Why the Economic Impact of Climate-Driven Disaster Risk Is Increasingly Unaffordable

July 4th was the hottest recorded day on earth. Floods and mudslides in Japan, India and South America; heat waves in China and Europe; fires in Canada; hurricanes, wildfires, floods and tornadoes in the US.

The rising risk of disasters is not just making insurance unaffordable, it's making it unavailable in two of the US's most populous states: California and Florida. And that, in turn, will have significant economic, social and political effects globally as climate immigration, housing and food costs are impacted. JL 

Rachel DuRose reports in Vox:

Climate change isn’t just making natural disasters worse, it’s making them occur more frequently in places they rarely did before:  11 million people in the northeast are under flood risk; wildfire smoke engulfed the East Coast and the Midwest, Winter Storm Uri left 4.5 million Texans without power, killing 246 people.  Upgrading would cost billions, but may be necessary given that storms could be linked to global warming. Since US insurance companies are backed by international reinsurance companies, homeowners everywhere will pay the price for climate change’s global effects.

An estimated 11 million people across the northeastern US are under flood risks or warnings this week after historic levels of rainfall — 1-in-1,000-year events — swept through New England, with rivers in Vermont and New York’s Hudson Valley overflowing and turning town streets into waterways.

Flash flooding killed at least one person in New York, and New York Gov. Kathy Hochul confirmed several more people are missing. On Tuesday, President Joe Biden declared a state of emergency in Vermont, where, according to Gov. Phil Scott, thousands of residents have lost their homes and businesses.

The Winooski River, which runs through Vermont’s capital, Montpelier, rose above its normal level of below 11 feet to a height of about 20 feet. This is the second-highest height on record for the river, only falling behind Vermont’s “greatest natural disaster,” a 1927 flood that killed 84 people.

Vermont and New York last experienced such dire circumstances in 2011 and 2012 respectively, when Hurricane Irene and then Hurricane Sandy charged across the country, bringing catastrophic flooding.

Hurricane Sandy killed 72 people across the Northeast and mid-Atlantic, including 44 New York City residents. While residents in Vermont lost power during Sandy, it was the hurricane the year prior, Irene, which devastated the state, destroying 2,400 roads, 800 homes and businesses, and 300 bridges.

Learning from Irene over a decade ago, Vermont knew it did not have the resources alone to handle its current flash floods, and called in aid from North Carolina, Massachusetts, Michigan, and Connecticut before the storm struck. The region’s lack of preparedness for these extreme events also makes sense when taking into consideration the area’s history with natural disasters.

 

Vermont was once considered one of the most natural disaster-resistant states in the country, and a local Vermont news station reported people were moving to the state for the purpose of avoiding worsening wildfires, droughts, and floods elsewhere in the US. “Vermont is one of the few places in the world that is likely to get more habitable,” Chris Koliba, a professor of community development and applied economics at the University of Vermont, told Boston’s NPR news station, WBUR, in 2021.

Climate change isn’t just making natural disasters worse, it’s making them occur more frequently in places they rarely did before; for example, wildfire smoke engulfed the East Coast and many parts of the Midwest earlier this summer, and Winter Storm Uri left 4.5 million Texans without power and killed 246 people in 2021.

While the electric grid and homes in the Lone Star State were designed to withstand extreme heat, they have virtually no resilience to cold weather (and even heat events have begun to put pressure on the Texas grid in recent years). Upgrading this system would cost billions, but it may be necessary given that researchers believe storms like Uri could be linked to rapid global warming in the Arctic.

Scenarios like Winter Storm Uri and this week’s flooding in the Northeast will become more and more common. Places with a history of natural disasters have the community knowledge and infrastructure to weather these events, but those that have never or rarely handled them before will need to upgrade and build new infrastructure quickly.

“It’s getting harder and harder to adapt to these changing conditions,” Rachel Cleetus, policy director for the climate and energy program at the Union of Concerned Scientists, told the New York Times this week. “It’s just everywhere, all the time.”

The risk of natural disasters is everywhere (even in the most resilient places). People will no longer just have to prepare for intensified versions of the natural disasters they know, but they will also have to consider the possibility of new types of disasters — floods, storms, heat waves, droughts, and fires — impacting their community. And since most US insurance companies are backed by international reinsurance companies that cover other parts of the world, homeowners everywhere will pay the price for climate change’s global effects.

Disasters everywhere

The northeastern US wasn’t the only region experiencing extreme rainfall and flooding this week.

Flooding in downtown Montpelier, Vermont, on Tuesday, July 11, 2023.

