Home insurers are removing natural disasters from their policies as climate risks rise

In the wake of extreme weather events, major insurers are increasingly failing to provide the coverage that homeowners in areas vulnerable to these disasters most need.

At least five major US property insurers – including Allstate, American Family, Nationwide, Erie Insurance Group and Berkshire Hathaway – have told regulators that extreme weather caused by climate change has caused them to stop underwriting coverage in some areas. and exclude protections against various weather conditions. events and increase monthly premiums and deductibles.

Major insurers say they will reduce damage from hurricanes, wind and hail by underwriting property insurance policies along coasts and in countries affected by wildfires, according to a voluntary survey conducted by the National Association of Insurance Commissioners, a group of state officials that regulates rates and policies. shapes.

Insurers are also more willing to drop existing policies in some regions as they become more vulnerable to natural disasters. Most home insurance coverage is annual, so providers are not bound to it for more than a year.

This means that individuals and families living in places once considered safe from natural disasters could lose crucial insurance protections as their exposure to natural disasters expands or intensifies as global temperatures rise. increase.

“The same risks that make insurance more important make it harder to get,” Carolyn Kousky, associate vice president of the Environmental Defense Fund and nonresident researcher at the Insurance Information Institute, told The Washington Post.

The companies mentioned these policy changes as part of unpublished responses to the regulatory group’s survey. The survey was distributed in 2022 by 15 states and received responses – some sent as recently as last month – from companies covering 80% of the US insurance market.

Allstate said its climate risk mitigation strategy would include “limiting new [auto and property] business . . . in areas most prone to hurricanes” and “implementing deductibles or exclusions against tropical cyclones and/or wind/hail, as appropriate”.

The country as a whole has already retreated in some areas. The company said that in 2020 it “reduced exposure levels in some of California’s most dangerous urban wilderness interface areas.”

In its response to the regulators’ inquiry, Nationwide said it was no longer underwriting coverage for “properties within a certain distance of the coastline” due to hurricane potential.

More changes will come. “More targeted hurricane risk mitigation actions are being finalized and will begin by the end of 2023,” Nationwide told regulators.

Berkshire Hathaway, which also offers reinsurance – insurance policies for insurers – wrote that the increase in weather disasters means “it is possible that the terms and conditions of policies will be updated or revised to reflect the evolution of this risk.

U.S. homeowners have faced unprecedented disasters in recent weeks that have highlighted new challenges facing insurance markets.

Hurricane Idalia caused severe flooding in Georgia and the Carolinas, and devastated areas of Florida that had never been directly affected by a major storm. Tropical Storm Hilary caused $600 million in damage on the West Coast, according to Karen Clark & ​​Co., a major disaster modeling firm. Fires on the Hawaiian island of Maui, the causes of which are still under investigation, caused $3.2 billion in property damage, the company said.

According to insurance industry experts, these disasters show how quickly claims costs are rising in the face of climate change.

U.S. insurers have paid out $295.8 billion in natural catastrophe claims over the past three years, according to international risk management firm Aon. This is a record over a three-year period, according to the American Property Casualty Insurance Association.

Natural disasters in the first six months of 2023 in the United States caused $40 billion in insured losses, the third costliest first half on record, Aon found.

“There is nowhere to hide from these severe natural disasters,” said David Sampson, president of the American Property Casualty Insurance Association. “This is happening across the country, so insurers need to review their risk concentration.”

This trend is too expensive, insurers say, and requires rewriting policies or eliminating coverage in growing geographies.

Rate increases for home insurance are regulated by state agencies. That can prevent companies from setting policies that accurately reflect risk, said Daniel Schwarcz, who studies insurance markets at the University of Minnesota Law School. Instead of setting much higher prices for insurance policies in specific areas that might be more vulnerable — such as regions below sea level or bordering fire-prone areas — insurance companies must set relatively comparable prices across a state.

“Our business is to evaluate risk based on risk,” Matt Mayrl, vice president of strategy, performance and partnerships at American Family Insurance, said in an interview. “Sometimes your price can’t match your risk. »

Experts say many policy changes might hurt some consumers, but they’re important to the survival of the insurance market as a whole.

Typical home insurance policies cover damage from all kinds of perils, including fire and smoke, wind and hail, plumbing problems, snow and ice, as well as vandalism and theft. Flooding is generally covered by a separate program administered by the federal government.

Under policy changes that many major insurers are telling regulators, companies will continue to offer basic policies to customers in disaster-prone areas, but without protection for damage caused by those disasters. For example, an insurance policy in a region affected by hurricanes may exclude coverage for damage caused by wind or hail, or in a country affected by wildfires, a policy without protection against fire and smoke.

Consumers who want these coverages will need to purchase an add-on policy or purchase insurance from another provider.

“The fact that insurers have the ability to limit their exposure or change it over time means that ultimately their concerns don’t fully align with those of their policyholders,” Schwarcz said.

Representatives for Allstate and Erie declined to comment. Berkshire Hathaway and Nationwide did not respond to requests for comment.

Insurance markets, especially those serving many parts of the country, rely on relatively stable risk projections for natural disasters. By balancing the risk of late spring wildfires in the Pacific Northwest with early fall hurricanes in the Southeast and winter storms in the Upper Midwest, insurers can spread the risk between constituencies. In theory, providers can collect monthly premiums from a large customer base without paying claims from too many large-scale disasters at once.

But weather patterns are changing as the planet warms.

“There’s no longer a wildfire season, it’s all year round,” said Sampson, who is also a member of President Biden’s Wildfire Mitigation and Management Commission.

Major hurricanes are becoming more frequent and bring more intense rainfall, said Paulo Ceppi, a climatologist at Imperial College London. Meanwhile, ‘tornado alley’ – an area overrun by tornadoes that stretches from Texas and Oklahoma to Kansas and Nebraska – is moving east, according to published research from 2018 and 2022. in the journals Nature and Environmental Research Communications.

The variability of weather conditions means that insurance companies can no longer rely on previous risk projections that have helped them make decisions.

“Potential changes in the frequency and/or severity of catastrophic weather-related losses pose both short-term and long-term risk,” Nationwide wrote in its response to the survey. “The activity observed in recent years deviates from historical norms or modeled expectations. »

As insurers abandon certain markets or remove certain risks from their policies, some homeowners are left without insurance. State governments have put in place insurance policies of last resort.

In Florida, the taxpayer-funded Citizens Property Insurance was the second largest insurer in the state in 2021 by policies written, according to the Insurance Information Institute. Fourteen insurance companies left Florida in April or have bankrupt policy portfolios. Farmer’s, the fifth-largest home insurer in the United States, announced in July that it would not renew nearly a third of its policies in the Sunshine State. In California, where State Farm and Allstate have withdrawn or significantly reduced their new policies, a state-backed policy covers 3% of residents.

But even state-backed policies have to deal with climate risks.

“When you see insurance companies pull out en masse because the cost of rebuilding homes in Florida is putting them out of business,” Sierra Club executive director Ben Jealous said, “it’s either hubris , or madness to think that the state would not be bankrupt to intervene to help.