With the debate on anthropogenic ( caused by humans) climate change long since settled, it is time to move on to other questions, specifically why we are not doing more about it. Climate change denial has been relegated to a few oil industry apologists and reactionary journalists, but for the most part the critical problem remains ignored, and we have yet to see the media coverage or the mass movement to renewable energy that we need.
The question is a simple one but the answers are complex, but part of the answer being that ordinary people do not believe that climate change is something that effects them right now. The truth however, is quite different. Not only is climate change a matter that each individual must claim some responsibility for, but it effects us now, in ways that most people will never even think about.
In this two part series, I will be reviewing the profound effect that our changing weather is having on your insurance, and the consequences that are to follow.
The three weeks around the end of June and the beginning of July was a terrible time for flooding in Canada. The flood in Alberta lasted days and flooded a large part of Calgary, as well as many smaller towns, and on July 8,2013, a sudden storm hit Toronto, unleashing a massive rainfall and flash floods that no one was prepared for. The total bill for these flood events? $270,000,000 for Intact Insurance alone.(1) Just to put this in perspective, the average Canadian home insurance premium is $840 per year, according to InsureEye.com.(2) If we divide the property damages by the average home insurance premium, it would take the premiums of 321,429 homes just to pay for these two weather related events, before taking into account the other expenses such as commissions and administrative costs that also come out of these premiums.
We can never state with scientific certainty that one specific event was caused by climate change, however we can with absolute certainty say that changing weather patterns are tied to climate change, and that this change has been dramatic. As Insurance Bureau of Canada president Don Forgeron warned a business conference is St. John’s, “ our weather patterns have changed… the trend is unequivocal. The number of severe weather events is doubling every 5-10 years”. (3)
These changes are happening all over the globe, and in many different forms. We have seen several “storms of the centuries” hit the east coast, a dramatic increase in tornado activity across the Midwest, and many more sudden and severe storms in Ontario.
Insurance, as we all know, is a business, and like any other business, when the costs go up, the increase is passed on to the consumer. The thing that most of us are not aware of however, is that climate change is the number one driver of price increases in home insurance. Even in 2005 insurance expert Evan Mills stated that in regards to insurance premiums and losses, “Impacts of climate change are already manifesting and projected to become enormous over time (4). In 2006 The Association of British Insurers revealed that weather and climate change were already driving a 2-4% annual increase in insurable losses,) and Allianz, the largest insurance company in Europe, stated that climate change could be driving up insurance losses by 37% annually in less than a decade, meaning losses in excess of one trillion dollars per year. (5)
Most people’s initial reaction to this is to simply shrug it off with a “what else is new, insurance is going up”, but that type of reaction fails to grasp the scope of the problem. First of all, if your home insurance rates go up 20%, you are probably not going to sell your house, but you’re going to make sacrifices somewhere. If you have ever bought a house, think back to sitting in the lawyer’s office on closing. Before the deal is completed however, you must provide proof of insurance. To truly understand the effects that this can have on individuals, we’ll follow the breadcrumbs for a moment, to see where they lead. To do this, there are two critical things to remember, First of all, insurance companies are starting to minimize their exposure in many disaster prone areas. Allstate, for example, has cut the number of policies they hold in Florida from 1.2 million to less than 400,000 after recent hurricanes erased all the profit that the company had made in 75 years in that area. (4, Mills) We are starting to see these types of reactions in many different areas. Insurance companies refusing more policies, raising deductibles on certain types of coverage such as sewer back up, raising base premiums, and pulling out of certain areas. Second, the insurance industry is the foundation upon which our economic system is built ( this point will be described in more detail in part II of this article ).
When regular insurance companies raise rates and limit policies in certain areas, people pay more for insurance and are more often pushed to high risk insurance companies at a much higher price. When people are buying a home, what truly matters is the total cost of ownership, inclusive of taxes and insurance. This does more than just push the cost of owning a home higher, but also pushes many people out of the housing market all together. More and more people cannot afford the price of insurance in addition to their mortgage payments, and this problem is going to become a bigger over time.
It will not be long before all these factors start to come together to cause some very predictable and devastating economic results. Let’s look at a hypothetical example along the gulf coast of the US. Say a major city in the area, St Petersburg FL, or Mobile Alabama, gets hit by a bad tropical storm this year, causing 10’s of millions of dollars in insurable losses, and then next year, gets hit by a Hurricane. Insurance companies begin to cut their losses and pull out, leaving high risk insurance companies to pick up the slack. Suddenly insurance rates are $200 per month for most people, instead of $75, some people get behind on their mortgages, desperate to pay their insurance bills, while others cancel their insurance, leaving them one storm away from losing everything. As more people move out, fewer people move in, and housing prices are starting to drop while some of the big employers pick up and move to safer ground. After all, they are subject to higher insurance rates as well, plus the interruptions to their business. This is a recipe for complete financial collapse, and mass exodus ensues, leaving a shell of a city with little hope for improvement. As these people look for other places, many will no longer be able to buy a home, and a large influx of people can lead to higher unemployment rates at the new location, maybe temporarily, maybe not.
Does this sound a little far-fetched? Between the writing of the first draft of this article and the version you are reading now, a few things have changed. First of all, one the biggest insurance companies in Canada announced sweeping changes to their home insurance coverage. They have increased deductibles, greatly expanded the areas in which they will not provide sewer back up coverage, and reduced potential discounts for their customers. In Alberta, it is rumoured that property policy owners should expect 30%-60% increases in their property insurance rates this year alone.
Climate change is not just an environmental issue, but also an economic issue, as well as a social justice issue in that its effect on the poor and middle class will be far greater than on the rich, at least initially. Insurance is just one way that climate change is effecting each one of us, right now.
1) The Toronto Star, Saturday July 27th,2013 “Alberta cost property insurer Intact Insurance 270 million.
3) Maclean’s magazine, June 25th, 2013, www2.macleans.ca/2013/06/25/Uninsurable-homes-in-Canada’s-Future-climate-change-expert-predicts.html
4) Dr. Evan Mills, 2005, “responding to climate change, an Insurance Industry perspective”, evanmills.lbl.gov/pubs/pdf/climate-action-insurance.pdf
5) On Environmental Science and Technology Online News, April 19,2008, www.pubs.org/subscribe/journals/esthag-w/2006/apr/business/pt.insurance.html
Written by Greg Groen, R.I.B.O.