From massive wildfires to turbocharged hurricanes, disasters linked to climate change are racking up billions of dollars in damage across large swaths of the country, and insurance companies are struggling to keep up.
State Farm, the largest property insurer in California, announced on Friday that it would no longer write new policies for homeowners or businesses in the state due to the high wildfire risk, writes Thomas Frank.
The stunning decision is largely due to laws and policies in California that limit the ability of insurance companies to raise rates, industry officials say. Although State Farm has huge financial reserves, the company decided that the increase in wildfires — combined with the inability to increase premiums to profitable levels — was too risky for its shareholders, Tom told Power Switch.
Michael Wara, a climate and energy policy expert at Stanford University, told Tom that State Farm’s decision to shrink “in the most valuable real estate market in the country” could threaten the broader economic picture in California, compelling other insurers in the state to take similar action.
It’s not just California. Across the country, in states like Louisiana, Colorado, Florida and Texas, property insurance systems are collapsing under the weight of climate change — even without statewide limits on rate increases.
“Property insurers have insufficient financial capacity to pay claims,” Tom told Power Switch. “In the Gulf Coast, a dozen insurers have become insolvent in the past year because they couldn’t pay all of their claims.”
Hotter temperatures are creating drier, highly combustible conditions, fueling an increase in wildfires. And sea-level rise and increased wind and rainfall are fueling more destructive hurricanes and flooding.
Compounding the issue is an increase in populations in vulnerable areas like the Atlantic and Gulf coasts and areas in the West where people are building homes in once-pristine forested areas, Tom said.
It’s unlikely that a policyholder would be denied a claims payment because their insurer is broke, Tom said. States have developed backup systems to pay claims in the case of emergencies.
But costs are increasing, and those systems will continue to be tested as the rate and intensity of climate-fueled disasters grow.
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