Extreme Weather Damage is Making Certain US Regions Uninsurable

by Wall Street Rebel - Michael London | 05/31/2023 12:05 PM
Extreme Weather Damage is Making Certain US Regions Uninsurable

As a result of insurance companies withdrawing their services from places that are prone to natural disasters, State Farm will no longer accept applications for commercial or personal property insurance from homeowners in the state of California.


One of the factors that is being pointed to as contributing to the worsening of a insurance financial crisis is the climate change issue.

State Farm, a prominent homeowner insurance provider in California, has announced its decision to cease offering coverage to homeowners. This phenomenon is not restricted to regions with a heightened vulnerability to wildfires but encompasses all areas within the state.

Insurance providers are adopting various measures, including increasing rates, reducing coverage, or completely withdrawing from certain regions in response to financial losses. The actions mentioned above have led to a rise in expenses for homeowners, thereby rendering it more arduous for them to uphold their abodes.

As per Roy Wright, the erstwhile insurance chief at the Federal Emergency Management Agency and incumbent chairperson of the Insurance Institute for Business and Home Safety, a research organization, a cost exists associated with the manifestation of risk. The notion of risk is commonly linked with a corresponding expense. Until now, we have not fully comprehended the matter at hand.

There is projected to be a fourfold increase in flood insurance costs in the eastern Kentucky regions that were severely impacted by storms during the previous summer. Louisiana's main regulatory body overseeing insurance has officially declared a state of crisis within the insurance market. As a corrective action, the state proposes subsidies valued at millions of dollars to encourage insurance companies to establish their operations in the area.

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It was recently stated by State Farm, the most prominent provider of home insurance in California, that the company would stop accepting applications for the vast majority of new insurance plans sold in the state. The increased risk that the company faces as a result of catastrophic disasters is the impetus behind this choice.

The spokesman for State Farm did not respond to the query that was made for a remark and did not explain. The company expressed their gratitude for the state and local authorities in California for their efforts to reduce the damage caused by the wildfires. However, in order to improve the company's financial stability, it was determined that it was essential to stop underwriting new policies.

The effects of climate change led to a considerable increase in the severity of a string of fires that broke out in 2017, many of which were started by faulty pieces of utility infrastructure. The dramatic increase in the severity of wildfires in California has led to a huge rise in the cost of insurance. As a result of insurers choosing not to protect homes that are located in high-risk areas, the insurance coverage for some homeowners has been completely canceled.

Michael Soller, a spokesman for the California Department of Insurance, has said that the department is actively involved in addressing the underlying reasons for the disruption in the insurance business on a national and international scale. The most important of these is the ongoing shift in the climate.

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The challenges currently being experienced by California bear a striking resemblance to those encountered by Florida after the devastating impact of Hurricane Andrew on Miami in 1992. Numerous insurance companies suffered bankruptcy due to the incurred losses, leading to the departure of most national carriers from the state.

As a result, Florida set up a convoluted system that includes a market based on small-scale insurance firms and supported by the Citizens Property Insurance Corporation. This government-mandated program protected homeowners that could not afford private wind insurance..

The Category 4 hurricane that made landfall in the Florida Keys in 2017 and subsequently progressed up the coast did not result in an unusually significant level of damage. The hurricane reached the Florida Keys and made landfall. However, the initial storm in a series, ultimately leading to Hurricane Ian in October of the previous year, rendered the insurance model unreliable and ineffective. A period of elevated claims activity for a duration of one year was succeeded by a subsequent period of several years characterized by minimal or negligible claims, thereby enabling the entity to replenish its reserves.

After the occurrence of Hurricane Irma, a significant number of years have been fraught with calamitous events.

Private insurance companies encountered difficulties in fulfilling claim payments, leading to the closure of multiple entities. As mentioned earlier, individuals who successfully completed the challenge experienced a significant increase in their rates.

As per the statement of Michael Peltier, the official representative of Citizens Insurance, a growing number of individuals have opted to switch from the private insurance market to Citizens. This has resulted in Citizens emerging as the largest insurance provider in the state. Nonetheless, it should be noted that Citizens does not extend coverage to properties that have a replacement cost exceeding $70,000, or $1 million, in Miami-Dade County and the Florida Keys.

Despite facing various challenges, Florida possesses a significant advantage. There is a steady influx of new residents who are capable and willing to bear the elevated expenses associated with residing in the area. The escalating insurance expenses in Louisiana have posed a significant threat to the survival of certain local municipalities.

Following the aftermath of Hurricane Katrina in 2005, the insurance market in Louisiana experienced a similar decline to that of Florida's market after Hurricane Andrew, as insurers started to withdraw from the state. The failure of nine insurance companies resulted in a surge of clients towards the state's recently established Citizens plan, which was designed based on the Florida model. The state subsequently experienced a succession of hurricanes, the initial of which was Hurricane Laura in 2020.

According to a recent interview with James J. Donelon, the Insurance Commissioner of Louisiana, the insurance market in the state is currently experiencing a crisis.

In December, the state of Louisiana was mandated to enforce a 63 percent increase in the yearly premiums for the coverage provided by its Citizens plan, resulting in an average of $4,700. As per Mr. Donelon, the company procured a loan amounting to $500 million from the bond market in March. The purpose of this loan was to fulfill the claims of homeowners who were left without any recourse due to the insolvency of their private insurance. The state government has recently reached an agreement to provide supplementary subsidies to private insurers, effectively compensating these entities for their operations within the state.

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Although residents in coastal areas are already feeling the pinch from rising wind insurance premiums, another financial burden has emerged: flood insurance.

In 1968, Congress created the National Flood Insurance Program to insure properties with federal funds in the event of a flood. The economic concept of "market failure" may be traced back to the inception of the flood program, as it was in California with the wildfires and in Florida with the hurricanes. Since private insurance did not want to pay for flood damage, homeowners had few options.

The program's major goal was met: homeowners now have easy access to flood insurance at a reasonable cost. However, when the storms worsened, the program suffered more casualties.

The program's administrator, the Federal Emergency Management Agency (FEMA), began charging premiums reflective of actual flood risk to houses in 2021. The government took this measure to reduce future financial losses and provide a clearer picture of the actual danger that certain assets face.

These increases, phased in over many years, may add substantial sums in certain cases. Flood insurance for a single-family home in the United States presently costs an average of $888 per year, as reported by the Federal Emergency Management Agency (FEMA). The average cost would increase to $1,808 under the new risk-based pricing structure.

In addition, the effects of climate change might make rates substantially higher than initially estimated by the time current policyholders actually have to pay premiums that reflect that total risk.


                      State Farm no longer accepting property insurance applications in California

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