CLIMATEWIRE | The devastation caused by Hurricanes Helene and Milton has sharpened concerns about the financial stability of state-run insurance plans and the escalating climate risks they are taking on.
Increasingly intense hurricanes, wildfires and other climate disasters have forced these so-called insurers of last resort into a role typically assumed by the private sector as the primary insurer within their borders. This has left these backstop insurers holding more risky policies for property in vulnerable locations.
And lawmakers and finance experts fear these state programs might not be able to carry that burden for much longer, looking toward the federal government to step in to deal with the rising costs of these disasters.
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"There is a sense that there might need to be some broader response here than just state-level programs," said Thomas Zemetis, a director and analytical lead at S&P Global Ratings with expertise in public finance. "It seems that some of that is coming forth in the federal view and the lens to say, 'Do we need something that's more broadly supportive as these risks continue to rise and there's the increased exits or reduction in policy coverage at an affordable level?'"
Conceived as a fallback to ensure homeowners can maintain insurance needed to secure mortgages, these insurers offer subsidized policies when private insurance is unavailable. But they are now operating in ways they never anticipated as increasing climate risks shrink private insurance options and boost premiums across the country.
“I’m pretty skeptical of the longer-term willingness of states to continue to shoulder the burden,” said Benjamin Keys, a real estate and finance professor at the University of Pennsylvania’s Wharton School.
If state-run programs continue to be the only option for some homeowners in climate-distressed areas, the financial pressures will likely continue to grow, raising fears that they will ultimately have to turn to federal taxpayers for help.
In Florida, Hurricane Milton’s damage could have a major impact on the state’s insurance market. Milton made landfall near Sarasota as a Category 3 storm, but the state may have avoided the worst-case scenario of a landfall in the vulnerable Tampa Bay region, the nation’s 17th most populous metro region.
Citizens Property Insurance, the Florida state-backed insurer, has said it can cover losses from Helene and Milton through its reserve and catastrophe fund. It could also raise rates for all Florida policyholders, whether for property or otherwise, to plug the gap — even if they live nowhere near the disaster zone.
Citizens is the largest insurance provider in the state at 1.3 million policies. Republican Gov. Ron DeSantis has previously warned it is not solvent, though Citizens’ CEO has pushed back on that claim. Those statements sparked an investigation by the Senate Budget Committee earlier this year to explore how a destructive event in Florida could ripple across the country if Citizens cannot cover its losses.
“Climate change is driving insurance premiums higher across the country, and nowhere more so than in Florida, which is in the throes of a full-blown insurance crisis,” Senate Budget Committee Chair Sheldon Whitehouse said in a statement on Wednesday. “Citizens, Florida’s state-backed insurer of last resort, has ballooned in recent years and is potentially one catastrophic storm or storm season away from insolvency, raising the prospect of a request for a federal bailout.”
Analysts are still closely monitoring the state-backed insurer’s financial position.
“Citizens Property Insurance Corporation has been making concerted efforts to depopulate its book,” AM Best, an insurance rating agency, said in a note Wednesday. “However, any cutback in capacity among other insurers will only add to the number of property owners covered by Citizens.”
The private sector’s flight from Florida, due to a combination of litigation and flood- and wind-risk from hurricanes and climate change, thrust Citizens into a greater role to stabilize insurance markets, property values and homeownership. But similar trends are playing out in California, Louisiana and now Texas and North Carolina, all of which operate state insurance plans, said Ishita Sen, an assistant professor of business administration at Harvard Business School.
“Florida is 20 years ahead of other states” in terms of climate risks to insurance, Sen said. “How much Citizens can withstand a shock will tell us a lot about how the states can act as a backstop.”
While Florida’s plan is truly backed by the state, meaning the state itself is ultimately on the hook for covering losses, other state-run insurance plans in California, Louisiana, Texas and North Carolina operate differently. Those programs require the private companies that write policies elsewhere in the state to collectively cover losses for homeowners who could not find affordable private insurance.
But if private firms want to avoid paying out the riskier policies that form that pool, they can elect to leave the state entirely, which would in turn raise the costs on the private companies that remain in the state-run plans.
The warning signs for other state-backed insurance programs are growing. The head of California’s insurer of last resort raised alarms earlier this year that its model is becoming infeasible, which has put pressure on the state to allow private companies to more easily recoup losses.
California Insurance Commissioner Ricardo Lara is implementing a climate resilience strategy that state insurance commissioners agreed to in March, said Michael Soller, deputy insurance commissioner and spokesperson. Recent actions would require its state plan to pay from reserves, reinsurance and other sources to prevent people from paying the full costs from an event that exhausts its existing funds, he said.
"Commissioner Lara’s strategy will lead to increased writing of policies in wildfire-distressed areas," Soller said.
In North Carolina, insurers on Monday argued for an average 42 percent rate hike in a hearing before the state insurance commission, noting Helene and other storms have ballooned losses.
“Whether you want to call it climate change or not, there is no denying that we are having bigger, stronger, and more costly catastrophic storms than we have seen in any of our lifetimes,” Mickey Spivey, attorney for insurance industry group North Carolina Rate Bureau, said in the hearing.
Insurer decisions to reject coverage renewals for California homeowners in its most wildfire-affected regions spiked 800 percent between 2015 and 2021, according to research by climate risk firm First Street Foundation. Louisiana’s state plan has adjusted to the growing riskiness of its books by hitting thousands of policyholders in 2022 with an average 63 percent premium hike to account for losses.
It’s those types of figures that have the Senate Budget Committee and experts like Keys worrying the state-backed systems are becoming unsustainable.
“It is a new and unprecedented burden,” he said. “State lawmakers would much prefer to have this burden passed on to every taxpayer in the country rather than their own citizens.”
Federal lawmakers from these states have already begun looking for Congress to create an off-ramp for their state insurance backstops, though with little traction.
Rep. Jared Moskowitz (D-Fla.) floated legislation in May 2023 that would require the federal government to issue cheap bonds to cover the gap in insurance premiums for homeowners after a hurricane. It would essentially subsidize homeowner insurance in places where premiums are skyrocketing and availability is shrinking due to climate risk.
Rep. Adam Schiff (D-Calif.), introduced a bill in January that would create a federal reinsurance program to offer government-backed coverage to people who cannot find insurance in the nation’s riskier areas, such as the wildfire-prone regions that dot the Golden State.
“While the Congressman’s work primarily focuses on the federal level, California’s FAIR plan wasn’t designed to be a first resort,” Schiff spokesperson Marisol Samayoa said in a statement. “The fact that it has become the only option for so many Californians highlights the failure of the insurance market to provide affordable coverage, prioritizing profits over people by pulling out of entire states. Insurance companies have long profited from the climate crisis while continuing to support fossil fuel projects. As a result, state plans like the FAIR plan have become the only option for many families, putting an undue strain on state resources.”
Reprinted from E&E News with permission from POLITICO, LLC. Copyright 2024. E&E News provides essential news for energy and environment professionals.