House On Fire: Why The U.S. Has Most To Lose In A Warming World

Home insurance: unavoidable necessity, or unaffordable luxury?

The answer might depend on where you live. In states like California and Florida, insurers are pulling out altogether, as climate-related disasters like floods and wildfires intensify, turning regular business risk into an impossible gamble. Some firms expect home insurance rates across the country to rise an inflation-busting 6% this year, with increases of 23% in states with more severe weather events.

Such brutal spikes are putting the possibility of homeownership even further out of reach for many first-time buyers. So what’s going on?

In the view of reinsurers—the firms that insure the insurance companies—a prime culprit is climate change. And Swiss Re, the world’s second largest reinsurer, warns that when it comes to property, the U.S. has the most to lose from a warming planet.

In a report focusing on 36 nations, the firm concludes that “warming temperatures bring physical repercussions including more intense hazards, which, in turn, can compound loss outcomes.” And with losses of $97 billion every year, the U.S. is losing more from climate change than any other nation in absolute terms. Swiss Re further calculates that the threat from all “weather perils,” including floods and tropical cyclones, amounts to 0.38% of U.S. GDP—not in the future, but right now.

It’s a threat that’s close to home for Mohit Pande, Swiss Re’s chief underwriting property officer, who says that the Norwalk River, near his home in Connecticut, is flooding his neighbors’ properties with increasing frequency. “It’s one local example of a powerful phenomenon taking shape globally: climate-related hazard intensification,” Pande writes.

Last year, such “catastrophe exposure” was cited by State Farm as a reason why it would no longer accept new applications for homeowners’ insurance in California. It’s also why insurers are pulling out of states such as Florida: as Insurify’s vice president of carrier management and operations Betsy Stella says, companies who insure insurers such as Swiss Re are “subject to the same factors that impact underlying coverages: an increased number and severity of natural disasters, inflationary pressures, and labor and materials shortages.”

In short, reinsurers are no longer willing to gamble their money in places where floodwaters are rising and storms are intensifying. And climate experts warn this is only the beginning. Rapid global warming is lengthening the U.S. hurricane season, and helped supercharge Hurricane Beryl, the earliest category 5 hurricane on record. Beryl left at least 2.3 million people in Texas without power after causing severe damage and multiple fatalities across the Caribbean and Venezuela. Elsewhere, a recent study from fire experts found that wildfires over the last 20 years were made more frequent and more intense as a result of climate change. Meanwhile, the EPA has found that coastal flooding has increased every decade since 1950.

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Financial institutions are having a hard time adjusting to this more uncertain world. For example, while large investors develop models to assess risk to their assets, research indicates that the climate scenarios they use are not fit for purpose. Last year, the U.K.’s Institute and Faculty of Actuaries found that models being used by financial services to assess risk “exclude many of the most severe impacts we can expect from climate change … meaning the models understate the level of risk.”

It shouldn’t come as a surprise, then, that researchers are warning climate risk across the U.S. is, if anything, being underpriced, or that home insurance costs are seeing rapid rises in states from Louisiana to Maine, with respective rises of 23% and 19% just this year, according to Insurify. Without strategic action, more homes in more states look set to become uninsurable.

Swiss Re’s revelations around the economic costs of climate change shouldn’t detract from the fact that, in terms of lives and livelihoods, it is low-income countries that have the most to lose. Africa’s least-developed nations, for example, have contributed the least in terms of greenhouse gas emissions, but are suffering the most from its impacts. Elsewhere, the Swiss Re report shows that the Philippines, a developing nation, is suffering eight times the losses of the U.S. in proportional terms.

But these disparities have their own lesson to offer: climate change may not affect us all in the same way, but it is nonetheless affecting everyone, rich and poor alike. A key difference is that the U.S. actually has the money to do something about it, by investing both in mitigation (the reducing of greenhouse gas emissions) and in adaptation (preparing communities and homes for more severe weather impacts). “While Swiss Re calculates that global spending on mitigation must be increased significantly to create a net-zero emissions economy by 2050, this is money well spent,” says Mohit Pande. “Every dollar invested today means lower future GDP losses.”

Such claims are borne out by research from the International Energy Agency, which has shown that the costs of climate inaction far outweigh the costs of action. For its part, Swiss Re calculates that the economic benefits of adaptation, such as preparing communities and homes for more extreme weather, outweigh the costs by between two and 11 times. In this context, insurers have a key role to play, whether it be in investing in communities, by underwriting climate-relevant projects, or by sharing knowledge of risk. After all, from an insurance standpoint, improving the odds for property is simply good business sense.

“Costs associated with climate change are just starting to impact consumers,” Pande says. “With hazard intensification due to become a driver of future economic losses, our industry must capture this in its models and underwriting, to keep pace with evolving risks.”

For insurers and the people who insure them, the work of preparing for a fiercer, costlier planet has only just begun.