Information Institute, told the Washington Post.
Lloyd’s of London is a big player in the reinsurance industry, as is Swiss Re. These companies make a living (and a very nice living it is) by assessing risk and deciding what premiums to charge their customers to cover those risks.
As climate risks — ranging from wildfires, drought, extreme precipitation and storm surge — intensify in California and throughout the country, insurance companies and government regulation will have to find a way adapt, said Noah Diffenbaugh, a climate scientist and professor at Stanford University.
“Home insurance is a key way that people manage risk of climate-related hazards. And we’re seeing that these events can be very costly both at the individual level and clearly can be very costly for insurance companies.” State Farm’s decision to cease offering home insurance in the most populous state shows “adaptation is very difficult. What’s becoming increasingly clear is that the gap between what’s happening and what we’re prepared for is getting wider and wider,” he added
Lots of people say the Earth is not getting hotter but the underwriters who work for the reinsurance industry know better. You won’t find any climate deniers among them. And when they say the risks are too great, that’s when the whole global economy comes crashing down. Ultimately, it is the insurance industry that will decide where we can live, not voters or politicians.
The Takeaway
What should be obvious from all this is that the cost of living is ratcheting up dramatically. The dream of home ownership for many is now out of reach. People can’t afford the price of homes, can’t afford a mortgage to finance one, and can’t pay the insurance premium needed to get a mortgage. All of that drives the cost of rents higher as well.
While reactionaries in the US Congress are wringing their hands in despair because the wealthiest Americans are paying too much in taxes, millions of Americans are finding they cannot afford shelter or food. Climate change will fall heaviest on those who can bear those increasing costs the least. Most students of history can see where this is leading.
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