Climate events challenge litigation as cause of insurance rate hikes

Climate change causes insurance rate increases and non-renewals more than litigation against insurers, say experts and consumer advocates, drawing on the homeowners insurance pricing and climate risk report published by the Federal Insurance Office (FIO) in January. 

The report concluded that homeowners in places hit with climate disasters are paying more, policy non-renewals are higher where there are higher climate risks, and climate change makes insurance operations more costly.

Robert Hartwig, a University of South Carolina professor, had testified to the U.S. Senate in December that litigation against insurers, not climate change, is the main cause of rate hikes and non-renewals.

State insurance regulators are dealing directly with the correlation between climate risk and pricing, explains Katherine Hempstead, a senior policy advisor at the Robert Wood Johnson Foundation and author of "Uncovered: The Story of Insurance in America." California's insurance commissioner Ricardo Lara has been contending with this, she noted.

"He probably felt that if they actually let the companies price for what they really think the risk is, then tons of people are going to say their insurance is unaffordable," she said. "Regulators are between a rock and a hard place. There's a lot of pressure on them to stick it to the companies, keep rates down. But of course, if you do that, at a certain point, the companies will exit or they'll pull back in ways where it's not as bad as an exit, but they'll just drop people because they want to limit their exposure."

In regulatory changes made in December, Lara and the state's department of insurance had agreed to let insurers factor reinsurance costs into premiums and use catastrophe modeling. Hempstead calls these reasonable measures considering the connection of climate risk to pricing.

The increased frequency of climate events contributes to a rise in claims, which in turn raises premiums, acknowledged Todd Greenbaum, president and CEO of Input 1, a billing and payments company. However, stronger climate mitigation measures are needed, he said, adding that insurers want to keep coverages intact for profit but only if premiums match the risk.

"This is a free market economy, supply and demand," he said. "If people feel that owning a piece of property in Florida is just simply unaffordable because of the insurance, they're going to move inland, or they're going to move out of the state."

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Insurance industry representatives have pointed to litigation as a greater cause of rate increases and non-renewals than climate risk. Joanne Doroshow, executive director, Center for Justice & Democracy (CJD) at New York Law School, called this a denial of the function insurance should have, pointing to the industry's estimated $131 billion in net income in 2024, with a surplus of over $1 trillion.

"Insurers are supposed to be risk-bearing companies, but now they are walking away from consumers, businesses, and entire communities at the first sign of new risks," she wrote in a response to questions. "Insurers are using this recognition of increased disasters as a chance to change the rules of the game so that they take on less risk and earn more premiums."