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Climate Change And The Insurance Market: What Are Next Steps

By February 23, 2024No Comments

Climate change-related natural disasters are producing more frequent and severe water, rainfall, and flood losses. Last year, the United States experienced 28 distinct weather and climate disasters costing at least $1 billion. That number puts 2023 in first place for the highest number of billion-dollar disasters in a calendar year.

Such weather extremes are leading to more claims for home, auto, and other insured repairs. The increased claims are one factor in rising premiums, along with inflation and rising litigation costs. Minnesota homeowners’ insurance premiums have soared by nearly 400% in the last two decades as destructive weather events become more common. Moreover, several elements are converging that make adequate home insurance harder to get.

“Insurers are paying out significantly more in losses there than they’re collecting in premiums across the country,” said Aaron Cocking, president and CEO of the Insurance Federation of MN, at a recent meeting about climate change. “But especially here in Minnesota, much of the biggest losses are being driven by changing weather.”

Minnesota lawmakers have taken steps to deal with the issue that’s permeating the insurance industry. In 2022, Minnesota state leaders took action toward expanding climate strategy by releasing Minnesota’s Climate Action Framework, a comprehensive game plan for how the state can mitigate and adapt to a changing climate. The framework has six core areas of action: transportation, natural and working lands, energy and efficiency, community resilience, health, and the broader economy.

In 2023, Minnesota lawmakers established a program that set aside $1 million for homeowners to upgrade their roofs to make them more weather resistant. In February, the lawmakers met again to discuss the impact of climate change and costs to insurance companies and their clients. They focused on how the hard market impacts consumers and the independent agent’s role in helping consumers weather the storm.

The end of the hearing featured a bill that would provide more consumer protections when natural disasters hit. It seeks to prevent big price spikes when “storm chasers” respond to property damage from weather events, downed limbs, or flooded buildings. The bill, which makes just a few lines of changes to an excessive price prevention law, heads to the full House next.

The insurance industry has a unique role in addressing climate change by making society and the economy more climate resilient. Insurers can develop innovative insurance products that incentivize climate-related risk prevention, for instance, by offering lower premiums to policyholders implementing climate-related adaptation measures. Such measures—like anti-flood doors or early warning systems—can reduce the policyholder’s physical risk exposures and insured losses. Adaptation measures can, therefore, be a key tool to maintain the future supply of insurance products with coverage against climate-related hazards and help reduce the climate-related insurance protection gap.

While these challenges appear unique, the insurance industry has experienced a long history of successfully addressing different crises. Rest assured that your Nesbit Agencies team is taking a hard look at these factors to help you make better decisions around your needs. If you have any questions, do not hesitate to reach out to us.