Insuring Your Home: The Growing Concern of Extreme Weather Events and Rising Costs

2023-06-17 05:28:24

In North America, insurance companies are now reluctant to insure buildings in states subject to extreme weather events, such as the recent forest fires in Canada. As these disasters multiply throughout the world, this reluctance could increase.

Will insuring your home or other property become an unaffordable luxury? In California, which has suffered mega-fires in its territory in recent years, two of the largest companies in the country, All State and State Farm, are now refusing to insure new owners of homes or commercial premises.

Reasons given: inflation, construction or reconstruction prices that are too high, but above all the costs linked to the gigantic fires which have destroyed millions of hectares. For example, State Farm had taken in $7 billion in bounties, but paid out $4 in repairs in 2021.

“In California, one of the great natural risks is the earthquake. But this disaster is not insured”, notes Charles Nyce, professor of risk management at the University of Florida. “Wildfires are another. They have caused huge losses for insurers. This is a big concern. very diverse meteorological events, which will occur more frequently”, he analyzes.

Change of tone at the end of the millennium

These natural disasters are not new. Hurricanes and floods in other states in recent decades, including Florida and Louisiana, have already worried insurers quite a bit.

According to Arthur Charpentier, professor at the University of Quebec in Montreal, the real shock dates back to the 1990s, with Hurricane Andrew in 1992 which devastated the southeastern United States.

“Insurers realized that the amount of premiums they had collected on all P&C insurance in the province was barely enough to cover the homes that had been affected. They realized the potential costs were enormous. We thought that reinsurance could intervene. But here too, we realize that the capacities of reinsurers are limited. We therefore had to think about setting up mechanisms”, develops the mathematician specializing in insurance.

A neighborhood of homes damaged after Hurricane Andrew hit Florida in 1992. [Mark Foley/AP Photo – Keystone]

More restrictive insurers

In Florida, where insurance premiums are four times higher than the national average, large companies have thus become more restrictive. They have also created independent entities to specifically cover hurricane-related damage.

“In the 1990s, the State Farm insurance company had about 40% of the market share in Florida. Today, it has only 5%. It voluntarily restricted the number of insurance contracts by real estate. At the same time, it has created independent companies for its new contracts. If they go bankrupt, they will not drag the parent company down with them”, analyzes Charles Nyce.

More than twenty of them, in great financial difficulty, are also in the crosshairs of the regulator. Which is not really reassuring for customers…

This business model could however be applied in California, where the State does not authorize companies to increase their premiums beyond a certain threshold, which explains the refusal of some of them to cover new real estate.

Owners not all equal

Owners do not all have the same options. The richest will still be able to pay between 10,000 and 20,000 dollars in annual premiums.

The less wealthy cannot, in the United States, obtain a mortgage without insuring the house. Many individuals and even companies are now turning to state-guaranteed companies. Like Citizens Property Insurance, now the main insurance provider in Florida.

State measures

The situation risks becoming untenable for the authorities if disasters multiply. Measures are taken accordingly. On the southwest coast of the United States, the constructions of the seafront and the protective walls are thus being reinforced.

In California, we are trying to fight fires with preventive fires, without prohibiting new installations, while many people are fleeing the high cost of cities to peri-urban areas on the edge of the forest.

Bad weather in Italy caused severe flooding and extensive damage in May 2023. [Anadolu Agency – afp]

“The federal government will have to get more involved”

However, according to Charles Nyce, it is only when the federal government creates a fund or a national reinsurance that things will change: “At some point, the federal government will have to get more involved. We have earthquakes land or floods. When the government has control, then we will start to avoid and prevent risks in certain areas. At the moment, no one has said: ‘You cannot build, rebuild or live there'”, supports the Floridian professor.

In Europe, the situation depends on the country. France, for example, has compulsory public insurance covering natural disasters. France has taken a number of measures to make constructions more resistant. But according to Arthur Charpentier, they remain very timid when it comes to declaring non-building areas.

“Real efforts” required of owners

According to Swenja Surminski, of the risk management company Marsh & McLennan, insurance must evolve and stop disempowering individuals to encourage them to build or rebuild differently.

“When a flood hits, insurance usually helps homeowners assess the damage, repair and rebuild. But now there are new ideas about how to build back better, allowing insurance to work with customers. The aim is to tell them: ‘You have been flooded once, you are likely to be flooded on other occasions. How can you make your house more resilient?’ It is an important signal: ‘Yes, you continue to be insured, but there are real efforts so that the next flood will have less of an impact on you'”, she explains.

Global issues

It is therefore a question of emphasizing prevention. Firstly, because the majority of the world’s population is simply not insured, because it cannot afford it. Then because the issue of climate change goes far beyond national borders.

The smoke from the Canadian fires has reached New York, recalls Arthur Charpentier. The city’s environmental policies, whatever they are, will not change anything. “Climate change is not a local problem. It is a global problem. What can happen very far away can have enormous consequences, including in another country”, underlines the Canadian professor.

>> Also read: Fires rage in Quebec, 100 million Americans concerned

Francesca Argiroffo/friends

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