Michael Heffner had owned his detached house a short drive from the seafront in Virginia Beach, on the US east coast, for exactly one year when his home insurer abruptly cancelled coverage.
“They just dropped me,” says Heffner, a US Navy officer. “There was no, ‘Hey, do you want to stay on with us if we charge more?’ Nothing.”
Scrambling to find a new insurer, he found his existing premium of about $1,200 a year impossible to replicate. Instead, he received quotes ranging from $2,000 to $3,200.
Chelsea Stoffen, a middle school teacher from Virginia Beach, was also ditched by a large insurer, despite being with them since 2016. “They gave me one month’s notice,” says Stoffen. “I was freaking out because I felt so rushed.”
Local insurance brokers say they have seen a big jump in calls from homeowners in search of cover as companies pull out of certain neighbourhoods. “A lot of people are hurting right now, rates are going up and up,” says Kevin Torcia, a broker at Goosehead Insurance in the area.
Last year was the worst he had seen “in the last 15 years, easily”, he adds. Torcia helped about 70 jilted customers shop around for home insurance, up from a dozen the previous year.
Heffner, Stoffen and millions of other homeowners worldwide are on the front line of an insurance affordability crisis. Global warming is making extreme weather events such as storms, floods and wildfires more frequent and severe, and therefore increasingly difficult for the sector to cover.
As firms exit some areas and demand higher premiums in others, affordable home insurance cover — for many an essential annual outlay, often a condition of their mortgage debt — is getting harder to secure.
The global picture explains why. A run of four consecutive years when overall insurance losses from natural catastrophes have topped $100bn, previously the mark of a remarkably bad year, has spooked executives.
In the US, a repricing of risks has sparked a significant rise in premiums. Several big US insurers, including State Farm and The Hartford, have paused their underwriting of new home policies in the state of California. A significant factor has been a sharp rise in the cost of property catastrophe reinsurance, or insurance for insurance companies.
European executives also warn that insurance prices will have to rise after a series of extreme weather events on the continent. In Australia, the biggest yearly price rise in two decades left 1.24mn households facing “home insurance affordability stress”, up from 1mn the year before, according to the country’s Actuaries Institute.
All this is adding greater urgency and attention to a challenge long predicted by environmental activists: that climate change will make parts of the world uninsurable.
Senior industry executives are now unambiguous in making a link between man-made global warming and the insurance affordability problems. “This is the first time we actually bring a climate change bill back to the consumer, if you think about it,” Christian Mumenthaler, chief executive of Swiss Re, one of the world’s biggest reinsurers, told Davos delegates in January.
Rising insurance premiums were a kind of carbon price on consumers, he said, with higher costs resulting from “us living the way we’ve been living”. He added: “But of course [consumers] don’t like it and the politicians don’t like it.”
Insurance executives frequently highlight how the sector has modelled climate risks for decades. But speaking privately, some senior figures say the industry fell behind when it came to understanding the threat to affordability from climate effects.
“The insurance industry had its head in the sand around climate change,” says the chief executive at one big insurer, speaking on condition of anonymity. “It’s a gigantic pain and it tried to avoid it. It will spend the next few years [looking at it] and it will figure out how to do things better.”
Last year saw a record-breaking number of natural catastrophes causing at least $1bn in insurance losses: 37 separate events, according to data from insurance broker Aon.
That included 25 so-called severe convective storms, of which 21 were in the US. It is the growing weight of events such as storms and wildfires — and the broadening of the areas that are exposed to them — that is raising anxiety in the sector, and changing the way risk is viewed.
Virginia, for example, is not a state renowned for massive natural catastrophes. But high winds and flooding have long been a feature. As global warming shifts the Earth’s meteorological patterns, supercharging drought and rainfall, it is one of many areas where insurers are pulling back.
Severe thunderstorms are the kind of event that insurers traditionally labelled “secondary perils”, since they do not bring the massive loss of an earthquake or hurricane.
“We no longer can call such events secondary,” says Ernst Rauch, chief climate scientist at Munich Re, the world’s biggest reinsurer by premium revenue. “They have reached in the aggregate the order of magnitude of a major hurricane, or tropical cyclone, or winter storm.”
Looking at its data over decades, there is “a significant upward trend” in the US and Europe of such claims, Rauch adds, even accounting for inflation in rebuilding costs due to things such as labour and materials becoming more expensive. The science “explains very well” that the heat and moisture in the atmosphere leads to higher frequency and intensity of such thunderstorms, he says.
Some executives in private partially put some blame on the risk-modelling companies the insurers lean on to forecast losses, saying that the effects of climate were underplayed.
The dramatic pullback in the reinsurance market after years of underperformance has added to the urgent sense among insurers that they must reprice.
The cost of property catastrophe reinsurance cover, which they use to share the burden of natural disaster claims, is at its highest in a generation. Reinsurers have also sharply raised their so-called attachment points — the level of losses that need to be reached for the reinsurance to kick in.
That has left more risk with primary insurers. Dean Klisura, head of reinsurance broker Guy Carpenter, told analysts in January that attachment points “did not come down” in crucial turn-of-the-year negotiations and that continued to “expose [insurers’] balance sheets to attritional volatility”.
Such a trend could test the sector’s limits, some say. If yearly losses stick above the $100bn level, and firms are forced into further price rises and pullbacks to protect their balance sheets, it could “harm the whole proposition of the insurance sector to society”, says one reinsurance chief executive. There will be growing “patches” where buying insurance is uneconomical, Swiss Re has predicted.
