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Friday, September 29, 2023
Sept. 29, 2023

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For companies that insure U.S. homes, ‘the risk is unprecedented’

Climate change has led some to curb sales of policies


A season that has already seen water crises and wildfire smoke is rapidly becoming an inflection point in the pitched battle between climate change and the price of homeowners’ insurance in the U.S.

American International Group Inc., which has already pulled back from new California business, is now set to curb home-insurance sales for affluent customers in around 200 ZIP codes across the U.S. The decision was first reported in the Wall Street Journal on Thursday, citing people familiar with the company’s plans.

AIG’s decision comes on the heels of both State Farm and Allstate Insurance Co. announcing plans in recent weeks to stop writing new policies in fire-prone California. In Florida, meanwhile, the past 13 months have seen seven of 47 local property insurance businesses go under; another 24 are now on a regulatory watch list.

But the AIG move stands out, because of both the broadness of its reach — touching states that are not normally considered in the high-risk pool — and what that breadth says about the years to come. A warming world means rising waters, stronger storms, more wildfires, and more places experiencing extreme weather and natural disasters. Anyone in a high-risk area, whether the woods of New Jersey or the floodplains of Illinois, could see their access to insurance affected.

Insurance experts say the industry’s reaction tracks. Natural-disaster losses from 2020 to 2022 in the U.S. caused a record $275 billion in insured damages, according to the American Property and Casualty Insurance Association. Those figures, combined with the impact of high inflation on replacement costs, have insurers scrutinizing vulnerabilities beyond traditional regions of risk.

“The risk is unprecedented, and the peak risks, which are what cause insurance companies to worry about insolvency, are the ones having the most change with climate,” said Nancy Watkins, a principal at Milliman Inc., an insurance consulting firm. “What we should expect to see is more of these pockets of insurance unavailability, where the market contracts.”

At the core of the problem is a disconnect between the rising perils of climate change, how those perils are assessed by insurance companies and how much customers are willing to pay to protect against them.

Traditionally, insurers have looked backward to predict risk, and some states even limit the degree to which insurance companies can rely on predictive computer modeling. But as escalating catastrophes take a toll on bottom lines, insurers are getting better at looking forward — and the results aren’t pretty. Insurance rates are rising nationally, although unevenly.