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Two Steps Forward

The coming business insurance apocalypse

Homeowners’ insurance is the latest climate casualty. Could business coverage be next?

Silhouette of two fire fighters tackling a raging fire

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Last week, my wife and I were notified that Kemper, with which we’ve had a homeowner’s insurance policy for well over a decade, will soon stop insuring our home due to increased wildfire risk in the area around our Oakland, California, neighborhood.

Keep in mind that there hasn’t been a wildfire in Oakland since 1991, and that one was several miles away.

Kemper’s note wasn’t a total surprise. Over the past month, a succession of insurers have announced they’ll no longer sell insurance in California, including Allstate and State Farm, the state’s largest home insurer, both citing increased wildfire risk. At the same time, State Farm has asked state regulators to approve rate increases for current policyholders by an average of 28.1 percent.

It’s not just California. Farmers Insurance Group and American International Group last week said they are halting home policy sales in Florida — two of the 16 property insurers that have pulled out of the state over the past 18 months. As in California, insurers in the Sunshine State cited increased losses from natural disasters.

Rising climate-stoked calamities are leading insurers to rethink, restrict or renege coverage.

Fire coverage isn’t the only hot topic for policyholders. Rising losses from floods, hurricanes, heat waves, droughts and other climate-stoked calamities are leading insurers to rethink, restrict or renege coverage in other U.S. states.

Climate isn’t solely to blame, of course. Inflation has driven up the cost of materials and labor to repair or rebuild damaged homes. Rising interest rates have increased the cost of borrowing for insurance companies and the reinsurers that backstop them. And homebuyers keep pouring into areas susceptible to natural disasters, such as floodplains, coastal areas and forested regions known as the wildlife-human interface.

Still, "Climate change is one of the main drivers behind the home insurance increases consumers saw last year and will continue seeing this year," according to the “2023 Insuring the American Homeowner” report by Insurify, an insurance provider. “Climate shocks are making parts of America uninsurable,” the New York Times recently reported.

For homeowners and renters, a climate-borne insurance apocalypse is arriving. And as insurers increasingly drop coverage, it’s unclear who, exactly, will step in. State insurance pools are one option — Florida’s Citizens Property Insurance is one such so-called insurer of last resort, available to residents unable to secure policies elsewhere. Earlier this year, Colorado’s legislature voted to create a public insurer to serve as a last resort in that state.

But last-resort insurers have limits, too: Florida’s state insurer last week applied for a double-digit rate increase to cover growing losses, affecting more than a million homeowners. One state policyholder, a disabled veteran, was notified that his annual premium would jump from about $2,800 to more than $15,000, a West Palm Beach TV station reported. Overall, Florida’s home insurance rates are up about 57 percent since 2015, by far the biggest rise of any state.

Other states are facing their own crises. As the New York Times reported: "In parts of eastern Kentucky ravaged by storms last summer, the price of flood insurance is set to quadruple. In Louisiana, the top insurance official says the market is in crisis and is offering millions of dollars in subsidies to try to draw insurers to the state."

Clearly, this is unsustainable. And the ravages of a changing climate are only now letting themselves be known. Consider a new study by the nonprofit Climate Central, which assessed the past 50 years for what it called "fire weather" — days with an incendiary mix of high heat, low humidity and strong winds. It found wildfire seasons are getting longer and more intense, especially in the U.S. West, although parts of the East have also seen increases. It noted that California, Oregon, Texas and Washington are experiencing fire weather more than twice as often now than in the early 1970s.

Getting down to business

How will all this affect business coverage? In California, Allstate announced last year it would pause new commercial insurance policies in the state. Last week, Nationwide announced plans to re-examine its commercial portfolio, citing "catastrophic weather events" as one reason. Commercial rates in Florida are expected to go up as much as 50 percent, and a doubling of premiums isn’t out of the question, according to a new Yardi Matrix report.

Commercial customers in most states have largely been spared the pain homeowners are facing, perhaps because companies are better able to absorb steep increases. But there are limits to how much financial pain companies can withstand.

There may be implications for companies even if business coverage remains available and affordable.

And there may be implications for companies even if business coverage remains available and affordable. Those rising (or canceled) homeowner policies may belong to your employees or customers, and the ensuing disruption could have a ripple effect on their lives and livelihoods.

Moreover, climate change has hit states’ workers compensation systems as more severe weather patterns, wildfires and other incidents have resulted in lost worker hours and is having detrimental effects on mental health, according to the trade publication Business Insurance. After a disaster, it explained, "employers must manage recovery efforts that are outside their usual operations, and employees can face more hazardous environments at work and home."

It's not all bad news for insurers. Indeed, the industry is ramping up products to help commercial customers mitigate climate risks. Earlier this year, for example, Zurich Resilience Solutions, the commercial risk advisory and services unit of Zurich Insurance Group, partnered with carbon project developer South Pole to launch a new climate-related offering to companies. According to Insurance Business, it will focus on measuring physical climate risk and emissions, helping corporate customers "establish a strategy to reduce each." Meanwhile, Chubb announced the launch of a new Global Climate Business Unit focused on alternative and renewable energy, climate tech, agribusiness and risk engineering services.

Never, ever let a good crisis go to waste.

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