Spotlight on Climate: Got insurance? Climate change drives up costs

Do you have fire or flood insurance for your home or business? In some communities such insurance is getting harder to come by. In parts of California, fire insurance is no longer available. In Florida, insurance companies are closing up shop completely because of repeated and overwhelming hurricane costs. A recent Nextdoor conversation suggested that some folks in Flagstaff are having a hard time finding fire insurance. How can we move forward to manage the new risks and costs brought on by climate change?

As the Chief Claims Officer for a large insurance agency network, I see the pressures mounting on the industry and on consumers like you. Since insurance companies are in the business of assessing risks and costs, our industry has been at the forefront of assessing the huge impacts of climate change. For you, the consumer, what you want is an insurance company that will cover your risks and costs as completely as possible for the lowest possible premium. To do this, insurance companies need to assess the risks and costs and charge consumers the appropriate premium, so that they can cover your costs when losses happen.

To understand these pressures, it is important to know that the premium you pay to an insurance company goes into a pool of money for all the people that company has on their books. That pool of money isn't just for people in your area but applies to everyone insured by that company. This is good because it 'spreads the risk' and can lower costs. Only some customers experience a particular disaster, so the overall costs are lower, and these costs are 'shared' across the larger pool of customers.

However, climate change affects everything, and when climate disasters are widespread across large areas AND more frequent, it becomes harder and harder to spread those risks and costs. Now that climate change is increasing the frequency and intensity of wildfires, hurricanes, flooding, drought, extreme heat, and other weather-related disasters, insurance companies can no longer spread the risk, and they feel greater pressure to raise premiums to cover such widespread costs.

Other options are that insurance companies don't raise premiums, but rather change how much they cover. They may no longer provide full replacement cost but only cover the depreciated value of your home or roof. Companies may also apply larger deductibles or percentage of loss deductibles forcing homeowners to absorb more costs. They may also exclude certain types of losses, or they may no longer fix a roof or siding if the damage is only to appearance and not to the item's functionality.

Fortunately, some companies still offer fire insurance in Flagstaff, and you can still get flood insurance by special request. Unfortunately, this could change as the financial impacts of climate disasters continue to increase. In the future you may need insurance to cover your property for damage caused by fire, hail, wind, flood, or other causes, and you may not be able to get it. Or if you can, the coverage may not be enough to make you financially whole in the event of a loss.

Arizona is a perfect example of a location with increasing risks from climate disasters. Heat has increased, leading to drier ground and drier forests. This, mixed with historically limited forest management, leads to catastrophic wildfire risks that could cost Flagstaff as much as $2.8 billion. Further, the inability of dry ground to absorb water in heavy rain leads to higher flooding risks.

So, what does this mean to you? It is essential that you communicate with your insurance agent to understand your risk (https://climatecheck.com/) and ways to seek coverages to reduce your own financial exposure to loss. Additionally, they can educate you on ways to reduce your risks, which may make you more insurable. Are your home and landscaping FireWise? Can you install fire suppression systems? Can you afford a large deductible or insure your home for actual cash value rather than replacement cost?

There are numerous options, but three things are certain. Insurance costs are not going to go down, climate issues are going to get worse, and the cost to repair damaged property will continue to rise. Make sure you are prepared.