Imagine if you were one of the thousands of homeowners in California who received a letter in the mail telling you that your insurance company was cancelling your policy – not because of something you’ve done, but because of an increased risk for climate disasters in the state.
This is a situation that is happening to more and more homeowners caught in the expensive wake of record-breaking climate destruction around the world.
While climate change is driving more disasters, as predicted, where exactly the hammer will land next is harder to guess. The way the insurance industry is responding to this uncertainty is an indicator of what’s to come. With their decisions to increase prices, and leave whole areas uncovered, they are signaling a future of even higher costs – with homeowners among the hardest hit.
In this article we’ll explore how climate change is driving a crisis in the insurance industry, how they’re responding, and what this means for homeowners and renters.
WHAT’S DRIVING THE INCREASE IN COSTS
In addition to the physical costs in the form of property destruction and loss of life, climate change has a huge financial impact. In the United States, the combined cost of climate disasters between 2020-2022 has equaled more than $400 billion. In Canada, the cost is close to $2 billion annually, with the average cost of each disaster increasing by 1250% since the 1970s.
At the same time, more people than ever in Canada and the United States are moving into areas of high risk for climate-fuelled flooding, wildfires, and hurricanes. This movement is largely driven by a search for better jobs and a lower cost of living. For many it’s a situation of survival – they may be aware of the risks but feel they have no better option if they want to pay the bills and put food on the table.
Property developers are also capitalizing on lower costs to build in areas prone to climate impacts. For example, new housing is built in flood prone areas on the East Coast of the US at a rate two to three times higher than average. This impacts lower income families hardest of all and contributes to the unequal impacts of climate change on communities of colour.
The final piece of the puzzle is that with fossil-fuelled climate change speeding up the rate of climate disasters around the globe, and governments being too slow to take action to prepare for their impacts, areas that were not previously considered at risk are becoming increasingly vulnerable.
The combined result can be seen in the facts like these: 1 in 10 Americans now lives in areas at high risk for flooding, while in Canada, over four million people live in areas at high risk for wildfires.
HOW INSURANCE COMPANIES ARE RESPONDING
The Insurance Bureau of Canada reports that Canadian insurance companies spent an average of $2 billion each year on losses related to what they call “natural catastrophic events” between 2009 and 2020. In the United States, climate disasters cost insurance companies $130 billion in 2022 alone, and that number is expected to rise.
A large part of the reason that the insurance industry is destabilzed comes down to the fact that current insurance rates were developed in a world that no longer exists. As a result, companies are increasingly pulling out of areas they consider high risk – a situation that experts warn is becoming unsustainable.
Insurance companies have begun raising their rates, restricting coverage, or both. In some cases, they now see areas as being uninsurable at rates people would pay, and are refusing to issue coverage altogether.
Between 2021 and 2022, it is estimated that climate risks have resulted in a 12% increase in premium costs in the United States. These increases have been felt across the board, including many areas that have yet to actually experience climate disasters. Meanwhile, in highly vulnerable cities like Miami and New Orleans rates are now as high as $5000 USD ($6,800 CAD) per year.
In Canada, the people of Alberta – a province that has suffered both catastrophic flooding and wildfires in the past decade – are the hardest hit. The average home insurance rates in the province have risen 140% since 2011, a rate that far outpaces inflation.
In a particularly worrying example, State Farm – the largest home insurer in California – has stopped accepting applications for most types of insurance, regardless of whether the home is in an area of high risk. In turn this means there are fewer options for insurance, and this drives prices even higher.
As a whole, the insurance industry is still at the beginning of a journey to integrating its business practices with the reality of climate change. For example, many insurance companies have yet to integrate their investment strategy with the climate impacts they are seeing today, investing billions in fossil fuel companies that are driving climate change.
WHAT THIS MEANS FOR HOMEOWNERS AND RENTERS
According to Benjamin Keys, a professor of real estate and finance at the University of Pennsylvania’s Wharton business school, the combined result of the above is “leaving homeowners with fewer choices, less protection, and more financial distress.”
For some homeowners, they do not have the budget for these increased insurance costs, leaving them on the hook for paying for any damages to their homes out of pocket. On top of this, if homeowners are unable to find affordable coverage – or coverage at all – they may be unable to renew their mortgage.
But it’s not just homeowners who are vulnerable. Renters have very little control over what happens to their homes. If their landlords don’t have the right insurance coverage and disaster hits, they may be left to live in unsafe conditions for months or even years.
HOW YOU CAN PREPARE
- Homeowners: Go over your insurance policy carefully, and make sure you’re covered for the impacts that are most likely in your area. If your current policy is missing some key impact areas, consider buying additional coverage.
If you’re in the market for a new home, experts suggest taking a close look at risks for that property and community in the coming years, and factoring that into your decision making.
- Renters: Ask your landlord what kinds of coverage they have for your home. It is also a good idea to have renter’s insurance to make sure your personal property is covered, and you can also look into buying additional standalone insurance for impacts like flooding.
Record-breaking climate impacts, combined with the insurance industry’s struggle to keep pace, is leaving individuals and families increasingly vulnerable. As we wait for the necessary changes from the insurance industry and governmental institutions in response to these challenges, we can take steps to understand how the financial consequences of climate change will continue to affect homeowners and renters – and what we can do to prepare.