The America impossible to insure due to the climate crisis
The crisis is not only environmental. The financial impact also seems monumental. The decision by State Farm, the largest vehicle and home insurer in the US, to stop selling policies for homeowners in California, has set off all the alarms about the economic blow that climate change can mean in the medium and long term in the first world power. The risk of fires and other natural catastrophes at the national level is beginning to be so high that it is no longer worthwhile for many companies in the sector to continue insuring.
The reason given by the Illinois-based company, which stopped accepting new clients on May 27, is the “historic increase in production costs, outpacing inflation, and the growing exposure to catastrophes”. Although they acknowledge the efforts made by the administration of California Governor Gavin Newsom to mitigate the effect of the fires, they understand that this decision is necessary to “improve the financial strength of the company.”
They are not the only ones. Days after State Farm's announcement, another California insurance giant confirmed it was heading down the same path.. Allstate has explained that its goal is to “continue to protect the customers we currently have,” according to a company spokeswoman, and that increasing the number of policies at this time could compromise that obligation.. AIG and Chubb, firms specializing in luxury residences, have also joined the list.
Tom Corringham, an economist at the Institute of Oceanography at the University of California San Diego, believes that there are certain areas that should no longer be inhabited and that lawmakers should seriously consider acquiring properties in high-risk areas to evacuate them, a scenario that at the same time would be a major legal conflict. “Otherwise, if we let the market regulate itself, the only beneficiaries will be the insurance firms,” he says.
climate maps
For his part, Matthew Kahn, professor of Economics at the University of Southern California and an expert in climate change, told EL MUNDO that “the insurance industry itself could mitigate the crisis by lowering the prices of policies in areas of the country where the risk is much lower”, aware that “we are facing the challenge of climate change and we must adapt”.
Kahn proposes creating “climate maps” that mark risk areas and help insurers more precisely to evaluate coverage. However, much of the damage has already been done.. Devastating fires in recent seasons in various parts of California have skyrocketed policy prices, forcing some firms to deny coverage in certain regions of the state. They are billions of dollars in losses that they have had to absorb.
In 2020 alone, in the midst of a pandemic, there were more than 8,000 fires that destroyed more than 18,000 square kilometers of land, twice the size of the province of Lugo. In 2017, the infamous Thomas hit Santa Barbara and surrounding areas, killing 23 people and destroying 1,063 structures, to name one.. The list of similar catastrophes in the last decade is endless.
Hurricanes and tornadoes in other states
But it's not just a matter of fires. Experts blame climate change for storms that caused severe flooding in Kentucky last summer and have helped drive up insurance prices. There is talk of an increase of up to 400% compared to the rate of a year ago. The picture is similar in Florida, where hurricane seasons make it increasingly difficult to find a company to insure your properties.
The smoke from the fires in Canada reached US cities such as New York
Some of the large firms in the sector have long since left the State, leaving the field clear for small companies that are finding it increasingly difficult to stay afloat.. The trend that previously made the business sustainable has been broken. If previously the model was based on a bad year of storms followed by several of relative calm to cash in, now the outlook is bleak almost every season.
There are also tornadoes in Kansas or Missouri, where the devastation after their passage is almost absolute.. At the moment 70 people have lost their lives so far this year, three times more than the same period a year ago. Hailstorms have also become recurrent, with records in Texas, Colorado and Alabama in the last three years.. The one that landed in Calgary, Canada, in June 2020, caused damage to more than 70,000 houses and vehicles and destroyed multiple crops.. It lasted 20 minutes.
State Farm itself published the numbers of claims for these kinds of storms nationwide in March, with an increase of 45,000 from 2021 to the beginning of 2023.. The amount allocated to cover these policies exceeded one billion dollars.
To all this equation we must add the increase in housing prices in recent years, especially in the coastal areas of California.. “It's not just the risk of loss but the magnitude of the loss when a house burns down in California,” says Dave Jones, head of the UC Berkeley School of Law Climate Risk Initiative.. “We are moving resolutely toward a future where property cannot be insured, not just in California but throughout the United States.”