Extreme weather creates insurance crisis

But with the frequency of extreme weather events rising in Texas and across the nation, the future of that business is falling into increasing question.

Texas racked up $375 billion in damage from weather and climate disasters between 2018 and 2022 -- more than any other state -- according to this year's National Climate Assessment. And as insurance carriers rack up record claims, they are raising premiums at a fast clip. Rates are up more than 15% this year in many cases, according to S&P Global Market Intelligence, forcing homeowners into less comprehensive policies that cover less and less of repair costs with each passing year.

Roger Newman, an insurance adjustor in Katy, says that, more often than not, when his clients go to to file a claim with their insurance carrier they are discovering that their policies are riddled with exclusions or high deductibles on certain types of weather events, a sharp break from the standard policies of the past.

"I see it every day. Say a hail storm hits, it used to be a regular replacement cost, but now they've added these cosmetic endorsements where they'll argue there's no structural damage," he said. "But the damage isn't always obvious. It may take six months to a year before the moisture starts penetrating. And by that point, it might be too late to file a claim."

The situation is expected only to worsen in the years ahead, as carriers look to reduce their exposure to weather-related disasters that analysis by the National Ocean and Atmospheric Administration shows have increased exponentially over the past two decades. Since 2010, Texas has been hit by 94 weather events in which damages exceeded $1 billion, compared with 60 such events over the previous three decades combined.

This year, the Biden administration ordered insurance companies to hand over five years worth of data showing their premiums, claims and losses by ZIP code to assess the degree to which homeowners are being put at financial risk by shifts in the insurance market.

A senior official at the Treasury Department, who was not authorized to speak publicly about the inquiry, said officials were concerned about a potential disruption to the home insurance market as carriers pull out of certain high-risk markets.

Insurers have stopped selling new home insurance policies in Florida and California all together, saying they are no longer able to provide coverage under state insurance regulations that limit their ability to raise rates.

Companies are not pulling out of Texas yet, but they are looking at further rate increases and limitations on what their home insurance policies will cover, said Rich Johnson, a spokesman for the Insurance Council of Texas, which represent carriers.

"We've had multiple billion-dollar events already this year. At the same time, inflation is driving up repair costs," he said. "I don't think there will be pullbacks like California, but say you live in a certain area with high risk for hail your deductible might go up, or they might change what's covered and what's excluded."

Home insurance had been a fairly low-cost expense for decades -- like life insurance, something you paid for hoping you would never need. But after Hurricane Andrew struck Florida and Louisiana in 1992, racking up more than $25 billion in damage -- a record at the time -- insurance companies started to reassess their home insurance business, said Doug Heller, director of insurance at the Consumer Federation of America.

Homeowners suddenly found their policies no longer covered damage from hurricanes or mold mitigation or even fence repair, even as premiums more than doubled between 2000 and 2022, according to the Federal Reserve Bank of St. Louis.

"Private insurance is not competing for American homeowners who live in climate-impacted areas anymore," Heller said. "We need to wrap our heads around the severity of the insurance crisis in America."

Undercovered, underfunded

That tension was evident at a meeting this summer of the Texas Wind Insurance Association, which since 1971 has provided insurance against storm damage for homes along the Texas Gulf Coast that cannot find coverage from traditional insurers.

The state-backed group has been operating for years without the premiums necessary to cover the potential losses from a big hurricane, according to analysis by its staff. After the board voted against a rate increase in August, Ron Walenta, a board member, questioned whether the strategy wasn't more hope than logic.

"I have my heart and prayers going that we're going to get lucky this year, again," he said. "We need to raise the money in (reserve). What are we going to do, issue IOUs? I don't know."

The vast majority of Texans buying insurance in the private sector are left to navigate an increasingly complex web of variables when trying to buy a policy.

After a period of severe rate increases, the Texas Department of Insurance stopped requiring carriers to write standardized home insurance policies in the early 2000s. The Legislature passed an insurance reform bill in 2003 that, among other things, allowed companies to raise premiums without prior approval from state regulators.

"In Texas, there used to be form A, B or C policies, and the carriers would just submit the policies for review," said Robert Grisham, a Dallas attorney who works on insurance cases. "Now every carrier is different. They write whatever the hell they want and shoehorn it through. We could have three Allstate policies, and they're all different."

Asked about the worsening options for consumers, a spokesman for the Department of Insurance said "companies are adding new options to give policyholders ways to manage their coverage and costs.

"When reviewing your insurance policy, it is important to understand what you're paying for. An agent can help with this process. Ask questions if you don't understand your policy coverages or limitations," he said.

The question facing the Biden administration is what -- if anything -- can be done.

People continue to move to disaster-prone areas such as California and Florida, despite rising premiums. Insurance companies say they are encouraging homeowners to take steps to mitigate risk to their homes, such as trimming back brush or installing storm shutters, but such measures reduce costs only so much.

"There are more catastrophic losses related to extreme weather, and people keep moving into harm's way," said Scott Holeman, a spokesperson for the Insurance Information Institute, a trade group. "These are long-term trends."

At the same time, state regulators have steadily taken a more hands-off approach to the industry over the past decade. In Texas, the state insurance department still reviews rate increases but only after the fact, and challenges are infrequent, said Ware Wendell, executive director of the consumer group Texas Watch.

"The insurance department doesn't have all the tools to keep an eye over what's happening to ratepayers," he said. "The industry talks about competition, but this is not a free market situation. Insurance isn't like buying a TV. It's closer to a necessity because our lending practices require us to have insurance."

Treasury Secretary Janet Yellen said this year that data collection underway would help "inform potential approaches to improving insurance availability and affordability for consumers."

One idea floated by consumer advocates at a Senate hearing this summer was to make the federal government a backstop for cataclysmic home insurance losses caused by climate change, as it did for coverage against terrorist attacks after the Sept. 11 attacks.

Texas Office of Public Insurance Counsel David Bolduc, appointed by Gov. Greg Abbott this year, said figuring out a way to get homeowners covered at a price they can afford will not be easy.

"There's an increasing tension about how you make sure people have access to insurance at a rate that's reasonable for them," he said. "It's not a simple problem. From where I sit, if you look at the companies reporting, it's been really bad the last few years. Their loss ratios in some cases are 100%, so they paid out everything they took in."