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Climate change and changing weather patterns could impact insurance rates

Kimberly Goodwin

Mike Chaney

By BECKY GILLETTE

Issues like climate change and shifting weather patterns can have a big impact on how property insurance rates are calculated, said Mississippi Insurance Commissioner Mike Chaney, who is also the chair of the Catastrophic Working Group for the National Association of Insurance Commissioners (NAIC).

The nation is seeing more frequent and severe natural disasters, with the number doubling in number during the past 20 years. Losses are also rising. The U.S. saw its costliest year to date in 2017 with more than $300 billion in damages.

“Insurance and financing are a lock and key for economic development not just in Mississippi, but any other state,” Chaney said. “That is why catastrophic models are important and why it is important that they be used correctly. If you can’t finance a project, it is usually because you can’t get insurance. If you can’t insure a project, you can’t finance it. An example is if you can’t get poultry house insurance, you don’t have a poultry industry. And you aren’t going to have poultry to eat.”

Catastrophic models give the regulators and the insurance industry the ability to assess and manage risk for property and for commercial development and businesses.

While insurance is usually calculated on past events, the changing climate and weather patterns could change the way future risk and premiums are calculated. The NAIC is working on a report analyzing the trajectory of climate change and modeling project loss potential.

“Disclosure of climate risk is important because of the potential impact climate change can have on insurer solvency and the availability and affordability of insurance across all major categories,” NAIC said in the recent report. “Recognizing the need for insurers to account for any potential effect these risks might have on the availability and affordability of insurance, some state insurance regulators administer a climate risk disclosure tool.”

One weather pattern being noted is a shift in tornado activities down to the Dixie Belt.

“They do not know why it is moving,” Chaney said. “There was a tornado in Alabama March 3 that killed 23 people. That same day there were eight other tornadoes in Alabama, 20 in Georgia and seven in Florida. We don’t know if this weather pattern is something that is an anomaly or due to a change in weather patterns.”

People who have mortgages on homes or other buildings in flood prone areas are usually required to purchase flood insurance, primarily through the National Flood Insurance Program. Chaney said the Mississippi Insurance Department has done a lot of work in Mississippi to allow private company flood insurance to be accepted in lieu of national flood insurance. It took federal approval to do that. In addition to Mississippi, Florida also has private flood insurance.

“Private flood insurance is way less expensive for people,” Chaney said. “People have to talk to insurance agents if they want to know more about private flood insurance.”

Chaney said another reason it is important for insurance commissioners to be aware of the risk of damage from future natural disasters and severe weather events is they are an important factor in rate increases. If an insurance company asks for a rate increase based on the potential for a future natural disaster, insurance commissioners need to know if the models used by the insurance companies are acceptable.

Stronger building codes on the Mississippi Gulf Coast put into effect after Katrina have had a big impact on reducing rates. A recent category 1 storm on the Mississippi Gulf Coast produced less than $1 million in damages.

“We see Mississippi as being very proactive for catastrophic risk management,” he said. “Part of that is the lessons from Katrina.”

Chaney said there have been some good insurance rate decreases on the Mississippi Gulf Coast and State Farm has lowered is auto insurance rates statewide by 11.2 percent.

“That’s a big deal,” Chaney said. “Other good news for Mississippi is we have a report from National Hurricane Center predicting less hurricane activity in the Gulf and Atlantic region for 2019. That translates into a cheaper reinsurance for our wind pool, the insurer of last resort on the Gulf Coast.”

Currently Mississippi is seeing some rain-induced flooding along the Mississippi River. That is happening in Vicksburg right now, which is where Chaney lives.

“Farmers have flood water who haven’t had flood water for 40 years,” Chaney said. “Inland flooding involves a lot of complex issues such as backwater levees and building code enforcements.”

Coastal and flood prone areas face the biggest risk for higher insurance premiums, said Kimberly R. Goodwin, Ph.D., who is interim director of the School of Finances and the Parham Bridges Chair of Real Estate at the University of Southern Mississippi.

“The insurance premium relates to the probability of a flood occurring in that area,” Goodwin said. “If flood events become more likely to occur, insurance premiums will rise. While those purchasing flood insurance generally carry the burden of the increase, it is also possible that insurance rates in general could increase for homeowners throughout the state. By increasing insurance premiums among all policyholders, the insurance company may help to decrease their risk of future loss.”

There have been extremely devastating wildfires in California this past year. But the risk of loss due to wildfire is much smaller in Mississippi than in California.

“Part of the reason is due to climate,” Goodwin said. “California is relatively dry compared to Mississippi, and the Santa Ana winds act as fuel for the wildfires. Mississippi is not a dry and windy place. In addition, forested areas are generally set apart from high population areas, so the damage to property would be minimal when compared to California.”

High insurance rates could impact home sale activity. Goodwin said research shows that higher flood insurance premiums result in lower home values (all else being equal). It also makes it more difficult to sell a home in a flood prone area.

“Both of those factors discourage home building and sales,” Goodwin said. “It can also be more difficult for homebuyers, especially first-time homebuyers, to afford a home. The cost of the insurance premium is considered along with the mortgage payment in establishing the total monthly home expense by mortgage lenders. A high insurance premium could prevent homebuyers from being able to qualify for a mortgage. First-time homebuyers are most vulnerable since they tend to be younger and have less money available for a down payment, among a variety of factors.”

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About Becky Gillette