U.S. Insurance: First In The Climate Crisis Line Of Fire

At the end of last year, I spoke to clients at our annual Responsible Investment Conference. I began my talk by highlighting the fact that the US insurance industry was increasingly at the front line of the climate crisis, with companies backing away from states where climate-related catastrophe risk was becoming more and more difficult to model and quantify. A number of clients followed up with me on this specific topic and I thought it was worth going into a little more detail here.

This very tangible example of the impact of climate change on risk and economic growth is something I’ve discussed on a number of occasions with Matt Goldklang, one of our climate scientists and a source of great insight and perspective on the intersection of climate science and investment. Matt and his colleagues in Man’s RI team have been doing some amazing work on decarbonization with Columbia University – I’ll share some of the key findings in a future edition of this column. For now, I wanted to focus on some important observations around climate risk and insurance.

There’s a slowly and quietly unfolding crisis in the US insurance market as the industry struggles to find ways of pricing in climate-associated risks, particularly the heightened threat of wildfires, flooding and storm damage. Matt pointed me towards the map below, which shows the spiraling cost of insurance in wildfire-hit California. It’s important to note that both costs (+97%) and the number of structures destroyed (+215%) in wildfire events in the state have been rising precipitously, even though the total area burned has increased at a slower rate (+48%).

The problem is that insurers’ catastrophe models simply haven’t been able to keep pace with rapidly-escalating climate-related risks. There has been a surge in the number of new data providers who are using AI to try and bridge the gap between outdated models and the new reality – NVIDIA, Google and IBM have all launched products in this space. For the moment, though, insurers have recognized that they are unable to capture the changing shape of tail risk and have stepped back from the market. In California, for instance, non-renewals – where the insurer refuses to renew insurance for a property – stand at more than 20%. In Florida, the state is now the largest insurer, with Farmers Insurance Group the latest in a long line of underwriters no longer offering coverage in the state. Citizens Property Insurance Corp., the state insurer, saw policies increase by 168% between 2016 and 2023 to over 1.3 million.

All of this has a meaningful impact on the US economy. Those who are able to secure insurance may find it prohibitively expensive, while the average US homeowner who receives an insurance non-renewal notice automatically loses a double-digit percentage of the home’s value. The map below, taken from this excellent report by First Street, shows the concentration of the more than 39 million homes which, if their market values were adjusted to reflect the true cost of insurance, would reveal a $236bn climate black hole in the US property market.

What strikes me as important about this analysis is that, at the moment, most of the financial services industry still has a choice as to whether and to what extent to engage with the climate crisis. When it comes to insurers and catastrophe risk, that choice is no longer there. Eventually, we will all be in this situation, with the slow unravelling of the US insurance industry a bleak warning of what will come for those who fail to prepare.