- Boca Raton, FL
Climate change is a front-and-center topic on the world stage. The Earth is becoming warmer, with worsening floods, droughts and wildfires further endangering our ecosystem.
A recent report by the Intergovernmental Panel on Climate Change (IPCC) — a body of experts convened by the United Nations (UN) — warns of continued climate disruptions if action isn't taken.
The report, which drew on more than 14,000 scientific studies, says that "deadly heat waves, gargantuan hurricanes and other weather extremes that are already happening will only become more severe." In fact, UN Secretary-General António Guterres described the report as a "code red for humanity."
Billions in Insured Losses
Natural disasters are destroying homes and businesses at record-breaking rates:
- Hurricanes Harvey, Irma and Maria caused combined insured losses of $92 billion, according to Swiss Re.
- In 2017 and 2018, insurers paid nearly $25 billion in losses from three California wildfires — Camp, Tubbs and Woolsey.
- Catastrophe modeler Karen Clark & Co. earlier this year estimated that the wildfire that destroyed 1,000 structures in Boulder County, Colorado in December 2021 will cost insurers about $1 billion.
- According to the Texas Department of Insurance, insurers as of the end of 2021 received 508,529 insurance claims and expect to ultimately pay about $11.2 billion in insured losses from Winter Storm Uri.
And based on 2022 peril predictions from forecasters, this year's storm season is not going to help reduce the strain on insurance carriers.
In response to relentless catastrophes, insurers are reassessing exposure, with stricter underwriting guidelines and restricted appetite, diminished capacity and market exits in catastrophe areas. The insurance industry, policyholder advocates and state regulators are calling for changes as climate change continues to alter the landscape.
Hurricanes: Warmer Temperatures and Rising Sea Levels Intensify Storms
Warmer ocean temperatures and higher sea levels are expected to continue to intensify a hurricane's intensity and impact.
Hurricanes are getting wetter, with 10% to 15% more precipitation from cyclones predicted in a 2-degree Celsius scenario, which is the global environmental community's widely accepted limit on temperature rise to avoid significant and potentially catastrophic changes to the planet.
Hurricanes Harvey in 2017 (which dropped over 60 inches in some areas), Florence in 2018 (which dropped over 35 inches) and Imelda in 2019 (which dropped 44 inches) demonstrate the devastating floods that these high-rain hurricanes can cause, according to the Center for Climate and Energy Solutions (C2ES).
And future coastal storms are likely to be more damaging as sea levels rise, says the C2ES.
Up to 21 Storms Predicted
The U.S. National Weather Service expects that up to 21 major storms will form this hurricane season — well above the annual average of 14.
In fact, Tropical Storm Alex already hit South Florida the first week of the 2022 hurricane season and brought more than 10 inches of rain to Miami over a 72-hour period, according to AccuWeather, causing massive flooding.
"The severity of weather events in Florida, Louisiana and other areas has brought unprecedented challenges for insurers," says Rep Plasencia, RPS executive vice president.
"Carriers are no longer able to totally rely on risk modeling software, particularly historical patterns, given the changing severity and frequency of climate-related events. The increase in storm activity, along with other factors [roofing scams and litigation] — particularly here in Florida — have impacted the insurance market, with several carriers ordered by the state into liquidation and others unable to get reinsurance," Plasencia continues.
Albert Geraci, RPS area president for Florida, notes that changing weather patterns have impacted the insurers' ability to achieve rate adequacy:
"Hurricanes are lingering much longer, for example. Look at Hurricane Harvey in Texas, which stalled over the state and caused billions of dollars in damage. Tornado Alley, which typically refers to the area in the Plains and Midwest, is now shifting geographically to Alabama and Mississippi. These pattern changes have made risk modeling challenging and have insurers limiting their capacity."
It's important to note that the insurance market in Florida is not the only one being disrupted by extreme storm activity. At least six insurers in Louisiana have declared insolvency in the first half of 2022.
The Perfect Storm for a Battered Insurance Market
Adrianna Rivera, RPS Personal Lines underwriter manager, explains that the main concern for carriers in Florida is the risk of wind and the ability to price accordingly for the exposure.
"Seventy-five percent of a homeowners policy rate in Florida is based on wind," she says. "Carriers are exiting Florida, as they are not willing to assume catastrophic wind exposure."
In addition to severe weather risks, Florida's litigious landscape has further exacerbated the insurance market situation in the state.
"When property damages occur in the aftermath of a hurricane, you see overinflated claims, fraud and lawsuits, creating the perfect storm for a battered insurance market," says Rivera.
