The end of insurance.
As an ending, Insurance should be the best sector in making sure they have prepared for every eventuality. I imagined they would have been great at assessing the creeping risk of climate change over recent decades. But have they done too little, too late to understand the multiple impacts for regular homeowners? A recent podcast episode from the New York Times reveals a concerning shift with insurance companies appetite to cover US homes.
As a consumer experience home insurance should be a pretty simple transaction. And certainly for banks to approve a mortgage it is critical to get protection in place. Ultimately the agreement is about off-setting the risk of damage, or at worse destruction of the property to the potential cost of rebuilding or repairing. This risk agreement is then paid down with monthly instalments.
Ideally the homeowner never needs to make a claim. The relationship then goes on until the home owner sells the property and moves. Other endings include the worst-case scenario where the home gets destroyed and the insurance pays out to cover the cost of rebuilding. Smaller claims are more common, such as a roof hole, or a pipe leak, where damage might need a smaller payout. Then along comes climate change and shifts the foundations. Along with these established principles.
Christopher Flavelle and Mira Rojanasakul, climate change reporters for The New York Times, looked at the insurance market in Florida and the impact from climate change. Which had been driving the cost of insurance upwards. In this new The Daily episode, they looked wider at how it the problem is growing right across the US.
Insurance companies don’t like talk about this problem directly, so Christopher and Mira looked asked a ratings agencies that rate insurance companies called AM Best1. And sure enough the risk of these companies is getting higher as the business model is moving. They also spoke to insurance executives, state insurance commissioners, academics and homeowners.
Although the big ‘act of god’ risk are certainly increasing with climate change, it is the smaller ones which are chipping away at the business model. Christopher Flavelle describes it as “in the past few years, previously small-scale threats like wildfires, hail and windstorms have become more intense and frequent. That means the threat to insurers has grown as well. In Iowa, a number of insurers have stopped writing homeowners insurance since the start of last year, dropping tens of thousands of customers. Insurance agents say it’s getting harder to find companies that will write new business. The same is true across the Midwest, in much of the Southeast, and in parts of the West. We found that the insurance industry lost money on homeowners coverage in 18 states last year.”2
Consumer experience
People like seeing a destination for their investments. Maybe these aren't so tangible sometimes. It might be a comfortable retirement by way of paying in to your pension. Or the comfort of owning your own house by way of your mortgage. Insurance is about avoiding the imagined personal apocalypse. If that dangerous ending is becoming more tangible people will scramble for the solution. In the short term that will be seeking insurance even when the costs go up. In the long term it will mean even the most hardened climate denier will have to hope for environmental improvements. That might change political views.
Christopher Flavelle explains one conversation “Tim Kuehner, a general contractor whose home just outside of Marshalltown, Iowa, was damaged in the 2020 derecho storm, saw his annual premium jump to $9,189 this year from $6,453, a 42 percent increase. His insurance agent, Bobby Shomo, told me that many of his clients are facing similarly large increases.”3
Insurance currently has mixed endings as a consumer experience. There is a scheduled transaction model with monthly payments. An annual contract renewal period. Which until now was a simple role over experience for many people. But as we hear from Tim Kuehner above, these are going to be a different type of experience. Fraught with renegotiation and potentially horrifying increases. The worrying apocalypse ending fear of wildfires, floods, and hurricanes was often the reason people went for insurance in the first place.
According to the episode, more responsibility will be placed on homeowners to mitigate their own risk by ‘hardening the home’. By cutting grass near wild fire zones and toughening roofs to avoid hail stones for example. Although these will cost people direct investment and could take time, it does give people some agency in their own immediate risks. But they can’t be expected to mitigate the risk of climate change by cutting some grass. Thats the last option with Federal Government protection. Which already happens in some areas against floods. But to make the government ‘insurer of last resort’, would be a gigantic undertaking.
These last two experiences push the consequences of the consumer experience of insurance towards solving a source risk, not financial off-setting. This could change more than insurance. As our leaders seem to be drifting focus away from climate, a quick and costly whiplash on peoples biggest assets might reprioritise towards solving climate.
In conclusion, The Daily’s host, Sabrina Tavernise asks Christopher Flavelle “Are we looking at the end of insurance?” Chris dryly said “We are looking at the end of insurance as we know it.”
1 https://web.ambest.com/ratings-services/industry-centers/reinsurance-information
2 https://www.nytimes.com/2024/05/14/climate/climate-change-homeowners-insurance-takeaways.html
3 https://www.nytimes.com/2024/05/14/climate/climate-change-homeowners-insurance-takeaways.html
