A Storm Is Brewing
Last Tuesday, Hurricane Beryl made landfall on Grenada’s Carriacou Island in the Caribbean as a Category 5 storm. This event marks the earliest recorded Category 5 hurricane to develop in the Atlantic, signaling a very early start to the hurricane season. The abnormally warm waters of the Atlantic this year facilitated Beryl’s development and have led meteorologists to predict an ominous hurricane season ahead.
As ocean surface temperatures rise, we can expect to see a longer hurricane season and an increase in the number of storms. The intensification of the Atlantic hurricane season poses severe challenges to the insurance market, especially for Americans living along the coast. Between 2020 and 2022, NOAA recorded 60 weather and climate disasters in the US with losses exceeding $1 billion each. There were $93.1 billion in losses due to disasters in 2023 alone.
With the increase in frequency and severity of storms, the risk of property damage increases, leading to a surge in insurance claims. This surge is putting significant financial pressure on insurance companies and negatively impacting policyholders, particularly in California, Louisiana and Florida.
States are responsible for regulating their own insurance markets to limit situations in which insurance companies raise rates unreasonably and exploit vulnerabilities in the market. However, some of these regulations have prevented insurers from setting rates that appropriately reflect the risk, leading them to withdraw or limit coverage in high-risk areas. Since 2017, eleven property and casualty insurance companies that offered homeowners policies in Florida have liquidated. Other insurance companies are leaving the state entirely or refusing to renew policies. With fewer insurance companies to choose from, homeowners are seeing steep increases in premiums, if they can get insurance at all.
As insurance companies begin to price climate change risk into homeowners policies, coastal communities face broader economic and social challenges. High insurance costs and limited availability can hinder economic development with potential investors deterred by the high risk. Disparities in insurance affordability and availability can also exacerbate existing inequalities. Lower-income households, already vulnerable to economic shocks, are disproportionately affected not just by rising premiums costs but also by the danger of losing home equity as valuations decrease. Since banks require borrowers to have homeowners’ insurance as a condition of the mortgage, it will be harder for homeowners to sell their properties in areas where insurance coverage is limited. Lower property values are also detrimental to municipalities that rely on property tax revenue.
While all Americans are hoping for a slow storm season this year, there is little doubt that increased warming has intensified the Atlantic hurricane season. The financial implications for the insurance and reinsurance markets are significant, leading to higher premiums, stricter underwriting criteria, and the need for alternative risk transfer mechanisms. The broader economic and social implications underscore the urgency of addressing climate change and implementing strategies to mitigate its impact on vulnerable communities. Coastal homeowners, insurers, and policymakers must work together to navigate these challenges and build resilience against the growing threat of intensified hurricane seasons.
Meghan Pearson