Climate change increases insurance costs. Freak hurricanes like Helene only make things worse

Hurricane Helene, a climate change-driven tropical cyclone that hit much of the southeastern U.S. in late September, has claimed more than 230 lives and damages are estimated at $30-47.5 billion. However, these statistics reflect real human costs, such as those incurred by a 27-year-old mother who died with her twin children after a tree fell from the roof of their home in Thomson, Georgia.

Among other things, Hurricane Helene showed that climate change is inescapable because some affected communities (e.g. the city of Asheville) were thought to be safe from the effects of climate change. But it also has other quality-of-life implications, including something many may not think is related to climate change: insurance rates.

Just ask Dr. Charles Nyce, professor of risk management and insurance in the College of Business at Florida State University. In listing the three main factors causing property insurance rates to rise across the United States, he included increased exposure and inflation to a third – climate change.

“As the population increases, so does the opportunity for development,” Nyce said. “This is leading to an increase in wealth exposed to natural disasters that we have not seen in previous generations.”

With the costs of repairing damaged property already skyrocketing, the double whammy of inflation and climate change is driving up insurance rates.

“We also see growing disaster areas,” Nyce said. “This includes wildfires, hurricanes, tornadoes, severe convective storms, etc. The combination of these three factors leads to higher insurance costs.”

Additionally, Nyce said, the uncertainty associated with extreme weather events is baked into insurance products.

“Remember that insurance regulation is designed to ensure insurers are solvent to pay claims, which means that to be solvent they need higher premiums and capital to make sure they have enough money to cover future losses.” Nyce explained. The resulting higher prices will inevitably fall hardest on those least able to bear the heaviest burden.

“Less wealthy people will incur higher costs and will be least able to afford the additional costs,” Nyce said. This economic problem “will have a greater impact on poorer people in the U.S. because they have less wealth to shoulder the additional costs. It will also have a greater impact on older people on fixed incomes.”

Dr Rebecca Elliott, professor of sociology at the London School of Economics and Political Science, explained that the fundamental problem with the US insurance system – one that has come to the fore as a result of climate change – is that, like much of the modern economy , it is ultimately characterized by high levels of persistent income inequality in the country. Low-income Americans are struggling to save and build wealth, which means the cost burden imposed by these disasters and attempts to cover them through insurance will be exceptionally difficult for them to bear.

“For the most part, insurance rates are indexed by risk – in other words, higher risk, higher premiums,” Elliott told Salon. “So as the risks that clearly arise from the impacts of climate change increase, cost pressures will increase and increase, threatening the economic security of many Americans. There is a general crisis around the affordability of insurance, both for individuals (i.e., homeowner’s property and casualty insurance, which covers wind and fire) and public insurance (i.e., NFIP) is not fit for purpose if it is not within financial reach people who need it.

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This problem is not insoluble. As Elliott noted, insurance companies often justify premium increases by pointing out that the National Flood Insurance Program (NFIP) is having difficulty helping private entities cover losses due to the increased number and severity of recent floods. It is certainly true that since Hurricane Katrina in 2005, the NFIP has been tens of billions of dollars in debt to the Treasury Department because it has not generated enough revenue to cover losses. However, Elliott says there is an alternative way to solve this problem.

“Another way to increase premium revenue is to expand the risk pool,” Elliott said. “Currently, only mortgaged homeowners who live in official flood zones are required to have a flood policy – ​​and this requirement is already very poorly enforced. If you extend the purchase requirement, potentially even to all homeowners, then many more people pay into the scheme, many of them relatively low risk and therefore at more affordable rates.”

Elliott added: “In the world of risk-based insurance ratings (public or private), the most important thing is to reduce underlying risk. If risk falls, prices will fall as well. It means aggressive action to further mitigate the worst impacts of climate change by reducing greenhouse gas emissions. It also means massive investment in infrastructure and recovery strategies that will keep people safer as we experience impacts we can no longer avoid. This is a problem that cannot be left to home owners alone. It’s too big.”

Indeed, Elliott suspects that individual homeowners’ doorsteps are already being bombarded with insurance concerns. For example, Americans affected by Hurricane Helene may be in for a nasty surprise when they try to obtain compensation for their losses.

“Undoubtedly, most people affected by Helene will not have a flood policy in place,” Elliott said. “Many, many people will be surprised by this – they will assume that their all-risk homeowners policy covers flooding. This is not the case. So when they clean up the garbage, they will find that they basically have no resources to rebuild beyond their own savings or what ultimately flows in in the form of disaster relief. This averages several thousand dollars per person applying. This is another reason to expand the mandatory purchase requirement.”

Nyce noted that because insurance plays a key role in our economy as a risk financing tool, reformers should view it as “just one piece of the climate change puzzle.”

“We need a robust public-private partnership that includes not only insurance but also mortgage lenders, construction companies and local, state and federal officials to develop a more comprehensive disaster risk management plan,” Nyce said. “Our current system has many cracks in it where too much risk ultimately falls on the homeowner.”

While homeowners should also bear the risk of location decisions, it’s harder for them to get good information due to climate change, which brings things full circle.

“Because risk levels are constantly changing and siting decisions are long-term decisions (houses are built to last), the frictions that occur continue to increase the risk of natural disasters,” Nyce said. “Partial solutions are likely to fail.”