Hurricane Beryl brought flooding to Houston, Texas, in early July. The storm was seen as a likely harbinger of a hyperactive Atlantic season. Credit: EPA
Everything everywhere
Rising catastrophe exposures have US leaders racing to find solutions, and Australian insurers are watching with interest
By Wendy Pugh
Before Hurricane Beryl slammed into Texas last month, it had already set records. It was the earliest Atlantic hurricane to reach category 5 intensity and the speed at which it developed from tropical storm strength set it apart.
The US is dealing with rising natural catastrophe exposures, with windstorms, wildfires and hail creating increasing problems alongside the large-event risks presented by hurricanes and earthquakes.
The nation recorded 28 billion-dollar extreme weather events last year, US Senate Budget Committee chairman Sheldon Whitehouse told a recent hearing, while warning losses and claims are likely to rise as climate change threatens cascading consequences.
“Climate risk makes things uninsurable, no insurance makes things unmortgagable, no mortgages crashes the property markets, crashed property markets trash the economy,” he said.
The budget committee has held hearings titled Riskier Business: How Climate Change is Already Challenging Insurance Markets, as the US grapples with issues familiar in Australia, including mitigation, land use planning, building standards, insurer risk pricing, affordability and government responses.
The Insurance Council of Australia, in partnership with the American Chamber of Commerce in Australia, last month took a delegation of insurance professionals and government decision-makers on a five-day study tour to Washington DC and Sacramento, California, to gain insights.
ICA chief executive Andrew Hall noted at the National Press Club in Canberra last year that California has similarities to Australia, but repercussions from a reliance on heavy regulation have shown a path not to follow.
“We can look at markets that have tried things, and we can learn from where they have worked and where they have made mistakes,” he said.
The Australian delegation received briefings on the US National Flood Insurance Program, met with members of Congress from flood-affected communities and visited Silicon Valley to gain insights about artificial intelligence.
ICA and the California Department of Insurance also committed to a “historic” climate and resilience partnership to “build a shared view” of growing risks and solutions.
“With such close ties between our two countries, there was an ongoing commitment out of all the discussions to continue to share lessons, policy ideas and challenges to try and close the protection gap issues in insurance,” Mr Hall said.
The study tour came at a challenging time for the US industry, with ratings company AM Best estimating the nation’s property and casualty sector suffered underwriting losses topping $US20 billion for a second straight year in 2023, driven by personal lines.
AM Best associate director of industry research and analytics David Blades says insurers have been aggressively pursuing price increases for a few renewal cycles to better reflect rate needs and to spark a reversal of losses.
“However, regulatory constraints, inflationary pressures and more frequent and severe weather-related events continue to dampen results,” he says.
The American Property Casualty Insurance Association and Reinsurance Association of America identify the root causes of problems as increased asset values in exposed regions, economic inflation, more extreme weather, climate change, legal system abuse and regulatory coverage mandates, rate suppression and rate approval delays.
Some major insurers have stopped offering new policies or are limiting cover in California as regulations restrict their ability to price for rising claims costs, and pressure has risen on the Fair Plan insurer of last resort. The state, historically associated with earthquake risk, is experiencing worsening wildfires and is vulnerable to flooding.
The Insurance Information Institute (Triple-I) says California’s problems are exacerbated by the 1988 measure Proposition 103. The measure was intended to protect consumers but has limited companies to pricing based on historical data, rather than incorporating advanced modelling technologies, while also barring them from including reinsurance costs.
California’s insurance commissioner Ricardo Lara has announced reforms including allowing forward-looking catastrophe models in return for insurers writing more policies in wildfire-prone areas.
“We have been surviving with 20th-century regulations for 21st-century problems,” Mr Lara said in May. “We are compressing decades of deferral and delay into a one-year timeline of action.”
On the other side of the country, national insurers rated by S&P Global and AM Best have left Florida due to its catastrophe exposure and a litigious landscape that has added to building repair inflation in pushing up claim costs.
Exposures are increasing as the state’s attractive climate, favourable tax rules and a US trend of population shifts to southern regions increases development, and most of the state’s residents live in higher-risk coastal counties.
Finity principal Rade Musulin says US Census Bureau data shows Florida’s population increased from 2.8 million to 12.9 million between 1950 and 1990, while rapid development coincided with decades of below-average hurricane activity that lulled insurers, regulators and others into a false sense of security.
Hurricane Andrew provided a wake-up call when it crossed the coast south of Miami in 1992, becoming the nation’s costliest natural disaster for insured losses at the time. Industry estimates have put the losses in 2023 dollars at about $US35 billion.