The Sunshine State is where people want to live. Thirteen cities in the Sunshine State were in the top 25 for migration growth in 2020 and 2021. "Florida attracts people from all over the country," explains Geraci, "with the majority wanting to move close to the water. As the population becomes increasingly dense in coastal areas, the insurance market is evaluating whether it can obtain and provide the capacity required."
Geraci cites rising sea levels in Miami and the concern over the potential impact of a major storm hitting the area: "You have the majority of the population residing within 20 miles of the coastline, which increases the risk of devastating property damage."
Addressing Hurricane Challenges with Building Codes and Materials
Building codes and building materials have changed over the years for better climate-change resiliency, but Plasencia explains that these codes are for new construction. "Older inventory still exists, with many homeowners unable to invest in modern building materials."
Additionally, property reforms have been recently passed in Florida in an attempt to stabilize the market. This includes a $2 billion reinsurance fund, $150 million for hurricane "hardening" — making homes less vulnerable to damage — and new rules on coverage denials and attorney fees.
Plasencia, Geraci and Rivera all echo the same sentiment: Climate change has contributed to insurers' inability to effectively use existing risk modeling software to price catastrophic events properly.
This pricing inaccuracy has resulted in years of unprofitability, with the majority of insurers and reinsurers adjusting their appetite to exclude or limit Florida in their business strategy. RPS works with insurance agents to provide coverage options in the Excess and Surplus (E&S) market and offer creative solutions, including wind deductible buybacks and alternatives for insuring layers of property values.
Wildfires: The West Is Dry and Primed for Another Fiery Season
While California is consistently in the spotlight for its wildfires, the entire Western United States is exposed to destructive fires.
According to the University of California, Los Angeles, much of the West has been mired in a drought dating back to the turn of this century — the driest the land has been in 1,200 years. Most scientists believe that the drought has dried out forests, making them more vulnerable to wildfires, which has been exacerbated by the Earth's warming as a result of climate change.
By mid-2022, wildfires have already burned more than 1.9 million acres in the United States, and peak fire conditions haven't even begun in much of the West.
"The reservoirs in California are low, with snowpack down yet again this year," says Marcy Tabora, RPS Personal Lines manager. "We could be looking at another catastrophic season, with an insurance market continuing to be challenged in brush-exposed and wildland urban interface areas" where populated areas are adjacent to brush and wildland.
Tabora explains that while more players are writing homeowners policies in California, very few, if any, are insuring for fire in wildfire-prone areas: "The biggest issue is that reinsurers are unwilling to back up the primary insurers' exposure, so carriers won't write the fire exposure in these areas."
Homeowners in brush and wildland urban interface areas typically turn to the California FAIR Plan for fire coverage on their structure and buy Difference In Conditions (DIC) insurance for protection against liability, water damage, theft and other non-fire perils.
"Basically, the DIC policy we provide serves to fill in the gaps of the FAIR Plan and round out coverage for the homeowner," says Tabora.
What's Being Done to Put Out the Insurance Fire?
Several efforts are underway to mitigate and transfer wildfire risk.
The California legislature had earmarked several billion dollars to help eradicate some exposures in the wildland urban interface areas, but unfortunately, much of the money was reallocated to other projects, Tabora notes.
The California insurance commissioner put a one-year moratorium on cancellations and non-renewals by carriers; however, this moratorium doesn't help attract new market entrants.
"A new election year for the commissioner may bring efforts to minimize carrier withdrawals and get reinsurers back into the fold based on a model that's profitable," Tabora says.
Tabora also explains there has been ongoing community collaboration with the state and counties to help mitigate some wildfire exposures, including eradicating tree-killing beetles, reducing fuel in wildland areas and addressing egress issues in towns for evacuation efficacy.
"There's an effort to get the public to realize its role in hardening their homes to make them less susceptible to wildfire," says Tabora.
"Town hall meetings with homeowners are held to discuss fire prevention and get consumers more involved. Risk mitigation strategies, for example, include clearing brush, using different roof and siding materials, moving propane tanks away from the house and storing firewood away from the house.
"The key for consumer collaboration to work is for homeowners who have taken measures to harden their homes and improve their risk profiles to become eligible for coverage consideration and quoting," explains Tabora. "Historically, this has not been done."
California has implemented changes in ordinance laws, construction regulation and material uses.
But just as with Florida, these changes only impact new home construction. Existing homes don't have all the modern materials incorporated into them.
In addition to reforms made to the California FAIR Plan in 2021, the state legislature and the California Department of Insurance are planning additional reforms to make the program more accessible.
