Climate Change & EPA Policy Driving Rates Higher
Climate change continues to push insurance rates up through more intense natural disasters. A new analysis argues that recent EPA rollbacks could worsen the situation by increasing health and recovery costs, putting further pressure on underwriters to re-price risk.
In 2023, severe thunderstorms and other natural catastrophes resulted in insured losses surpassing $100 billion for the fourth consecutive year. Severe convective storms, including thunderstorms with hail and tornadoes, were the primary driver, causing an unprecedented $60 billion in insured losses. This marks a significant increase from the previous 5-year average of $32 billion for such events. The sheer frequency of smaller-scale events is compounding the financial impact for insurers. In 2023, the U.S. alone experienced 18 separate weather events that each caused insured losses of $1 billion or more. This trend of high-frequency, lower-severity events is creating a sustained strain on insurer profitability. Florida remains the most expensive state for homeowner's insurance, with rates up to four times the national average. Between 2020 and 2023, the average premium in Florida increased by $1,450. States like Louisiana are also experiencing sharp increases, with a projected 23% hike in 2024. In response to rising risks, FEMA has updated its flood insurance pricing methodology with Risk Rating 2.0. This new system aims to align premiums more closely with a property's individual flood risk by considering factors like distance to a water source and rebuilding costs, rather than just relying on outdated flood maps. While aiming for more equitable pricing, Risk Rating 2.0 is expected to increase the cost of flood insurance for approximately 77% of existing policyholders. Projections indicate that 66% of these policyholders could see their annual premiums rise by up to $120, while 11% may face increases between $120 and $240. Insurers are increasingly turning to advanced climate risk modeling to better forecast potential financial impacts. These forward-looking models simulate various climate scenarios—such as wildfires, floods, and wind events—to quantify potential losses and inform underwriting and pricing decisions. Regulatory changes at the EPA that alter how the health benefits of clean air rules are calculated could further impact the insurance landscape. By no longer monetizing the health benefits associated with reduced air pollution, the real-world costs of increased illnesses and recovery, which can translate to higher claims, may be underestimated in policy decisions. This shift in EPA methodology means that the economic analyses of new regulations will focus more heavily on compliance costs for industries, potentially downplaying the significant healthcare savings and avoided losses that result from cleaner air. For insurers, this could mean a future with less regulatory support for measures that mitigate health risks and associated claims.
