As the dust settles in the aftermath of Hurricane Idalia, the full extent of the economic impact remains a mystery. However, the storm has served as a stark reminder of the escalating challenges and costs linked to insuring homes in an era of increasingly volatile weather patterns and rising temperatures. The hurricane, though less devastating than originally feared, is estimated to have caused damages and lost output ranging from $12 to $20 billion, as reported by Moody’s Investor Service. In Florida alone, insured losses due to Idalia may reach nearly $10 billion, according to USB Bank.
The insurance industry, often overlooked in discussions of climate change, is at the forefront of how Americans are experiencing its effects. With homeowners’ insurance a necessity for anyone purchasing a house through a mortgage, insurance companies in disaster-prone regions are finding themselves either drastically increasing rates or completely withdrawing from certain areas. Such changes could have serious implications for homeowners and the mortgage industry, as insurance is a prerequisite for securing a mortgage. As the industry grapples with quantifying the risks posed by climate change, the question of how insurance will adapt in the wake of events like Hurricane Idalia remains critical.
The Rising Cost of Home Insurance Amid Climate Change
As the aftermath of Hurricane Idalia is felt by coastal residents in Florida, Georgia, and the Carolinas, the reality of the increasing costs and challenges of securing home insurance in an era of climate change is becoming clearer. While the full financial impact of Idalia is yet to be determined, Moody’s Investor Service estimates damages and lost output between $12 and $20 billion. Insured losses in Florida alone could total nearly $10 billion, according to USB Bank.
Climate Change and Insurance
The insurance sector is a key arena in which Americans are experiencing the effects of climate change. Home insurance is a prerequisite for anyone buying a house with a mortgage, making it an unavoidable part of homeownership. As weather events become increasingly unpredictable and severe, insurance providers in disaster-prone areas are either hiking up their premiums or pulling out of certain regions completely.
The Future of Insurance in the Age of Climate Change
James Eck, a senior credit officer with Moody’s Investors Service who recently published two comprehensive reports on the subject, predicts some future changes in the insurance sector. He suggests that homeowners may have to bear more of the initial risk, with deductibles potentially rising to $20,000 or $25,000. Insurance providers could also limit their risk by capping the number of homes they insure in a given area, diversifying their customer base and reducing their exposure to risk.
Adapting Homes to a Warming World
To keep premiums affordable, insurers might encourage homeowners to implement low-cost flood protection measures. These could include moving utilities above base flood elevation levels, replacing carpeting with flood-resistant tiles, waterproofing basements, installing sump pumps and flood vents, and using flood-resistant insulation and drywall. These adaptations would mitigate the damage from flooding and make clean-up easier.
The Challenge of Calculating Risk in a Warming World
The insurance industry has traditionally relied on statistical models to calculate risks and set premiums accordingly. This task has become increasingly complex as climate change exacerbates the frequency and severity of natural disasters. As Robin Dillon-Merrill, a professor of operations and management at Georgetown University, explains, "Insurance generally presumes that events hit random people, not entire blocks or subdivisions or ZIP codes. It starts to break down when the disasters keep getting bigger and bigger."
The Cost of Construction and Climate Change
The cost of insurance isn’t only going up due to climate change. Rebuilding costs have also risen due to higher construction prices, inflation, and supply chain issues. In Florida, several insurers have reduced their offerings or completely exited the market due to frivolous lawsuits, fraudulent insurance claims, and overall hurricane risk. A similar trend is emerging in California, where the increasing number and intensity of wildfires are causing insurers to halt new policies.
Climate change is reshaping the insurance landscape in unprecedented ways. The days of affordable premiums and comprehensive coverage in disaster-prone areas may be numbered. For homeowners, the future could involve higher deductibles and the need for more home adaptations to mitigate damage. As climate change intensifies, the insurance industry, homeowners, and policymakers must collaborate to develop solutions that balance affordability with risk management.