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Feds: Does Climate Change Affect Insurance Costs?

The Federal Insurance Office wants details about climate change’s impact on insurance costs and availability, though industry and state regulators object.

WASHINGTON – The Biden administration wants to collect detailed information from insurance companies to analyze how climate change is affecting the cost and availability of property coverage.

The study would be undertaken by the Federal Insurance Office (FIO), an arm of the U.S. Treasury Department established under the 2010 Dodd-Frank financial overhaul, to monitor the insurance industry. The goal, supported by numerous environmental and consumer groups, is to assess the impact of climate-related exposures on the availability, affordability and sustainability of insurance in areas considered highly exposed to climate-driven weather events.

“The proposal represents a critical step toward supplying FIO with consistent, granular, and comparable insurance data needed to help assess the potential for major disruptions of private insurance coverage in regions of the country that are particularly vulnerable to the impacts of climate change,” states an October release. “The proposed data collection would also help FIO’s work to assess both the availability of insurance for millions of Americans as well as the affordability of such insurance.”

But the insurance industry and state regulators are pushing back against the idea.

In a sharply worded letter, the National Association of Insurance Commissioners – which represents state insurance regulators – asked the FIO to “reconsider its ill-advised approach.”

“It is unclear how FIO will use the data they intend to collect, and it is likely that any analysis will be misinterpreted and produce fallacious results in trying to identify climate risk,” states the association’s Nov. 22 letter.

Jason Tyson, spokesperson with the N.C. Department of Insurance, said the agency was aware of and reviewing the federal government’s request.

Ready to deal with catastrophes?

One of state regulators’ biggest pushbacks against the federal government’s data request is that managing insurance has historically been something handled at the state level.

But Don Hornstein, an administrative and insurance law expert with the University of North Carolina School of Law, said the federal government is increasingly getting involved in rebuilding communities in the wake of disasters due to their massive scope and impacts. That includes everything from covering losses in the underfunded National Flood Insurance Program, which annually hemorrhages money, to post-disaster grants and loans by the Federal Emergency Management Agency (FEMA) – programs that are largely meant to supplement, not replace, private insurance.

Hurricane fallout

“The federal government has every reason to get a sense of how and if insurance markets are up to the task of dealing with catastrophes,” Hornstein said.

According to the National Oceanic and Atmospheric Administration (NOAA), there were 18 weather and climate disaster events in 2022 with losses exceeding $1 billion each to affect the United States. These events included one drought event, one flooding event, 11 severe storm events, three tropical cyclone events, one wildfire event, and one winter storm event.

Damage from these events was estimated at $165 billion, with insurers having to pony up for a lot of those losses. That compares to an annual average of $57.6 billion for the years 1980-2022.

The most expensive by far was September’s Hurricane Ian, which devastated portions of southwest Florida, with damages estimated at roughly $100 billion, about $60 billion of that insured, and left the Sunshine State’s insurance market in shambles.

But how to price risk in disaster-prone areas adequately, and all the political, economic, development, and local land-use ramifications that involves, is a very delicate balancing act.

Which brings us back to insurance rates, and who should get to set them– or at least advise industry and regulators on whether current rates are up to the task, and insurance companies equipped with enough capital, if a big disaster does hit.

“Part of the fear among carriers and the states is that the federal government could come back and say the rates are inadequate and need to go up,” Hornstein said, noting that in many states – including North Carolina – that’s done by negotiations among state regulators and the insurance industry.

Stormy future

Local officials also could fear what a government report could mean for property prices and local real estate markets – especially since many beach towns rely on property taxes for the vast majority of their tax revenue. And with state and local officials having to face voters every few years, surging insurance rates can be a politically dicey proposition for those in power.

Joe Stewart is the government affairs analyst with the Independent Insurance Agents of North Carolina. He said anything that can be done to fully calculate the potential cost in increased damages and losses associated with climate events isn’t necessarily a bad idea.

“But the sense that this is coming from the federal government and is associated with climate change makes it a politically charged initiative, and might make people less inclined to be supportive of it,” he said.

But supporters of the government’s data request said ignoring the reality of what’s happening on the ground isn’t an option, especially when it’s becoming increasingly hard for residents in some high-risk areas and in economically marginalized communities to get affordable or in some cases any kind of insurance.

Yevgeny Shrago, policy director with Public Citizen’s Climate Program, said the government’s research will elevate the issue and allow officials and industry to “get a real reckoning of the size of the problem.” He said it will show where rates or limited access to insurance don’t match the risk – even if that risk from climate-driven changes has yet to manifest itself in a weather-related disaster.

“It might not happen tomorrow, but it’s coming,” he said. “There’s no benefit for being ostriches and keeping our heads in the sand when we know it’s coming. We can’t hide from this information. We need to know it.”

Public Citizen, a nonprofit consumer advocacy group, was one of dozens of environmental and consumer groups to come out in favor of Treasury’s data-collection plan. Others included Environmental Defense Fund, National Resources Defense Council (NRDC), Sierra Club and Greenpeace.

Alfonso Pating, climate finance manager with NRDC, joined others in saying it does no one, from residents to the insurance industry, any good to avoid trying to grapple with the situation that is already a growing problem in many areas.

“Data is data,” he said. “It doesn’t lie. And without this data, we can’t create concrete solutions for these problems.”

Joining state regulators with concerns over the government’s plan is the insurance industry. Along with providing potentially misleading information, the groups called the government’s request unnecessarily burdensome.

The Insurance Information Institute, a business association that includes more than 60 insurance companies, says collaborating with the insurance industry and taking advantage of information already available could be a better way to try and get in front of the climate risk issue.

“Rather than a separate undertaking of data collection, which could be duplicative, or even worse misleading, the Triple-I believes that existing publicly available information, combined with working with state regulators, would be a more productive approach,” stated Sean Kevelighan, chief executive officer of the Insurance Information Institute (Triple-I), in comments to the FIO. “What’s more, helping bring risk management more top of mind through improving systems and processes that already fall under existing federal oversight, such as property financing and community development, would be a better use of resources.”

The move by the federal government for information on the viability of some insurance markets comes close on the heels of the aforementioned Hurricane Ian and after several insurance companies have gone belly up, often leaving policyholders in the lurch and states to pick up the pieces, in the wake of extreme weather events.

The government has said it wants to collect information from major national insurance company and from smaller insurers in 10 states most vulnerable to climate disasters, including states on both coasts and those often hit by tornadoes. The states are North Carolina, Texas, Oklahoma, California, Florida, Illinois, Iowa, Louisiana, Missouri and New Jersey.

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