Climate change is partly responsible for a recent rise in insurance premiums, and costs will continue to rise in the future.
Climate changes make storms, extreme heat, floods, and other disasters more likely.
Insurance companies are passing on the costs of increased claims payments to consumers.
The Increasing Impact of Climate Change on Insurance Bills
If you are one of the many people shocked by the rapid rise in your insurance bills, don’t just blame inflation; blame climate change.
The increasing impact of climate change is a key factor in the recent rise in insurance bills, experts and researchers say. Climate change makes storms, floods, and wildfires more frequent and severe. While the loss of life is the most serious consequence of these events, there are financial costs as well.
For example, insurance companies have to pay more claims – costs that are ultimately passed on to consumers in one way or another. Inflation, along with climate change costs, has pushed auto insurance premiums up by 19% over the past year according to government data, and raised home insurance premiums by 21% between May 2022 and 2023, according to an analysis by Policygenius.
Estimating the Difficulty of Determining the Cost of Climate Change
It is certainly difficult to determine an exact price for climate change, as no one knows for sure whether any given hurricane or wildfire would have occurred without global warming, or how much worse the situation is because of climate change. Economists tend to think about it in terms of probability: what is the statistical chance that any storm or heatwave was caused by climate change?
Research suggests the number is high and increasing. A report from the United Nations’ World Meteorological Organization in 2021 found that among 77 extreme weather events between 2015 and 2017, 62 had a significant human influence.
A more conservative estimate attributes 50% of damage from natural disasters to climate change, costing many billions of dollars. In the United States, 25 climate and weather disasters costing at least $1 billion each have been recorded so far in 2023, according to the National Oceanic and Atmospheric Administration.
The Impact of Natural Disasters on the Insurance Industry
Natural disasters have already pushed the insurance industry to a crisis point in states that frequently experience disasters.
Earlier this year, insurance giants State Farm and Allstate halted the issuance of new homeowners’ insurance policies in California, stating that the state wouldn’t allow them to raise prices enough to offset the risk of wildfires. They were followed earlier this year by smaller companies such as Merastar Insurance, auto and home insurance company Unitrin, Direct Property and Casualty Insurance, and Independence American Insurance, according to reports.
AAA and Farmers and several other insurance companies have pulled out of Florida. (It’s not just natural disasters; the Insurance Information Institute blames Florida’s crisis on a series of fraudulent roof repair schemes that have increased litigation costs.)
In both states, homeowners who can no longer get standard insurance have had to turn to state-run programs that act as “last-resort insurers.” The cost of the option in California is higher and provides less coverage than private options.
The Impact of Reinsurance on Natural Disaster Costs
Even if you don’t live in a state that has recently faced a major natural disaster, you may still have to pay for it. Reinsurance companies, which insure insurance companies against losses, spread the costs of disasters.
“If
The reinsurance company was incurring significant losses in California, and it plans to recover these losses by increasing reinsurance for all other high-risk areas,” according to Jesse M. Keenan, a professor of real estate and urban planning at Tulane University, who is an expert on the impacts of climate change on the housing market.
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Article sources:
World Meteorological Organization. “An increase in weather-related disasters over the past 50 years, causing more damage but fewer fatalities.”
Yahoo Finance. “4 more insurance companies are leaving California after Allstate and State Farm withdrew from the massive wildfire risks.”
Policygenius. “Home insurance prices have risen by 21% as homeowners face climate change and a turbulent market.”
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