More recent hurricanes have included Ian, which two years ago caused total losses of $US55.8 billion, while concerns have risen over the financial resilience of smaller state-focused insurers, given the risk of mortgage market knock-on impacts in the event of failures. State-run Citizens Property Insurance Corporation acts as an insurer of last resort.
Mr Musulin told the US Senate committee hearing that despite major improvements since Andrew, most Florida building codes and land use policies do not reflect potential future risks, and other US regions are susceptible to similar issues.
“In coming decades, we must prepare for the possibility of more extreme hurricanes and coastal flooding from Texas to New England,” he said.
“Florida’s experience is a warning of what the future may hold in other states. Despite its innovative and extensive efforts to address its hurricane problem, premiums are high, consumers may face large assessments, and many are dependent on Citizens and smaller insurers.”
Market research from Bankrate has previously shown the average premium for $US300,000 of homeowner insurance in Florida is three times the national average, with high-risk areas exceeding five times.
Legal system reforms in Florida and Louisiana have produced early indications of improving premium levels. Federally, the National Flood Insurance Program – set up in 1968 as private market flood cover was either unavailable or unaffordable – has also made changes to address financial pressures.
“We should all be risk managers in this day and age We need to understand there is a collective responsibility for all – communities, consumers, policymakers and industries – to help improve how and where we are living.”
Triple-I president Sean Kevelighan
Congress cancelled $US16 billion of the program’s debt to the US Treasury in 2017 after claims from hurricanes Harvey, Irma and Maria pushed the scheme to a $US30.4 billion limit.
The Federal Emergency Management Agency has since introduced the Risk Rating 2.0 methodology, the most significant pricing overhaul since the program began, to better reflect exposures.
Triple-I says public discourse often frames the “risk crisis” as an “insurance crisis”, conflating cause with effect, and legislators responding to constituents may propose measures that ultimately create problems.
Insurance discussions are generating calls for both more and less state involvement, climate change and potential legislative responses remain politically divisive, while mitigation is often spoken about.
Professor Benjamin Keys from the Wharton School at the University of Pennsylvania has likened climate impacts to the Oscar-winning movie title Everything Everywhere All at Once. “Climate change is simultaneously inducing heightened risk of flood, storm damage, chronic inundation, drought, excessive heat and wildfires,” he said.
“If we do not take action on climate adaptation and mitigation, then we can expect private markets for wildfire and wind coverage to increasingly resemble the National Flood Insurance Program and rely on public support.”
Public finance economist EJ Antoni, from conservative think tank the Heritage Foundation, told the recent Senate committee hearing that climate change is not the problem, and what’s required is “reducing the government spending that created the inflation which is responsible for most of the increase” in premiums.
“Hurricanes are not becoming significantly more numerous nor more powerful, but we are building more homes in their path, and we are building more expensive homes there too,” he said.
Oklahoma insurance commissioner Glen Mulready told the hearing a “robust, competitive free market” is an essential aspect of managing premiums. He also noted that every $US1 in mitigation spending is said to save $US6 of loss claims.
A firefighter battles the Park wildfire, which raged across a huge area in California this US summer. Credit: EPA
Consumer Federation of America research found 6.1 million homeowners, or 7.4%, lacked insurance based on 2021 data, and the number has probably risen given double-digit rate increases and insurer exits from some communities.
The people most likely to be uninsured include lower-income residents and those in rural and climate-vulnerable areas.
The federation says the insurance gap requires investments in risk reduction ranging from fortifying homes and neighbourhoods to helping vulnerable homeowners relocate. “On the other hand, we also need to reduce insurers’ over-reliance on unregulated reinsurance, such as through the creation of a public reinsurance mechanism that would reduce costs for insurers and homeowners,” it says.
The Climate and Community Project, a policy think tank looking at “the current and future home insurance crisis”, has explored the issues facing people caught out by rising risks and premiums.
Community Housing Improvement Program chief executive Seana O’Shaughnessy told a webinar that property rebuilding in Paradise, a fire-destroyed northern Californian town, had been questioned without regard to all the circumstances.
“The truth is, the decision to rebuild is extremely complicated and climate change has changed the rules,” she said. “Areas of the state that used to be safe may not be reliably safe any more and, unfortunately, there aren’t great affordable options or places for people to go.”
Hurricane Beryl, which crossed the coast at category 1 strength, is a likely harbinger of a hyperactive Atlantic season, Colorado State University researchers have warned. But even one powerful system can be devasting and diverse perils are causing increasing damage across the country.
“We should all be risk managers in this day and age,” Triple-I president Sean Kevelighan told a podcast.
“We need to understand there is a collective responsibility for all – communities, consumers, policymakers and industries – to help improve how and where we are living. Because the fact is more and more people are living in harm’s way.”
