October 24, 2024
Climate Change Impacts Commercial Insurance Rates and Regulations
Recent headlines have highlighted the impact of climate change on homeowners insurance but commercial insurance lines are also experiencing its effects.
Homeowners
Homeowners across the U.S. have experienced substantial increases in insurance premiums. For instance, home insurance premiums rose by 21% between May 2022 and 2023. In high-risk states like Florida, premiums have jumped as much as 35%, making insurance less affordable for many homeowners.
In addition, some major insurers, including State Farm and Allstate, have stopped issuing new homeowners’ policies in California due to the elevated wildfire risks. Other companies are following suit in various high-risk areas, leaving many properties without adequate insurance coverage.
Commercial Insurance
But climate change has also significantly impacted commercial insurance in the United States, leading to increased costs and changes in the way insurers manage risk.
- Rising Insurance Costs: Due to the increased frequency and severity of extreme weather events, insurance costs for commercial real estate have escalated dramatically. For example, in states with high exposure to natural hazards, insurance costs have risen by 31% year over year and 108% over the past five years. This trend is expected to continue, with a projected cost premium increase of 24% above the national average by 2030 for high-risk states.
- Insurers Exiting High-Risk Markets: The added risk from extreme weather events has caused some insurers to reduce coverage or completely withdraw from certain states. This has left many commercial properties struggling to find affordable insurance options, increasing their vulnerability to climate-related losses.
- Increased Premiums and Financial Strain: Insurers are raising premiums to build reserves leading to a difficult balance where premiums might become unaffordable for many businesses.
NAIC
Insurers are adopting various strategies to mitigate climate risk, including enhanced risk assessments, the use of predictive analytics, and the development of new insurance models tailored to specific climate risks. Regulators are also becoming more involved, with increased focus on insurers’ preparedness and stress testing to ensure financial stability in the face of escalating climate risks.
Thus, the National Association of Insurance Commissioners (NAIC) has implemented several measures to help insurance companies manage the impact of climate change. Currently, 14 states and the District of Columbia require insurers to report their climate-related risks to the NAIC Task Force on Climate-Related Financial Disclosures (TCFD), covering about 80% of the U.S. market. It is fair to say that as climate change causes more losses for insurance companies, we can expect increased scrutiny on insurance transactions from legislators and insurance regulators.
Lawmakers, too, are increasingly recognizing the financial implications of climate change on the insurance industry. This is likely to drive legislative efforts aimed at enhancing consumer protection, promoting resilience, and ensuring that insurance markets remain stable and competitive in the face of climate risks
According to a recent report from Deloitte, “It’s likely that regulators will at some point start requiring more of insurers in the way of disclosure and its components and assumptions—including stress tests of a wide range of plausible climate-change scenarios and a determination of how climate data is used in risk modeling for pricing and underwriting decisions.”