Over the past several weeks, State Farm General Insurance Company, Allstate Insurance Company and American International Group Inc. (AIG) announced major cutbacks on accepting new homeowners insurance applications—all of California in the case of State Farm and Allstate, and in 200 zip codes nationwide, in the case of AIG. All three cited rising catastrophe exposure.
The turmoil in California is a new chapter in growing instability for insurance in climate disaster prone markets.
Wildfires have been at the center of national attention in recent weeks due to both the Canadian wildfire smoke that blanketed the U.S. east coast and insurers’ high-profile exits from wildfire-prone areas and beyond. At the same time, insurance markets may be headed for additional turmoil from hurricane season, which began June 1. Last year, Hurricane Ian alone cost more than $100 billion, as part of $165 billion in losses in 2022. The National Oceanographic and Atmospheric Administration has described a trend of high-cost events as a pattern that hints at the new normal.
But there’s more to this story than climate harms disrupting the math of insurance:
- Insurers are major contributors to the climate crisis, not only by continuing to underwrite and invest in existing fossil fuels, but by supporting the expansion of fossil fuel production.
- As they undermine consumers and their own markets, insurers are creating financial risks that could be passed from consumers and taxpayers to the rest of the economy.
Insurance companies are major contributors to the climate crisis—and therefore the harm to their customers and the chaos in their markets.
Even as they walk away from vulnerable homeowners, insurers continue to underwrite and invest in fossil fuels. Fossil fuel companies cannot operate without insurance, which means insurers are critical gatekeepers of climate chaos. While the International Energy Agency has made clear that there is no room for fossil fuel expansion in credible net-zero by 2050 pathways, U.S. insurers continue to underwrite new fossil fuel projects. The Insure Our Future scorecard shows that U.S. insurers are dragging their feet on phasing out coverage for fossil fuels. Not a single U.S. insurer has ruled out support for oil and gas expansion projects.
The Senate Budget Committee has launched an investigation into seven insurance giants that could highlight this hypocrisy on a national level.
In letters sent to the insurers, the Senators Whitehouse, Sanders, and Wyden asked for disclosure of coverage and investments in fossil fuels and how the companies respect human rights. Insurers typically do not publicly acknowledge which fossil fuel projects they insure, and the investigation could reveal discrepancies between insurers’ stated commitments and their support for fossil fuels.
Public Citizen recently uncovered that AIG, along with several other insurers, is insuring the Freeport LNG terminal in Texas. More than 140 organizations wrote to insurance companies on the anniversary of an explosion at an LNG terminal owned by Freeport LNG, highlighting the hypocrisy of underwriting LNG plants while backing away from homeowners in the area.
Insurers are also major fossil fuel investors. The most recent data published by the California Department of Insurance shows that State Farm alone had $30 billion invested in fossil fuels, and the industry had $582 billion in fossil fuel investments. Public Citizen’s analysis shows that AIG had $24.2 billion and Berkshire Hathaway $20.8 billion. Travelers, Chubb, The Hartford, and Liberty Mutual also had significant investments.
Financial risks passed to consumers could become systemic risks.
Insurers’ decisions to pull back from vulnerable areas belie significant profits they have made at consumers’ expenses. The industry recently hit a record-breaking policyholder surplus of $1 trillion in 2021 and had a similarly high surplus in 2022. Insurers have profited, particularly in California, by raising premiums, which have increased 19% across the country since 2018. Insurers are also offering less for more, by raising deductibles and lowering coverage limits, while carving out coverage for particular damage, sometimes illicitly. While strategies to delay, deny, and low-ball claims are not new, an expanding investigation into potentially fraudulent strategies by Florida insurers suggests insurers could be acting more brazen amidst the crisis.
These trends could quickly harden into a pattern of bluelining, in which companies identify areas at a higher environmental risk and deny financial services in those areas, compounding historical harms of redlining. Communities of color are disproportionately exposed to climate-related disasters like wildfires and flooding, are more likely to pay higher insurance premiums, and face greater obstacles and longer delays from insurance companies to recover claims. But everyone could end up paying as insurers spread the costs of rising climate risk across the country. Testifying before the Senate Budget Committee, the President of the insurance company Aon said the industry was “absolutely” spreading the risk over a broader segment than just the places with the highest claims.
As insurers transfer risks, taxpayers are ultimately on the hook. The combination of a climate crisis and an insurance industry retreat could create an affordability crisis that threatens Americans’ homes, life savings, and the economies of already vulnerable regions. Because climate risks are concentrated in certain regions, rising costs and falling availability could lead to foreclosure crises, threatening the state and local tax bases needed to fund basic mitigation and increasing risks for community and regional banks.
The Treasury Department’s Federal Insurance Office (FIO) has highlighted these risks on a national level. A new report released Tuesday morning from FIO highlights the need for insurance regulators to address increasingly challenging climate-related risks and makes twenty recommendations, noting that state regulators have only taken preliminary steps so far. The report responds to a 2021 Executive Order on Climate-Related Financial Risk, in which the Biden administration instructed FIO to assess issues or gaps in the supervision and regulation of insurers.
The Executive Order also tasked FIO with assessing the potential for major disruptions of private insurance in areas vulnerable to climate impacts. Last October, FIO proposed a plan to collect granular data from insurers on climate impacts for a report, which would be the first systematic nationwide assessment of what the climate crisis is doing to availability and affordability of insurance. On June 7, Maxine Waters, Ranking Member of the House Financial Services Committee sent a letter to the Treasury Department calling for a report on climate impacts on insurance markets.