Climate change and the extreme weather it brings present a serious conundrum for property and casualty insurance carriers. It’s prompting them to pursue different approaches to writing policies—but there’s no one-size-fits-all option.
Insurers evaluate both the frequency and the severity of extreme weather events to determine the extent of coverage and premium rates. In other words, they assess how often severe weather occurs and what the potential impact may be. Because of climate change, extreme weather events are happening more often, and at greater intensity, across the U.S.
In 2023, there were a record 28 storms that each cost at least $1 billion in damages. Eight of the 10 largest wildfires in California's recorded history have occurred since 2017, contributing to rate increases amounting to $8.5 billion since 2015. Convective storms have been wreaking havoc across the Midwest— and much of the U.S.—leading to a record number of damage claims from hailstorms in 2023. Hurricane Beryl caused significant damage and tragic loss of life in Texas, including an estimated $28-32 billion in total damages and economic losses. This year, some estimates put the damages from hurricanes Helene and Milton at almost $50 billion each.
The backdrop
Homeowners' insurance claim costs have risen significantly, with many insurers reporting increases of 20% to 40% on average over the past few years. In catastrophe-prone areas, these increases can be even higher. For claims related to natural disasters such as hurricanes, wildfires, and floods, the costs have risen even more sharply. For example, wildfire-related claims in California have seen costs increase by over 50%.
As a result, property owners with catastrophe-exposed homes are experiencing dramatic increases in premiums, often exceeding 100% across the country. This surge in insurance costs is placing a significant financial burden on homeowners, prompting many to consider alternative risk management strategies.
To cope with the skyrocketing premiums, many policy owners are opting to increase their deductibles, taking on more financial responsibility in the event of a claim. This approach can provide immediate premium relief but requires homeowners to be prepared for higher out-of-pocket expenses if a loss occurs. Additionally, some property owners are turning to self-insurance (assuming the responsibility for a certain level of risk or loss) for a substantial portion of their property portfolios, particularly for high-value assets or secondary homes.
Many insurers are rethinking where they write business—and how they can ensure they’re charging an appropriate rate. Carriers are also adopting a more proactive perspective, focusing more on the prevention of damage that leads to claims.
For instance, many carriers are making underwriting requirements more stringent. Instead of suggesting preventative measures on the part of the consumer, they’re now mandating them. Where they once may have recommended adding shutters, for example, they’re now requiring them. There are incentives or credits available to help policyholders meet new, tougher underwriting requirements that potentially transform uninsurable properties into insurable risks for carriers.
Some carriers are also rolling out non-renewing policies or leaving certain states completely. For example, State Farm has non-renewed about 30,000 policies in California this year and has also stopped accepting new policy applications. Farmers, Progressive, and AAA are pulling back in Florida. In fact, the Sunshine State has the highest home insurance rates in the country.
In the high-net-worth space, there’s been a significant increase in the amount of exposure and risk for carriers. Insurers are required to hold more capital to cover potential large-scale losses, particularly in segments where assets and liabilities are significantly higher. Capital requirements have increased by approximately 10% to 15% in some regions. This means the capital needed to cover policies and potential claims is much higher. Consequently, carriers are now offering a range of different products to serve the high-net-worth cohort.
One such product is a blanket property program. It entails policies that cover multiple homes, not just one policy for one home. Risk is spread, creating more cost efficiencies. More common on the commercial side, this kind of product is beginning to take off on the residential side.
Another emerging product is parametric insurance. This triggers in the event of a severe weather storm that happens in the holder’s general region. So, instead of having an adjuster visit the home and assess the damage, there’s an automatic calculation for what will be paid out.
The insurance market is also seeing a significant shift from admitted policies to non-admitted policies. Unlike admitted policies, which are regulated by the state, non-admitted policies offer more flexibility in terms of coverage and pricing. Non-admitted policies often have higher premiums because they provide coverage for higher-risk properties or unique circumstances that admitted carriers may not cover. These higher risks necessitate higher prices to compensate. But this also means they carry more risk for the policyholder, as they do not have the same level of regulatory oversight and may not be backed by state insurance guaranty funds.
What to do about it
So, what does this all mean for homeowners and policyholders in the U.S.? How might they deal with the new scarcity of, limits on, and higher expense of coverage due to severe weather?
- Be proactive. Policyholders should prioritize preventative measures and risk management. Working with a trusted advisor can help build against future loss. Remember: Mitigation is key. For example, installing an automatic water shut-off valve or a low-temperature sensor can prevent significant claims by detecting issues early and shutting off the water supply, reducing the risk of extensive damage.
- Be creative. It’s important to take a critical look at all policy options. Insurance advisors and carriers can offer innovative solutions to insure properties. In one example, we collaborated with the owners of a registered historic home in Colorado facing policy cancellation due to a flammable roof. But the local historical society wouldn’t agree to the roof replacement. An expert intervened and found a suitable material that would also pass the aesthetic requirements of the historical society, enabling the home to remain insured.
- Be realistic. Property owners and policyholders should approach insurance discussions with realistic expectations. While these conversations will vary from region to region, some key questions to consider include:
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What coverage options are available, and do they align with my property's specific needs?
- What is my budget for insurance, and how does it influence my choices?What level of risk am I willing to accept? For instance, am I comfortable with higher deductibles or less comprehensive coverage?
- Would self-insuring a portion of the property's value make sense, and what are the potential implications?
Answering these questions will help you make informed decisions, ensuring your property is adequately protected while aligning with your financial goals.
The severity and frequency of claims will likely continue to increase with climate change. However, policyholders can effectively manage and mitigate their risks by staying informed and proactive.
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