The Treasury Department’s first-ever attempt to pinpoint where property isn’t insured against climate risk suggests a potential willingness on the government’s part to protect businesses and homeowners from catastrophic losses.
The department’s Federal Insurance Office has proposed requiring big property insurers, who write over $100 million in annual premiums, to submit claim data in every zip code for the last five years.
The proposal, which grew out of President Joe Biden’s May 2021 executive order on climate risk, could ultimately lead to federal or state insurance programs, particularly to support vulnerable communities, attorneys say.
The Treasury is “looking for a remedy for inadequate insurance for the poor and working-class individuals,” especially in high climate risk areas, said Thomas Alleman, co-director of Dykema Gossett’s insurance practice.
One option could be government subsidies for climate-related insurance premiums, they say. Other programs could potentially be modeled on California’s earthquake insurance or the federal terrorism risk backstop.
The request comes as disasters grow more frequent and severe. Insurers are abandoning high-risk markets, going insolvent, and leaving residents and small businesses in places like wildfire-riven California with fewer coverage options.
Last year, natural disaster losses totaled $280 billion, almost 60% of which was uninsured, according to Munich Re, the German multinational insurance company.
State Options
FIO has no power to regulate insurers; that’s up to the states. But it can ask states to act. The 2010-Dodd Frank Act authorized FIO to monitor the industry, including spotting problems that could lead to a broader financial crisis and ensuring underserved consumers can access affordable, non-health insurance.
One option for FIO would be to ask states to follow California’s lead and set up their own insurance funds for specific climate risks, Ben Fliegel, an insurance recovery partner at Reed Smith LLP, said. The nonprofit California Earthquake Authority, established by state law, has more than 1 million policyholders. It’s financed with insurer contributions, policyholder premiums, and investment returns.
FIO could also recommend that states bar insurers from cutting coverage. Earlier this year,
“Insurers don’t want to carry the risks of the economy all on their backs,” Fliegel said. “And policyholders don’t want to fight with carriers for coverage all the time.”
If FIO’s data proposal is finalized—the public has until Dec. 6 to comment—it will have to identify uninsured regions, the extent of uninsured losses, and the potential costs of government backstops before making recommendations.
It’s unclear if its counsel would be welcome by the insurance industry; the office has been criticized in the past for overreach.
FIO has identified 10 states with high climate risks: Texas, California, Florida, Louisiana, North Carolina, New Jersey, Missouri, Illinois, Iowa, and Oklahoma.
Federal Routes
If FIO ends up calling for a federal climate insurance backstop, Congress would have to write or amend a law. That could take years, said Alleman.
Such a backstop could resemble the Treasury’s Terrorism Risk Insurance Program, put in place after the Sept. 11 attacks, said Alexandra Roje, a partner in Lathrop GPM’s insurance recovery practice.
When private insurers stopped offering terrorism risk coverage, and remaining offerings were prohibitively expensive, Congress in 2002 passed a law allowing the federal government to share insurers’ property and casualty losses from terrorist attacks. The program, originally intended to last three years, has been renewed four times.
Another possibility could be voluntary reimbursement for states.
“States could opt into a federal program to provide property and casualty insurance for low income individuals, and they would receive either a federal subsidy or federal payments in return,” said Alleman.
But if the federal government wants to get more involved in insurance regulation, “there’s going to be political resistance” and uncertainty, said Mark Romero, a consultant at insurance service firm Agile Rates. A future Republican administration could drop the FIO proposal, he said.
Jumping Ship
For insurers in high-risk areas, coverage decisions may come down to staying in business.
More insurance insolvencies occurred in the last five years than in any previous period, particularly in Florida, said Dan Ryan, a senior director at insurance credit rating agency AM Best. That includes 13 of the last decade’s 15 weather-related insolvencies.
In California, insurers began cutting home coverage in 2019 due to increasing wildfires. Non-renewals rose 61% that year in high-fire-risk neighborhoods, and 203% in the top 10 fire risk counties, according to the state insurance department.
But Sean Kevelighan, CEO of the Insurance Information Institute, blamed fraudulent claims—people falsely assigning damage to storms—and litigation by property owners for insurers leaving markets or going under.
Florida was home to 79% of homeowner insurance lawsuits but just 9% of US homeowner claims in 2021, according to the institute.
Another Obligation
Although insurers may eventually welcome federal or state climate risk backup, the initial data request may seem like just another obligation.
FIO estimated it would cost up to $4 million for all required insurers to provide the data, and that each insurer would spend 100 to 350 hours preparing it. It said it can subpoena the information if necessary.
Kevelighan said the institute would respond. The American Property Casualty Insurance Association also will respond, though the request is being reviewed for potential technical problems, said Phil Carson, the group’s vice president of financial regulation.
Whatever the outcome, FIO’s request shows it considers climate risk a widespread economic issue, Fliegel said.
“Hurricanes can hit Florida, Louisiana, or Texas, so from a national economy level, they want to make sure there is no coverage gap,” he said.
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