As the impact of global climate change continues to intensify, major insurers are retreating from providing coverage that homeowners in disaster-prone areas rely on. In response to extreme weather patterns, at least five large U.S. property insurers, including Allstate, American Family, Nationwide, Erie Insurance Group, and Berkshire Hathaway, have announced that they will now exclude protections from certain weather events, increase monthly premiums and deductibles, or stop providing coverage in some regions altogether.
This move by insurance providers is a response to the escalating costs of claims due to natural catastrophes. In fact, U.S. insurers have disbursed a record $295.8 billion in natural disaster claims over the past three years, according to international risk management firm Aon. This has prompted insurers to reassess their risk concentration and consider rewriting policies or eliminating coverages in increasingly vulnerable geographic areas.
Insurers Retreat from High-Risk Areas Due to Climate Change
Major U.S. property insurers are increasingly withdrawing coverage in regions prone to extreme weather events. Allstate, American Family, Nationwide, Erie Insurance Group, and Berkshire Hathaway have cited climate change-induced weather patterns as the reason for ceasing coverage in some areas, excluding protections from certain weather events, and increasing monthly premiums and deductibles. This shift is leaving homeowners in areas once deemed safe from natural disasters exposed as their risk of such events increases with rising global temperatures.
A Shift in Coverage
Insurers are becoming more willing to drop policies in areas that are becoming more vulnerable to natural disasters. As most home insurance coverages are annual terms, providers are not bound to them for more than one year. For instance, Allstate has announced plans to limit new business in areas most exposed to hurricanes and implement weather-related deductibles or exclusions. Likewise, Nationwide has already pulled back in high-risk areas and plans to finalize more targeted hurricane risk mitigation actions by the end of 2023.
Record Claims Costs
The insurance industry is grappling with escalating claims costs due to climate change. Over the past three years, U.S. insurers have disbursed a record $295.8 billion in natural disaster claims, according to risk management firm Aon. In the first six months of 2023, natural disasters caused $40 billion in insured losses, marking the third costliest first-half on record. The severe nature and widespread occurrence of these disasters have led insurers to re-evaluate their risk concentration.
Regulatory Constraints and Market Survival
Rate increases for homeowners insurance are regulated by state agencies, preventing firms from pricing policies that accurately reflect risk. This has led to insurers setting prices that are relatively comparable across an entire state, rather than setting higher prices for policies in specific high-risk areas. While these policy changes may be unfavorable to certain consumers, they are considered essential for the survival of the wider insurance market.
The Future of Insurance in a Warming World
As weather patterns shift with the warming planet, insurers can no longer rely on previous risk projections. The increasing frequency and severity of weather-related catastrophic losses pose both short and long-term risks. As insurers cut back on coverages, some homeowners are going without insurance altogether, leading to state governments establishing insurance policies of last resort. However, even these state-backed policies must face the realities of climate change.
Takeaways: This shift in insurance coverage underscores the far-reaching impacts of climate change. As insurers retreat from high-risk areas, homeowners are left vulnerable, and state-backed insurance policies may not be a sustainable solution. The insurance industry’s response to climate change is a clear indication of the urgent need for comprehensive strategies to mitigate and adapt to the impacts of a changing climate.