 John Tully/The Washington Post via Getty Images

In Japan, floods and mudslides killed at least three people in the Chūgoku region of Honshū and on the island of Kyushu. Over the weekend, the Japan Meteorological Agency issued an emergency warning and urged more than 1.7 million residents to take shelter. In northern India, landslides and flash floods caused by a monsoon killed another 91 people.

At the same time, a heat wave is wreaking havoc across the southern and southeastern parts of China. The current forecast puts temperatures at 95 degrees Fahrenheit for the next week, with some regions reaching temperatures as high as 104 degrees. Cities across China opened their air raid shelters over the weekend to provide relief to residents suffering from extreme temperatures.

This summer, these types of high temperatures are the norm nearly everywhere. July 4 was the hottest day on Earth on record, with the global average temperature reaching 62.9 degrees Fahrenheit.

Unfortunately, heat at this level also creates the perfect conditions for another type of natural disaster: wildfires.

In Canada, over 23 million acres of land have burned this year thus far, exceeding the previous record by more than 6 million acres even with months of fire season yet to come, the Canadian Interagency Forest Fire Centre reports. Altogether, more than 100,000 people have been evacuated from their homes in response to the nearly 500 blazes tearing across the country.

“Heat extremes are getting more frequent, more severe; precipitation extremes are getting more frequent, more severe,” Kai Kornhuber, a lecturer and research scientist at Columbia University, told the AP in March. “Fire weather, which is linked to wildfires, is getting more frequent, more severe, more areas that didn’t see these conditions before.”

Some of these regions are equipped with the knowledge and infrastructure to deal with historic levels of natural disasters, but as the range and intensity of these disasters spread, regions unfamiliar with their effects will need to adapt quickly. Not doing so could cost lives.

“When we talk about disaster response, we’re often thinking about what happens right after a disaster,” Rebecca Rice, a professor at the University of Nevada, Las Vegas, who researches emergency communications, previously told Vox. “But it’s not just how you respond right away. It’s how you build a stronger community, where people have the social resources and the capital they need.”

Global risk means higher insurance prices (for everyone)

As the global risk of extreme events, and therefore extreme destruction, rises, so do insurance costs. Earthquakes in Turkey, monsoons in India, and heat waves in China actually affect the cost of insurance for everyone.

People with their belongings wade through the flooded waters of Yamuna River after heavy monsoon rains in New Delhi on July 12, 2023.

 Arun Sankar/AFP via Getty Images

These disasters are also why insurance companies are increasingly relying on reinsurance companies. Reinsurance companies are “insurance for insurance companies,” as Vox’s Umair Irfan has reported previously; essentially, when a massive disaster occurs, these companies help cover claims. “Reinsurance providers act as a backstop and help front-line insurers cover claims when a massive disaster strikes,” he wrote. “As a result, international reinsurers like Swiss Re keep a close eye on global systemic risks branching from rising average temperatures.” (Swiss Re is a Swiss-based reinsurance company.)

When an insurance company puts together a plan and decides on a policyholder’s premium, they assess the risk of the area the policyholder lives in, Jason Thistlethwaite, a professor for the School of Environment, Enterprise and Development at the University of Waterloo, told Vox. If you live on a floodplain, on a low-lying coastline, or against a wildfire zone, that increases the risk, he added.

Still, the amount an insurance company collects in premiums may not add up to the total cost of damage if the area is completely decimated by an extreme event. Therefore the company purchases additional coverage from the reinsurer, Thistlethwaite said. Purchasing this reinsurance raises costs for policyholders.

In recent years, reinsurers have dealt with mounting losses globally, and therefore are raising their prices. “[The reinsurer] is going to pass those costs on to primary insurance and then the primary insurers are going to pass those costs onto their policyholders,” Thistlethwaite said. “There is some truth that a tranche of your premium is going to be reflective of the international risk environment generally.”

Increasing natural disasters aren’t just making insurance unaffordable, however: They’re also making it unavailable.

Earlier this year, one of the largest insurers in the country, State Farm, announced it would stop accepting applications for business and personal policies in the fire-prone state of California. The company, which is worth $131 billion as of 2022, is the largest single provider of bundle home insurance policies in California. Other insurers in the state, including Allstate, also halted accepting new clients.

And on July 11, Farmers Insurance announced they will no longer provide existing or new coverage in the hurricane-prone state of Florida, where they currently serve 100,000 policyholders.

Thistlethwaite says there are a number of interconnected elements driving insurers’ decisions to pull out of markets like Florida and California, including inadequately designed infrastructure, the increasing number of people living in high-risk areas, and the soaring costs of reconstruction.

But the increasing frequency and intensity of natural disasters is uncontestedly a problem: “It really is a combination of four factors, with climate change being one of the core drivers,” Thistlethwaite said. “It’s really that and it’s those three other big reasons why availability of coverage is eroding.”