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As news continually breaks that some insurers will not write new policies in certain high-risk areas, questions are beginning to swirl about how this will affect homeowners, especially as we move into peak hurricane season, and to what extent this trend of insurers pulling out of markets is due to natural disaster risks.
According to CoreLogic, the geographic concentration of “policies in force” is a major consideration for all property insurers, therefore, states with reoccurring risk exposure like Florida from Hurricanes and California from wildfires present a certain “balancing act” for insurers. While risk profile and concentration are major concerns for insurers, these are not the sole considerations when determining whether to continue writing business in a particular jurisdiction.
The regulatory environment of a particular state also plays a major role in determining whether to offer policies. Adding to the complexity of the regulatory environment in which insurers operate is the continued pressure within the construction labor market. Since the Great Recession of 2006—2010, there has been a persistent reduction in employees entering the construction trades.
So how does climate change affect the insurance industry? When a certain geographic area is repeatedly impacted by natural disasters, a pattern of social, demographic, and economic consequences begin to manifest. While the social and demographic consequences immediately impact those directly experiencing these events, the economic consequences yield unintended impacts on a far greater scale.
CoreLogic continues saying “as geographic regions experience these demand surges for both material and labor, regulatory bodies generally respond by enacting controls on the segments of the business sectors impacted by these catastrophes.”
“Legislative requirements have created a difficult dynamic for insurers with exposure to geographic concentrations of policies that have the potential for repeated catastrophe loss,” said for Jay Thies
In the case of California, perennial wildfires gave the state’s legislature fuel to strengthen building codes in 2008, which has since led to beneficial improvements. These code improvements include requirements for fire-retardant roof coverings, exterior walls and decks.
For insurers, these requirements are viewed as a net positive and implementing these changes reduces the likelihood and severity of loss. Recently, the California Department of Insurance announced the requirement for insurers to offer discounts the property owners who implement loss mitigation measures as outlined in state guidelines.
However, other legislative requirements have created a difficult dynamic for insurers with exposure to geographic concentrations of policies with the potential for repeated catastrophe loss. One of the primary tools that insurers use to buffer their risk is the purchase of reinsurance. In the case of California, regulations do not allow the costs associated with this reinsurance to be passed to policyholders; this is in addition to effectively capping annual rate increase requests.
In conjunction with these unrecoverable costs, insurers also lack the ability to use predictive wildfire modeling in California to assist with underwriting decisions. Under the current regulations, only historical wildfire exposure can be considered in insurance models. A change to allow predictive wildfire modeling in California would allow insurers to anticipate potential risks and make decisions to balance the overall exposure within a particular geographic region.
In summary, if the population growth in catastrophe-prone areas continues, the geographic concentration of risk that insurers will face will only increase. While the supply-and-demand curve for labor resources will attempt to intersect and normalize in these regions, markets facing repeated natural disasters will struggle to bring these economic forces into balance.
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