While shareholders apply pressure on companies to bolster their profits, politicians are insisting insurers keep cover available. “The increased risk of disaster events due to climate change no doubt poses a significant hurdle for insurers across the country, however, it is an unacceptable outcome to leave millions uninsured because of shifts scientists have been predicting for decades,” Democratic Congresswoman Maxine Waters wrote to the US federal government last year in response to the California departures.
In some areas, the question of whether the private insurance sector alone can handle the cost of extreme weather has already been answered. In the US, UK and other countries, a patchwork of state-backed insurers and national reinsurance schemes means that the taxpaying public is already sharing the cost of these risks.
The numbers of households supported by such schemes is ballooning. Florida’s state-backed insurer of last resort, Citizens, stood at 1.2mn policyholders at the end of last year, up from less than 450,000 in early 2020. Homeowners supported by California’s pared-back Fair Plan more than doubled between 2018 and 2022, surpassing 270,000, in response to worsening wildfires and cancellations by traditional insurers. The UK’s Flood Re reinsurance scheme stood behind more than 260,000 home insurance policies last year, up from 150,000 back in 2018.
The optimistic view in many parts of the industry is that private sector provision will rebound. A combination of rising prices, investment in catastrophe prevention measures and regulatory reforms will — especially if lower loss years are experienced — allow insurers to take back more customers. Private insurers did recoup some policies from Florida’s Citizens in recent months.
But global regulators and policymakers are preparing for a more frightening future. Uninsurable properties could spill over into other areas, warned the Bank for International Settlements in a November paper, by making mortgages harder to secure and increasing banks’ credit risks if homes are no longer eligible collateral.
The Bank of England warned in its 2021 climate survey that, in a scenario of governments failing to act on climate and global warming reaching 3.3C above pre-industrial levels by 2050, about 7 per cent of UK households currently covered would be forced to go without insurance due to unavailability or expense. In Australia, one in 25 homes will be in effect without cover by 2030, according to the Climate Council, an independent advisory body, which has said the country is “fast becoming an uninsurable nation”.
“You are seeing increasing numbers of people [globally] not insured because they cannot afford the premium,” says Mia Mottley, prime minister of Barbados. “And it’s not just people. You’re seeing it with businesses and at some point it’s going to become an issue with respect to access to and quality of their loans.” Under-insurance is a vast problem in the island nation; 95 per cent of those affected by 2021’s Hurricane Elsa did not have insurance.
Industry executives tend not to dispute that global warming is making extreme weather more frequent and severe. But there is strong debate over whether that is the significant factor driving up home insurance claims in recent years, rather than spiralling rebuild prices and other inflationary effects, as well as more building and settlement in at-risk areas.
In the US, the situation is more acute because home insurers typically need to get their pricing signed off by local regulators, making it more difficult for them to charge prices that they deem commensurate with the risk. Insurers have explicitly linked their departures from certain areas to the need to be able to price for expected losses.
There are various legislative efforts at state level to improve operating conditions, such as legal reforms aiming to deflate claims costs.
Policymakers are also giving the problem more attention. In November, the US Treasury for the first time requested granular data to assess the “increasing impacts” of climate change on household finances, citing “insurer pullbacks and significant premium increases in several states”. At the same time, two senators launched an investigation into how insurance companies are navigating climate risks, including asking firms for five-year forecasts of premium rates and inquiring whether they are considering exiting any markets.
Senior industry executives fear that the relationship between insurers and regulators is weakening. Whether companies are pricing fairly is an important and long-running discussion between the parties. Eric Andersen, president at New York-listed broker Aon, says the relationship “is breaking down more and more”.
The question now, say industry experts, is not whether governments will have to step in, but how much further they will have to go.
Already, a lot of tail risk is sitting with governments that have obligations to stand behind the various and growing local and national programmes. Australia has launched a public scheme to absorb some cyclone-related risks. Some politicians and industry figures have called for the US to adopt a federal-level insurance backstop for climate risks.
The UK’s flood reinsurance scheme is due to expire in 2039, but increasingly executives expect it will have to continue beyond that date. Last year the scheme’s then chair said that government spending on flood defences would have to go “further and faster”.
The affordability crisis has society-wide impacts, from where people choose to live to where they decide to retire. Growing costs are “having effects on the valuation of properties, the stability of markets, it’s having all these downstream implications,” says Steve Bowen, chief science officer at reinsurance broker Gallagher Re. “There are discussions now about where people are going to retire. Are they [still] going to Florida?”
The nature of insuring extreme weather is that losses from natural catastrophes will continue to ebb and flow. Climate change is expected to add to the year-to-year volatility. But experts say what matters most is the long-term trend. “As what’s considered a normal year continues to be more expensive,” says Bowen, “how does that new normal continue to be priced in?”
Insurers themselves stress both their societal role as a financial shock absorber for extreme events such as a natural catastrophe, but also their responsibility as prudent companies not to underprice those risks.
Prevention measures such as banning new homes on floodplains and investing in defences against floods and wildfires may be the only viable way of reducing the threat.
Increasingly the challenge of insurance affordability becomes a “policy question”, says Aon’s Andersen. “Do you support people that can’t afford the risk-based price? Or do you change [planning rules] so that you can’t build in certain areas? Those are not questions that are going to be solved by insurers.”
Data visualisation by Steven Bernard
Climate Capital
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