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Why are insurance companies pulling out of some states?

Insurers are pulling out of big states, and extreme weather and climate change is factoring into the decisions.
Why are insurance companies pulling out of some states?
Posted at 3:41 PM, Jul 22, 2023

From wildfires and hurricanes to flooding and more, Americans are feeling mother nature's wrath on their homes, cars and lives. And as disaster strikes more Americans, insurance isn't always there to help.

That's because in some high-risk states, insurance companies are halting new policies or leaving states altogether.

While each state has unique problems facing their insurance industries, the common obstacle across the country has been the cost of payouts from insurance companies after catastrophic weather events.

In 2022, natural disasters brought a global economic loss of $275 billion. Insurance covered about 45% of it, meaning a cost of $125 billion. The biggest single event loss was Hurricane Ian, which ravaged the southeastern United States.

These weather disasters have an indirect impact on the insurance crisis here in the U.S.

When an insurance company offers catastrophe coverage, they're essentially owning the "risk" of having to pay for damages. In turn, many insurance companies purchase a form of their own coverage called "reinsurance." In other words, the reinsurance companies are actually on the hook for the "risk" of a catastrophe.

SEE MORE: As more insurance companies leave, where can Florida residents turn?

Many of these reinsurance companies have global reach. As their catastrophe premiums have risen around the globe, insurance companies now can't afford their own insurance, so they raise prices on homeowners or pull out of expensive markets altogether. This can leave homeowners with fewer and more expensive options to choose from.

In Louisiana, more than 20 companies have shut down or left the state. The last resort insurer, which is state-owned and taxpayer-funded, is required by law to be more expensive than private insurers. The average premium for home insurance is over $2,000 a year, which is 46% higher than the national average.

"Families should not have to choose between food on the table and paying a ridiculously high flood insurance premium to a program that is governed by the federal government," said Rep. Troy Carter, (D) Louisiana.

There are also other reasons for the soaring premiums and insurance exodus that aren't related to extreme weather risks. Some insurers have also cited inflation, rising costs of construction and regulations lowering premium prices as reasons for leaving states. 

But some observers argue housing developments need to be limited in high-risk areas in the first place, as they continue to expand quickly in floodplains, along coastlines and wildfire-prone areas. For example, in Florida, the landfall area for Hurricane Ian had seen a population boom of 620% over the previous five years.

If these trends continue, it will be the perfect storm that leaves American homeowners without crucial protection in the face of extreme weather disasters to come.

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