What your insurer is trying to tell you about climate change

As climate-related disasters grow in frequency and intensity, major home insurers in some locations are concluding that no premium—or at least no premium that customers are willing to pay and state regulators are likely to permit—will cover the potential losses. Earlier this year, Allstate and California’s largest insurer, State Farm, announced that they would hold off on writing new policies for homes in the state. From 2019 to 2022, payouts to homeowners there more than doubled, but premium revenue from customers increased by only a third, according to industry data reported by The Wall Street Journal.

Rising home-insurance rates reflect a lot of factors: real-estate costs, building-supply prices, the whims of global financial markets, and, yes, corporate bean counters’ desire to maximize profits. But more and more, homeowners are also paying for the damage that climate change will cause to their property—and they should be paying. If the continuing risk of fires, hurricanes, and other weather-related disasters isn’t enough to make Americans think carefully about how and where to build a home, perhaps the rising cost of insurance might concentrate their mind. Yet policies at all levels of government suppress the signal that insurers are sending. That’s certainly true in deep-blue California. Even as prominent politicians there take pride in acknowledging climate risks, the state’s insurance-regulation system is built to discourage premium hikes.

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In California, insurance companies are prohibited from using statistical modeling to assess future fire risks when setting rates; premium increases must be based on insurers’ loss history, not on the growing likelihood of serious fires. The state’s pro-consumer rules can’t hold off reality forever. After Allstate dropped her, Pratt patched together coverage from other private insurers and from the FAIR Plan, California’s public insurer of last resort. But she said she’s now paying twice as much as in the past for coverage that’s less comprehensive.

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Every state has some sort of a public insurance system, like California’s FAIR Plan, for homeowners who can’t get coverage on the private market. These systems of last resort, however, are becoming insurers of first resort. After Hurricane Ian led to devastating losses in Florida last year, smaller insurance companies went bankrupt trying to satisfy claims. And over the past two years, the state’s insurance system, Citizens Property Insurance Corporation, has doubled its number of policyholders. It now covers about 13 percent of the homeowner’s-insurance market in the entire state. Is this sustainable?

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In the past, insurers have generally been able to diversify their own portfolios to balance different risks; historically, insurers that do business across the country could afford a bad year in one or two states. But the math becomes more challenging as disasters proliferate. The cost of reinsurance—essentially, coverage that insurers take out to protect themselves against big losses—has shot upward, in large part because of growing climate risks.

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In 1988, California voters passed Proposition 103, which subjected certain auto- and property-insurance rate hikes to state review. Consumer advocates argue that the insurance industry makes billions of dollars in profits in the state, and they have recently accused Allstate and State Farm of bullying California Insurance Commissioner Ricardo Lara into going along with excessive rate increases. (In a statement, Allstate told me that it has “paused” new homeowner-insurance policies because the “ability to adjust prices quickly in California is not an option due to Proposition 103.”) Another possibility, though, is that climate-related risks are becoming apparent faster than the state’s regulatory system can take them into account—lulling the public into complacency about the climate crisis.

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