US insurers/climate change: less reliable models augur poorly for policyholders
Insurers are not averse to hedging complicated risks. The industry has reportedly written policies on everything from Bruce Springsteen’s vocal cords to Heidi Klum’s legs.
But the actuarial science that has worked so well predicting when people might die or crash their cars struggles to model the impact of climate change. An increasing frequency of extreme floods, storms and wildfires means a business model in which a year of heavy payouts tends to be followed by a few quiet years to rebuild reserves is strained.
Insured losses from natural disasters in the US topped $275bn between 2020 to 2022, the most ever for a three-year period, according to the American Property Casualty Insurance Association.
At the same time, inflation and supply chain issues have sharply pushed up the cost of rebuilding. All this has taken a toll on insurers’ earnings. The US property and casualty (P&C) industry recorded a $26.5bn net underwriting loss in 2022, says rating agency AM Best.
Underscoring the growing impact of global warming, the combined ratio for US homeowners’ insurers averaged 104.8 per cent in the five years between 2017 to 2022, meaning payouts and expenses exceeded premiums earned. By contrast, the average for the previous five-year period (2012 to 2016) was 88 per cent.
Having outperformed other financials last year, the S&P Property & Casualty Insurance index is down 7 per cent so far this year. That compares with the S&P 500’s 15 per cent gain. Those with the most exposure to home insurance have suffered more. Shares in Allstate, the country’s second-biggest home insurer by premium volume, have fallen by a fifth. Hartford Financial Services, which writes far fewer home insurance policies, is down just 5 per cent.
Some states limit insurers’ ability to raise premiums. In response, insurers are restricting coverage or pulling out of some areas altogether. In recent months, both State Farm and Allstate have announced plans to stop writing new policies in fire-prone California. American International Group and Chubb have curbed insurance sales to affluent homeowners in high-risk areas. Yet climate change’s unpredictability means insurers will probably continue to ration any insurance risk.
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This story originally appeared on: Financial Times - Author:Faqs of Insurances