Heavy Rain and Flooding: More Mold Claims and Greater Infrastructure Risk
Climate change is increasing extreme single-day precipitation in parts of the country. Heavier downpours are taking a toll on cities, inundating homes and roads including in areas unaccustomed to heavy rain.
"Due to heavy rainfall and higher humidity outside of traditional coastal areas, we've seen a significant uptick in mold claims over the past 10 years," explains RPS environmental expert Nick Langham. "As a result, carriers are restricting mold coverage, including for multifamily and hospitality risks. They're controlling mold claims by higher retentions and the use of different deductible structures from a per-unit, per-room, or per-floor deductible in habitational and hospitality risks."
The Impact of Flooding on Infrastructure
Langham explains that increased flooding from hurricanes is also impacting wastewater facilities, landfills and other disposal locations and posing a growing risk to the environment from the potential release of liquid and solid waste materials.
"As rainstorms become more severe, we are seeing greater flooding concerns to our infrastructure which is causing overflow and more extreme release events," he says.
Water Contamination: Forever Chemicals and Litigation
Insurers are also concerned about the use of the "forever chemicals" perfluoroalkyl and polyfluoroalkyl substances (PFAS) at manufacturing facilities. Forever chemicals build up in the human body and environment instead of breaking down over time.
"PFAS contamination of air and groundwater is a growing concern. We have started seeing some claims and litigation on longer-terms policies that don't contain a PFAS exclusion or amendment," says Langham.
According to Verisk, it seems that litigation has spiked as researchers learn more about the potential dangers of PFAS. To date, much of this activity has concentrated on chemical manufacturers. Settlements in PFAS cases have already surpassed $1 billion, and many more are reportedly pending, says Verisk.
Although environmental exposures exist and carriers are restricting mold coverage, assessing their liability exposure to PFAS and raising premiums for certain classes of business, new entrants are entering the space as many more insureds buy coverage to protect against pollution risks.
Langham stresses the importance of discussing coverage options for mold, gradual pollution and other environmental coverages with all clients.
Energy: Pressure on the Industry to Stop Insuring Fossil Fuels
While our discussion has focused on climate change and the challenges posed by extreme weather events on insurance, the industry is also being impacted in other ways, including the pressure placed on insurers from investors and others to stop insuring fossil fuel companies.
Lloyd's of London, for instance, announced its plan to discontinue selling insurance for some types of fossil fuel companies by 2030, with other insurance markets and carriers also announcing similar goals.
"Pulling out from the oil and gas space has many ramifications," explains Clay Fuchs, RPS assistant vice president - Casualty. "Without insurance, fossil fuel companies are unable to maintain current production or obtain funding for new projects. Less insurance capacity will mean higher premiums, which ultimately translates to higher prices for consumers. To balance the need to reduce dependency on fossil fuels, a strong energy transition plan must first be in place. Renewables, geothermal and other alternatives are not yet at scale to offer a viable solution to oil and gas."
Grant Bryant, RPS area senior vice president — Energy and Environmental, says "We're looking to lower oil and gas prices, which have spiked for a number of reasons — including inflation — by seeking additional sources to address today's tight energy market."
According to Verisk, the world relies on oil, gas and coal for 80% of its energy needs. On the flip side, climate change has spurred the creation and acceleration of renewables, including wind and solar energy.
"There is a great deal of insurance capacity for green energy, which as a new industry is made up of companies that have implemented strong safety practices at the onset to help mitigate risk," says Fuchs.
Managing Oil and Gas Exposures
In terms of the oil and gas industry's exposure to hurricanes, companies are well prepared with robust risk-mitigation plans in place.
"Oil and gas companies in the offshore space either have a meteorologist on staff or contract with a third party to provide real-time information and data needed for risk assessment, so they can prepare to shut down wells and refineries and get everyone off a rig and onshore before a storm hits," explains Fuchs.
Some classes of business in the oil and gas space have experienced a reduction in insurance capacity because of their heightened exposure to certain risks. For example, saltwater disposal sites present a challenge due to tank battery exposures to lightning and the flammable fluids/vapors held within the tanks.
"The complexity of this risk requires a specialist in the energy market like RPS to help with underwriting discussions and capacity management," says Bryant.
Climate Change Will Continue to Change the Insurance Industry
From hurricanes and wildfires to mold and energy impacts, climate change poses many challenges for the insurance industry, including escalating risks from severe weather events and the need for better underwriting, risk modeling, pricing and reinsurance capacity for continued financial stability.
As insurers reassess exposures with stricter underwriting guidelines and restricted appetite, diminished capacity and market exits, many are pushing for regulatory and process changes as climate change continues to alter the landscape. In the meantime, alternative market options and creativity are required for insureds to be risk-resilient.