Climate change – an insurance wild card…

Insurance companies are highly sophisticated professional gamblers.  They will take risks in return for money (premiums) – that’s the business they’re in, but only to a degree.  Severe and destructive weather events including hurricanes, hail, tornadoes, flooding, straight line wind events, derechos and wildfires are occurring with increasing frequency and severity throughout the U.S. and beyond.  The unpredictable, destructive and costly aspects of climate change are a challenge for all of us, but especially for insurance companies and consumers.  A complicating dynamic, explained below, is the advent of predictive analytics and modeling that make potential risks more vivid to insurers in contrast to their traditional use of historical data.

In response to extreme weather events associated with climate change, insurance companies are reducing what they cover, increasing premiums, dropping long time customers and pulling out of entire regions in order to protect their profits and shareholders.  Reinsurers, the entities that insurers pay to assume their high dollar exposures, are also reacting by raising their prices. These developments are adversely impacting policyholders and the entire P/C ecosystem.  Property insurance has become less available and affordable to home and business owners in a growing number of regions throughout the nation.

Because of this, insurance consumers need United Policyholders’ help and voice more than ever.  We’re providing direct help to consumers through our Roadmap to Preparedness work and problem-solving through advocacy activities at national, state and local levels.

Through our consumer outreach and education work, we’re helping people and businesses shop for adequate property coverage despite limited options.  Through our Wildfire Risk Reduction and Asset Protection Project, we’re working to facilitate mitigation at the individual and community level and secure insurance incentives and rewards to those those invest time and money into reducing the chances of their property being damaged or destroyed in a wildfire. In August, 2022 UP updated state insurance regulators from across the nation on important progress we’re making toward that goal.

We are working toward solutions for escalating prices and shrinking coverage and helping strengthen and improve publicly-supported insurers of last resort such as the state Fair Plans (Citizens in FL and LA, the CA Fair Plan), and the National Flood Insurance Program.

In our roles with the Federal Advisory Committee on Insurance and the National Association of Insurance Commissioners, we are advocating for consumers with public officials and seeking solutions to decreased affordability and availability of property insurance.  We are engaging with industry leaders and lawmakers to increase mitigation incentives and insurance rewards to property owners throughout the United States.

Above all, we are fighting to preserve the principle that insurance policies must continue to indemnify loss victims and restore damaged and destroyed real property assets.  This principle is critical to a variety of stakeholders including the lending and real estate sectors, all levels of government and people and businesses everywhere.

Through our Restoring Insurance Safety nets Coalition initiative we are working to reverse the protection gaps that are leaving disaster victims short on funds for repairs and rebuilding and increasing dependency on government aid and charitable resources.

United Policyholders is helping through advocacy and the Roadmap to Preparedness

UP has been doing advocacy work at the intersection of climate change, extreme weather events and insurance since 2007. At that time, with support from the Rockefeller Family Fund, we helped launch the first Climate Risk Disclosure Survey so that regulators could monitor insurer research and actions related to climate change and help consumers adapt.  A grant from FEMA/the Rockefeller Foundation’s Resilient Cities program significantly boosted the Roadmap to Preparedness program through which we’re creating tools and resources to help people understand and contend with a changing property insurance marketplace.

In response to climate change data, “admitted” insurance companies are reducing their market share in brush areas by dropping long time customers, leaving entire regions and imposing steep brush surcharges.  While some are finding coverage through admitted competitors, many are having to turn to non admitted” (surplus lines) insurers.  Policies sold by non-admitted insurance companies are not scrutinized by state insurance regulators, nor are they backed by insolvency protection funds. A 2017 RAND Corporation study shows a dramatic increase in the market share of non admitted home insurance companies in California.

Many insurers are transferring risk back onto property owners through higher deductibles and new exclusions that drastically reduce coverage for water and other forms of property damage.  Property owners are having to be more proactive in shopping for insurance and taking steps to reduce risk in order to qualify for coverage. UP is doing what we can to help people maintain insurance on their homes and businesses and support mitigation efforts across the nation.

Insurance industry reactions to climate change has left an increasing number of people and businesses between a rock and a hard place: They can’t afford to pay for the increased cost of the policy their lender requires them to maintain, they can’t sell their property because of the new, high insurance price tag, and their job requires them to stay where they are. So UP is working with partners in coastal areas to help long-time low and moderate income residents and small businesses whose lender-required policies have become unaffordable and/or too bare-bones to provide adequate protection.

We are also assisting elderly/fixed-income and long-time residents of rural areas who are experiencing severe economic hardship because they can’t find or afford insurance on their homes. We don’t want people losing homes to foreclosure and becoming homeless because the cost of their insurance suddenly jumps from $800 to $8,000 a year and they can’t afford the cost or find a buyer willing to pay the high insurance price tag.  We are advocating for measured, balanced solutions that protect the victims of climate change while facilitating sound decision-making and resiliency.

A complicating dynamic:

A complicating dynamic in how insurers are reacting to scientific evidence of climate change is a major change in the way they underwrite (assess and price) risk.  Human underwriters and actuaries have been using historical data to assess risk, price policies and choose customers for decades.  But now it is common for insurance companies to rely heavily – sometimes exclusively – on models that purport to  predict the future based on algorithms instead of human underwriters and historical data.  We in the consumer advocacy community have identified these models as a major cause of reduced availability and affordability of property insurance in many regions of the U.S..  The models are designed by private companies that sell them to insurance companies.  You don’t need to be an economist or have an MBA to understand that modeling companies want their products  to appeal to insurance companies.  Insurance companies are in the business of being profitable. Modeling companies have an incentive to overstate risk to help their insurance company clients justify rate increases. Integrity problems with outcome-oriented predictive analytics are compounding the impact of climate change on insurance consumers.

Principles UP supports:

  • Regulators need to maintain order in property insurance markets and prevent price gouging
  • Consumers need help contending with affordability, availability, and mitigation financing challenges due to climate change
  • Insurers should be partnering with their customers by providing technical guidance on mitigation, discounts and incentives for risk reduction and reduced emissions 
  • “Green” insurance products that allow property owners to repair and rebuild using sustainable materials and heating/cooling systems

We commend insurers that are engaged in promoting sustainable development, green building practices and “pay as you drive” incentives that reward drivers for driving less.

To increase resiliency in wildfire-prone regions, in 2021 we added a curriculum unit to our Roadmap Recovery program that helps total loss victims rebuild homes that are less likely to be damaged or destroyed in a wildfire.  We are identifying the innovative design, materials, professional experts and features of these types of homes and encouraging people to rebuild smarter if they’re going to stay in the WUI.  To help disaster victims rebuild and repair “green”, we added a Rebuilding and Repairing Green unit to our Roadmap to Recovery educational workshop program in 2008.

United Policyholders continues to serve as a voice for insurance consumers where decisions related to insurance and climate change are being made by regulators, public officials and industry leaders.