How Natural Disasters Affect Insurance Policies

You might not think Trump’s ask for a billion dollar donation from oil executives in return for a promise to scrap Biden’s climate policies has anything to do with major insurers like Allstate and State Farm refusing to insure homes in states like California, Florida, and Louisiana. Unfortunately, they overlap in a dangerous nexus – extreme climate change risk driven by fossil fuel pollution is behind the insurers’ decisions. For over 40 years, I have worked to cut the air pollution that damages public health and accelerates climate change risk, but I hadn’t felt its personal cost. That changed when I recently learned that my California home insurance policy with the same insurer for more than three decades will not be renewed. And not only is replacing it virtually impossible, successfully finding alternative coverage will make my monthly bill two to three times higher. And I’m not alone. Tens of thousands of California homeowners are facing similar issues, but it’s not just a California problem. Extreme weather is driving unprecedented levels of property damage nationally, leading insurance companies to flee markets across the country. In states like Louisiana, Florida, and parts of the Midwest and Southwest, residents cannot obtain insurance, or the premiums have become so prohibitive that they are forced to go without. More than 35 million properties – a quarter of U.S. real estate – face skyrocketing insurance prices and plummeting coverage due to climate change risks. Insurance companies have made it clear to regulators that extreme weather, fueled by climate change, is driving these changes. Read my Oped in Forbes

Property insurance rates are about to rise sharply, and the shift is happening faster than many realize. Reinsurers, who back up primary insurers by sharing their risk, are adjusting their pricing models as climate risks grow more severe. New disaster risk models—like a recent update from RMS—are signaling increased losses for high-risk areas, particularly along the Gulf Coast, Florida, and Texas. These models anticipate more catastrophic events, and reinsurers are responding by raising their rates and tightening contract terms. This will have immediate effects. As reinsurers demand more from primary insurers, those companies will either pass along the costs to homeowners or pull out of markets entirely. We’re already seeing this in states like Florida and California, where premiums have surged by more than 40% in some areas. It’s a domino effect. Reinsurers need to protect their capital, insurers need to manage their risk, and homeowners are left with fewer and more expensive insurance options. In some cases, they’ll choose to go without insurance altogether—betting that federal disaster aid will cover them in the event of a catastrophe. This isn’t sustainable. As urban development continues in high-risk areas, the risks will only multiply. Insurance, which has historically helped homeowners bridge the gap between crisis and recovery, is becoming prohibitively expensive. We’re heading into a new phase where risk assessments are reshaping the entire market for coastal real estate. The question isn’t whether the insurance market will adapt—it’s how fast, and at what cost to those living in vulnerable areas.

Very interesting piece of research conducted by the Federal Reserve Board Dallas, NYU Stern School of Business and Rice University using CoreLogic's predictive Climate Risk Analytics (hazard, geospatial and resiliency science) and 2 more information service powerhouses, S&P Global and ICE. Well worth a read. Available at SSRN:  https://lnkd.in/grKJGWTp Heavyweight research conducted by Shan Ge (Assistant Professor at NYU Stern), Stephanie Johnson (Assistant Professor of Finance, Rice University) and Nitzan Tzur-Ilan (Research Economist Federal Reserve Bank of Dallas) The research paper continues the research into the intersection of natural disasters, mortgage markets, and insurance premiums. As temperature increases' intensify the frequency and severity of natural disasters, homeowners’ insurance premiums are rising sharply. This study investigates how increasing insurance premiums influence mortgage delinquencies and prepayments by leveraging a novel dataset linking insurance policies to mortgage outcomes of 6.7 million borrowers. The analysis shows that higher premiums significantly elevate the chances of mortgage delinquency and prepayment. These findings are robust to using an instrumental variable for premium increases. The effect of delinquency is more pronounced for mortgages with higher loan-to-value ratios, while the prepayment effect is smaller for these loans. Additionally, we find that delinquency effects are present in both GSE and non-GSE mortgages, implying risks for both the Federal Government and the private financial sector. The paper also points to the risks that rising insurance costs pose for mortgages and mortgage-backed securities. Delinquencies represent negative shocks for mortgage holders, a significant portion of the financial sector. Thus, our findings not only illustrate the direct impact on households but also uncover broader implications for financial stability as insurance costs rise due to climate change. For policymakers addressing the issue of insurance affordability, the findings carry critical implications. The results suggest that escalating insurance premiums are severely limiting household liquidity, driving some into mortgage delinquency. Given the broader economic consequences of mortgage defaults, our research underscores the potential value of policy measures like means-tested insurance subsidies to mitigate these effects. Patrick Dodd Devi Mateti Jayme (Poladian) Beck Howard Botts Mahmoud Khater George Gallagher Hallie Nester, M.S. Jennifer Castenson Robin Wachner Kristie Vainikos Stegen Kent David Lance Lambert Joe Francica Amy Gromowski Paul Gaspar Srinath Ravulaparthy Robin Sun Pete Lumbert Mark Weaver Mark Gongloff Selma Hepp, PhD David Claussen, PhD Clayton Collins Peter Carroll Diego Sanchez Malliga Krishnan GAICD Tim Lawless Eliza Owen Jennings Anand Singh Chris Hatter