In the past few years, a record number of hurricanes, tornadoes, and floods have ripped through parts of the United States, costing countless numbers of people their homes and livelihoods, and some even their lives. The resulting property damage has caused unprecedented losses for insurance companies, and it’s changed the way they analyze risk in many regions of the country.
In 2005, Hurricane Katrina cost insurance providers $45 billion dollars. In 2008, Hurricane Ike totaled $28.4 billion in losses. In 2010, the U.S. had more natural disasters in one year than a country has had in over six decades. And the damage from Hurricane Sandy in 2012 has cost over $35 billion so far. All of this adds up to a change in how companies insure both businesses and homeowners.
The Real Effects on Insurance Companies
In the United States, insurance companies are prohibited by law from raising their rates based on any single event. But as evidenced by the damage that has accumulated as a result of natural disasters since Katrina, this is more than one event and presents a growing problem. The increase in wildfires in California, storms in the Midwest, and flooding along the Southern coast, largely blamed on climate change, have bankrupted the cash reserves of some providers. This means that the risk-assessment professionals they employ are looking at how drastically they have to raise the price of premiums for individual policies and overall.
When it comes to insurance for homeowners, some companies are simply refusing to cover certain geographic areas. Insurance companies like to spread their risk out among a variety of locations, but parts of Florida, Louisiana, and Mississippi consistently generate the greatest losses of all. Some consumers in those areas could be paying enormous prices for insurance, if they can find any. Business insurance is a bit more flexible because so many different kinds are offered. While business owners will still invest in liability insurance, other types of insurance, such as business interruption, could become too costly. If the amount of the policy barely exceeds the cost of the premium, it won’t be worthwhile to purchase it, which can spell catastrophe for both customers and insurers.
In the long run, the effects of climate change on Mother Nature may have a a devastating effect on the economy. The challenge for the insurance companies is to become more diligent in assessing claims so they can minimize potential losses. It is legal for them to raise their rates considerably, using past events as a predictor of future ones. If the cost of premiums is too high, both the consumers and the insurers suffer. But if the costs aren’t raised enough, the next natural disaster to sweep through the country could result in losses too big for insurance companies to absorb.
The bottom line is that the changing weather in the United States means a change in the economic climate too. It will take some precarious crunching of numbers to continue to keep everyone’s head above water.
About the Author
A self-professed “weather nut”, Terrence Mast has spent most of his career as an actuary assessing risk for insurance companies. He discusses this and other topics related to his profession in his Guide to the Best Online Actuarial Science Degree Programs.