The impact of climate change on the insurance industry is substantial. As more frequent and severe storms hit cities across the US, more people are experiencing catastrophic losses. The increase in these losses forces many traditional insurance companies to raise their home insurance rates. Some have even found the situation so unmanageable that they’re pulling out of high-risk regions, or worse, becoming insolvent.
But it doesn’t have to be that way, at least that’s what our co-founder and CEO Sean Harper. believes. He acknowledges that climate change is terrible and needs to be stopped. However, he also points out that the impact of climate-related risks like hurricanes is something we can model. And that means that while it may be a large expense, it's a manageable one.
How climate change impacts home insurance
The impact of climate change has been an area of concern for the insurance industry going back at least two decades. But as the number of billion-dollar disasters steadily increases, so does the anxiety. The cost of paying a large number of catastrophic claims means many insurers have to rethink their underwriting process and even their ability to sell policies in some locations.
For homeowners, that turns into two for important questions:
- “Will I be able to find home insurance?”
- “Will I be able to pay for it if I do?”
Take Florida as an example. Hurricanes batter the state’s coastline every year. Add to that the increased cost of doing business in Florida, and it’s easy to see why insurers raise premiums, send non-renewal notices to homeowners, or leave the state altogether.
Why insurers should be prepared for climate change
Climate change is going to cause big expenses for property and casualty insurance, and the costs are most likely going to be passed on to consumers. One report on insured wind losses shows that our warming climate has caused more Category 3 and above hurricanes. The additional storms have already pushed losses up by 11 percent above what we’d expect if climate change wasn’t a factor.
Moreover, the report also says global temperatures are projected to increase by an additional 0.4 to 1.3 degrees C by 2050 and that will most likely cause average annual hurricane wind losses to increase an additional 10 to 19 percent by 2050. That’s a big jump, but it’s spread out over 30 years. Plus, insurance companies have this information and can use it to prepare for the cost.
How insurers can prepare for climate change
Insurance companies have to incorporate climate science when they create their catastrophe models, but they can also use technology that helps them price their policies more fairly. For example, we’ve done this by taking in more information about every homeowner that applies for coverage. Looking at this granular data, much of it from public records, allows us to:
- Set premiums that more accurately reflect the actual risk for each home.
- Ask fewer questions on our application.
Ultimately, these two outcomes make getting insurance easier.
Technology is also key to speedy claims process, as you can see in our response to Hurricane Ida. Because we have access to so much data, we were able to:
- Understand how our customers might be impacted by the storm.
- Alert them that the storm was coming and provide safety tips and shelter listings.
- Send post-storm wellness checks.
- Get aerial imagery for 94 percent of our impacted customers.
Another step that insurers can take is to use reinsurance to protect their business in the event numerous policies have to be paid out at once. Essentially, reinsurance is a contract between your insurance company and a reinsurer. The insurance company pays the reinsurer to take on some of the risk that comes with covering homes. By passing on some of its risk to the reinsurer, the insurance company is able to offer more affordable coverage in areas that are prone to certain, catastrophic perils.
Perhaps the most important way insurance companies can help their policyholders is to educate them about their risks. Home insurance discounts are one way we encourage our customers to take action, but we also provide educational content on things like:
All of these can help homeowners harden their property against damage – and that can reduce their chances of filing claims.
Ultimately, the impact of climate change on the insurance industry may be unavoidable, but it’s also predictable. Insurance companies have to find ways to get homeowners the protection they need at an affordable price.
