Over the past 40 years, Americans have been moving to more disaster-prone regions of the U.S. South and West. “A hurricane cutting the Gulf side of Florida now just encounters way more houses, way more businesses, way more roads, way more infrastructure than it did 40 years ago,” Keys said.
At the same time, climate change has been increasing the frequency and severity of extreme storms and wildfires in those fast-growing regions. Finally, when disaster strikes, inflation and labor shortages have driven up the cost of rebuilding.
All of these factors have made disasters more expensive, and contributed to the rise in premiums. But the biggest factor behind the rise, according to Keys, is the way that climate change is reshaping a fundamental pillar of the insurance industry.
Insurance is built around the assumption that disaster doesn’t strike everyone at the same time. For many types of insurance, that assumption is mostly true — a car insurer, for example, knows that it’s unlikely that every driver will get into a fender bender on the exact same day. But when it comes to home insurance, climate change is causing this assumption to crumble. A major wildfire could easily burn down an entire town, or a hurricane could easily rip the roofs off all the homes in a neighborhood. For this reason, insurance companies in disaster-prone regions end up purchasing their own insurance policies, known as “reinsurance.”
Reinsurance protects regular insurance companies from going bankrupt from a string of major disasters. Since reinsurance companies cover the epicenters of extreme weather, they’ve recently become extremely sensitive to climate risk. Since 2020, premiums for reinsurance have doubled, and will likely continue to rise. In states that experience frequent extreme weather disasters — like Louisiana, Texas, and Florida — insurance companies end up purchasing a lot of expensive reinsurance, and those costs get passed down to customers.
This is the biggest factor behind the recent surge in home insurance premiums, and Keys doesn’t expect it to stop anytime soon. In a recent interview with Bloomberg, Jacques de Vaucleroy, the chairman of the major reinsurance firm Swiss Re, said that reinsurance premiums will continue to rise until people stop building in dangerous areas.
Good article, several interesting specifics and a food overview. The last bold is mine.