Insurers pull back as US climate catastrophes intensify

The insurance industry is increasingly wary of the risks presented by climate and natural disasters, prompting major firms to scale back their presence in more vulnerable states.

In June, Farmers Insurance announced in a company memo it will no longer write new property insurance policies in Florida, citing "catastrophe costs … at historically high levels." Earlier in the month, AIG stopped issuing policies along the Sunshine State's hurricane-vulnerable coastline.

Those followed State Farm, California's largest single homeowners' insurer, which in May announced a moratorium on new policies in the state, blaming "rapidly growing catastrophe exposure." The decision came after years of devastating wildfires have sent insurance rates in California skyrocketing.

In testimony before the Senate Budget Committee in March, Eric Andersen, CEO of consulting firm Aon PLC, said that reinsurance companies, the firms that help insurers pay out costs, have also stepped back from high-risk areas, particularly those vulnerable to flooding and wildfires.

"Just as the U.S. economy was overexposed to mortgage risk in 2008, the economy today is overexposed to climate risk," he said.

The industry is feeling the pinch beyond the East and West coasts, as well, according to Mark Friedlander, director of corporate communications at the Insurance Information Institute. He noted that dozens of firms have reduced their presence in Louisiana, including 50 that have stopped writing new policies in the state's hurricane-prone parishes.

"This isn't just a story about Florida and California — all over the country there are insurers who are less willing to take risks," from those along major rivers to areas vulnerable to tornadoes, said Benjamin Keys, an assistant professor of real estate at the University of Pennsylvania's Wharton School.

Louisiana, in particular, has gotten less attention than California and Florida, but the state's insurance industry has been steamrolled by recent intense storm seasons.

"Many smaller, undercapitalized insurers in Louisiana were not able to handle the volume of losses from the 2020-2021 hurricane season," Friedlander said.

The industry, which has historically taken a more reactive approach to disasters, is shifting its strategy as such events become harder to ignore, he added.

"The industry's taking the approach now of what's called predict and prevent, meaning being proactive to address climate risk and make sure insurance coverage reflects that and make sure homes and business take preventative action," Friedlander told The Hill.

He noted that while Farmers made headlines, it's the 15th insurer to stop writing new policies in Florida in the last 18 months. Although most of those companies have not pulled out of the state outright, he added, three have.

"Insurers are in many ways the first movers" in response to trends like extreme weather and natural disasters, said Keys. "They have a significant amount of money at stake, so they're very exposed to the downside."

Florida is in a unique position, Friedlander said, because of a combination of high fraud rates and widespread litigation, which both compound the cost of insurance on top of the climate risks. A state law enacted this year creates a backstop for property insurance in hopes of alleviating some costs, but it's not yet clear how effectively it will counteract those factors, which have been building for years.

"The difference is in California and Louisiana, [insurance costs are] primarily climate-driven," he said. "They don't have the manmade factors we have here in Florida."

Florida also has a longer history of insurers coming and going, Keys added, going back to Hurricane Andrew in 1992, the most destructive hurricane in terms of property damage in the state's history.

"What that's meant is that the insurer of last resort in the state, Citizens Insurance, has become the largest insurer in the state," he said, on top of the federal flood insurance program.

"There isn't an equivalent for wildfires in California, so the risks in California are borne much more directly."

Keys also noted that the decisions don't mean the insurers will never write policies or operate in the state again. Rather, he said, they should be understood as a way for insurers to negotiate, both on what they can charge in premiums and what factors they can weigh.

"It's not that [insurers] don't want to do business in your state, it's that [they] don't want to do business at the current premiums [they] can charge," he said.

In the meantime, however, none of the climate risks and natural disasters in question show any signs of letting up.

In March of this year, Florida's state insurer said its funds were "significantly depleted" by 2022's Hurricane Ian, and that it will be forced to collect the deficit of $14 billion from policyholders if the state sees a major hurricane in 2023.

On the West Coast, the National Interagency Fire Center said at the beginning of June that it projects "likely above normal temperatures" in the West this summer.

"Clearly insurers are looking at this predict and prevent approach and they're also addressing risk exposure and looking at where they can profitably do business," Friedlander said. "We're going to see more companies making similar decisions."