DISASTER INSURANCEWith Climate Impacts Growing, Insurance Companies Face Big Challenges
The impacts of climate change are all around us: sea level rise, severe heat waves, drought, extreme rainfall, more powerful storms. These impacts are making natural disasters more intense and more frequent. Losses from each disaster—drought and wildfires in the southwest, severe storms in the Midwest, flooding in Kentucky and Missouri, and hurricanes in the southeast—have exceeded $1 billion, with the cumulative cost of disasters over the last five years reaching $788.4 billion.
The impacts of climate change are all around us: sea level rise, severe heat waves, drought, extreme rainfall, more powerful storms. These impacts are making natural disasters more intense and more frequent. Between 1980 and 2021, the U.S. suffered 7 or 8 natural disasters per year, on average, but so far in 2022 there have already been 15. Losses from each disaster—drought and wildfires in the southwest, severe storms in the Midwest, flooding in Kentucky and Missouri, and hurricanes in the southeast—have exceeded $1 billion, with the cumulative cost of disasters over the last five years reaching $788.4 billion.
As natural disasters become more frequent and more costly, insurance companies are facing big challenges — and when insurance companies struggle to survive, there are implications for the real estate market and the entire economy. If insurers are to weather the storms ahead, they’ll need to make some changes.
Why Disaster Costs Are Rising
Natural disasters are becoming more expensive not only because climate change is intensifying them, but also because of human factors. One of them is that more and more people have been moving into areas with higher risks of climate impacts. Redfin, a real estate company, found that from 2016 to 2020, more people moved to high risk areas such as Florida, Texas, Arizona and Nevada, than to low risk areas, drawn by cheaper housing, jobs, and warm weather. The populations of Florida, Georgia, South Carolina, North Carolina, and Tennessee are growing faster than the national average.
In addition, developers continue to build in areas with wildfire and flood risk. From 1990 to 2010, the number of houses in the wildland-urban interface—the area close to forests and thus at risk for wildfires—grew 46 percent. Redfin reported that demand for these homes has grown with the pandemic and the increase in remote work. Not only is vegetation more likely to burn in these areas, but the presence of many people means fires are more likely to start by accident. First Street Foundation, a nonprofit researching climate risk, found that 10 million properties across the U.S. face major and extreme wildfire risk.
