Last week, New Yorkers donned masks once again as smoke from Canadian wildfires engulfed the city. With air quality at its worst recorded level ever, residents were urged to stay indoors and outdoor events were canceled. Unfortunately, this is not an isolated event. Wildfires, fueled by extended dry seasons and rising temperatures, have raged across regions such as California, southeast Australia, Canada, and parts of the Mediterranean. According to Munich Re, global losses due to wildfires between 2018 and 2022 reached $69 billion, with insurers paying out $39 billion in claims. In fact, four out of the top five economically costly wildfires in the past ten years took place in California, prompting State Farm, one of the largest insurers in the country, to announce it would no longer sell coverage to California homeowners.
However, California is not the only state grappling with natural disasters made worse by climate change. Florida, Texas, Colorado, Louisiana, and New York are struggling to insure homes and commercial properties due to their exposure to climate-related risks. Some providers have left states like Florida as hurricane-prone areas experience drastic rises in homeowner premiums. But even as places like Miami sink, Florida’s population continues to grow, up 15% from 2010 to 2020. Incredibly, despite clear indications of the coastline’s limited lifespan, new condos are still being constructed.
It’s becoming clear that America has been subsidizing risk in disaster-prone areas for decades. Federal flood insurance, for example, has kept premiums artificially low while excluding the true cost of risk. Meanwhile, California has regulations dating back to the 1980s that prohibit insurers from projecting risk prospectively based on new climate models or incorporating the cost of reinsurance.
As premiums continue to rise, some will likely leave these disaster-prone areas, while those who remain will be forced to pay rising costs or become increasingly vulnerable. The White House has allocated $24 billion towards promoting climate resilience in at-risk communities, but the insurance industry will need to take a more proactive role as well. This includes working with building trades and real estate agents to warn potential buyers of the potential risks and costs of living in vulnerable areas.
This is a trend that is not limited to the US alone. For instance, Munich Re predicts similar developments worldwide given the high values at risk in regions like the European Mediterranean and parts of Australia. Insurers need to be vigilant and risk management measures taken accordingly.
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