Climate Exodus: Insurers’ Fleeing High-Risk States

Historically, insurance companies have relied on past data to predict future risks. But the growing unpredictability associated with climate change has thrown this traditional model off balance. As a result, many insurers find themselves confronted with a deluge of claims that puts immense pressure on their financial stability. This has led to an exodus of insurers from states like California and Florida where severe climate-induced disasters are becoming increasingly frequent.

This is also impacting the citizens in these states as even here in our office, we have sold many properties to families relocating from California and Oregon due to the increased frequency of wildfires. Others added that their motivation was high crime and homelessness. While California has been hit hardest by this exodus, states like Florida and the Carolina’s are seeing massive migration to their states as they have favorable weather a majority of the year with relatively low rates of wildfires.

But with the rate of weather-related disasters and increasing temperatures, will these states soon see an exodus as well? This year is predicted to be a particularly intense hurricane season, particularly in the Gulf where some areas are seeing water temps in the 90s.

Banks are not immune to these changing tides either. Financial institutions depend on insurance when providing loans, particularly for mortgages where the property itself serves as collateral. If insurance becomes unattainable, banks deem it too risky to lend against these properties. This reluctance from banks to finance uninsured properties could significantly deflate property values in high-risk regions. Prospective buyers may find it challenging to secure loans, reducing demand and driving down prices. This will only add to the number of people needed to relocate to find homes that are not only affordable but that can be financed and insured.

Climate change poses significant challenges to the insurance industry due to its influence on the frequency, intensity, and unpredictability of extreme weather events. Let’s explore how climate change impacts insurance companies:

1. Increased Claims: More frequent and intense weather events like hurricanes, floods, wildfires, and heatwaves lead to increased claims for property damage. These impacts can strain the financial resources of insurance companies as they pay out more in claims.
2. Uncertainty in Risk Assessment: Insurance companies rely heavily on historical data to predict future risks and set premium prices. However, climate change introduces a high degree of uncertainty, making it difficult to predict future weather patterns based on past data. This can make risk assessment and premium pricing more challenging and less accurate.
3. Geographic Shift in Risk: Climate change alters the geographic distribution of risk. For example, areas previously considered safe from floods or wildfires may now face these risks due to changing weather patterns. This can change the landscape of insurable properties and make certain regions uninsurable due to the high risks.
4. Increased Premiums: To cope with the increased risks and claims, insurance companies may need to increase their premiums. This could make insurance less affordable for many people and result in a higher number of uninsured or underinsured properties.
5. Insurer Solvency: In extreme cases, the increased claims due to climate change could threaten the solvency of insurance companies, particularly if they have not adequately factored climate risks into their pricing and risk management strategies.
6. Regulatory Pressure: Regulators and rating agencies are increasingly requiring insurance companies to factor climate change into their risk models and disclose their exposure to climate-related risks. This can increase the regulatory burden on insurance companies and require them to make changes to their business models.