How climate change can create insurance deserts

Nearly five years ago, as he championed insurance as a social good, Lemonade CEO Daniel Schreiber also posed the question, "What do you do when precise pricing puts insurance beyond the reach of those who need it most?"

Schreiber described a concept known as "insurance deserts": areas in which consumers and businesses struggle to pay for or even secure coverage. 

Carriers share the continued need to increase rates due to events like the Palisades and Eaton fires; severe convective storms; and stronger, faster-forming hurricanes. However, an alarming dichotomy emerges as you compare global insurance results and the end impact to the premiums (tariffs, for my friends abroad) customers pay for their personal and commercial risks. 

The insurance industry grew by an estimated 8.6% in 2024, according to an Allianz report; North America (the largest market) drove positive growth in P&C (7.7%) and life (14.4%). The combined ratio results for North America posted a $22.9 billion gain and a combined ratio of 96.6% (US, according to NAIC, was 97.5%) despite historic weather events including hurricanes Milton and Helene. Aviva reported an operating profits surge of 22% to $1.4 billion on strength of "capital light" business.

These strong results stand in contrast to troublesome findings from the Senate Budget Committee on the connection between climate risk and insurance. The committee finds that climate risk "is driving increasing non-renewal rates" (company-initiated cancellations at the end of policy term) and that "Higher non-renewal rates are also correlated with higher premiums."

Even more alarming, the committee categorizes climate change as a "looming economic threat" that "has become a major cost-of-living issue for families across the country." 

Finally, the research quantifies the impact of the two massive economic shocks we've experienced in the last two decades: the 2008 financial crisis and the COVID pandemic. "The economic shocks from climate change may be even worse." 

A storm on the horizon 

I've previously written on the perils of (pun intended) climate risk, and our current situation being "dire." Let's unpack how and why it could become a financial crisis, starting with lending institutions. 

A financial institution lending money to purchase property has "insurable interest," and thus can be listed on a policy of insurance as an additional insured. Furthermore, the same institution receives important communications on changes to policy status, such as a notice of cancellation. The insured (or customer) bears the burden of paying for the insurance (often bundled with their loan payment) as well as the obligation to repay the loan. 

Say a loss happens, like a flood or a storm. The insurance proceeds should be used to repair or replace the structure. However, certain perils (like flood) are not covered. Without insurance, the customer may not be able to repair the property, yet the obligation to repay the loan exists. And since a loss has occurred – even though a claim may not have been paid – the insurance company may choose to non-renew the policy due to "catastrophic risk exposure." 

This results in a person being stranded in a property they cannot sell or insure through standard markets, while continuing to bear the burden of the loan. And since the bank wants to protect its interests, it will "force place" coverage, typically at a higher rate, and pass the cost onto the borrower.

Some states and municipalities have enacted "buyback programs" to rescue stranded homeowners. Since 1989, FEMA has spent $4 billion purchasing about 50,000 homes – a great start, but not enough to address the issue or get ahead of it. 

As climate change evolves, areas not previously considered high-risk come under scrutiny. In the same budget committee report, North Carolina and Oklahoma are two states in the top 10 highest non-renewal rates in the country. Storms are no longer isolated to coastal areas, as high winds, hail and severe convective storms can cause damage hundreds of miles inland. 

When your carrier non-renews your policy, you must disclose that action on a policy application when securing a new policy, which could result in your application being declined. In other words, the same incident that led to the original policy not being renewed also makes it harder to secure replacement coverage. 

This cycle can quickly spin out of control. And since a given area is typically insured by multiple carriers, the market sees similar actions from multiple carriers at the same time. 

Even situations of not enough coverage, or "underinsured," represent potentially devastating consequences. The budget committee report notes that "67% of homes in the United States are now underinsured." That means a loss would not be fully covered, which could result in the home not being repaired or replaced, and any debt repaid. 

Now envision a scenario where all these factors interplay. A lack of available insurance coverage. Increasing amounts of debt. Individual or businesses wealth or livelihood tied up in a property. A single event, like a hurricane or wildfire, could trigger a cascade failure if the number of damaged properties reaches a critical mass. 

The resulting devastation displaces those homes and businesses, creating climate refugees. 

In part two, I'll expand and look at some examples of how different stakeholders are working to mitigate the threat.