Rebecca Blackwell/AP Photo
A house lies toppled off its stilts after the passage of Hurricane Milton, in Bradenton Beach on Anna Maria Island, Florida, October 10, 2024.
You might think that the insurance industry is going to suffer massive losses in the aftermath of Hurricanes Helene and Milton. Think again. Even as climate change has increased the ferocity of storms, the insurance industry has stayed well ahead of the game, not by working with consumers or with government to promote loss prevention and mitigation, but by hollowing out coverage.
It’s homeowners who will lose big. In fact, some insurers are making record profits by raising rates or adding far more exclusions than they need to. Allstate’s share price is up about 20 percent since July. Travelers’ is up about 16 percent.
Their strategies include the following. First, insurers have imposed excessive rate increases. In principle, these have to be approved by state regulators, but in practice insurers typically “file” notices of increases and the regulator approves them after the fact or fails to even review them. Insurance companies manage to tame regulators by threatening to stop writing policies in a state if a regulator does its job.
Property insurers have also been substituting inferior forms of coverage when a policy comes up for renewal. For example, homeowners may assume that they are covered for the replacement cost if, say, a roof blows off. That’s what traditional policies provide. But increasingly, insurers have been substituting depreciated replacement cost. If you last put on a new roof ten years ago and it cost you $10,000, the company may decide that its current depreciated value is only $4,000. So if the roof blows off, you get just $4,000 and not the cost of replacement.
In addition, policies in hurricane-prone areas are now more likely to have higher deductibles for wind damage, limits on interior water damage, and exclusions for damage from wind-driven rain, according to a comprehensive survey by The Wall Street Journal. And insurers have intensified their challenges to claims. The resulting prolonged litigation favors insurance companies, which have deeper pockets and longer time horizons than consumers with devastated homes.
Insurers have also become far more aggressive about canceling policies if a homeowner is in a climate-risky area, or for far more frivolous reasons. In virtually every state, there is no meaningful appeals process. Once you lose coverage, you go into a high-risk pool, where any kind of coverage may cost you five or six times that of your former policy.
Insurance companies, though nominally competitors, collaborate on a common database called CLUE, which stands for the Comprehensive Loss Underwriting Exchange. Once one insurer puts you into a high-risk category, you are stuck with it, and other insurers treat you as a high risk.
Once one insurer puts you into a high-risk category, you are stuck with it, and other insurers treat you as a high risk.
In general, there is no federal regulation of insurance. That is precluded by the McCarran-Ferguson Act of 1945, which bars most federal insurance regulation and leaves it to the states. The act was sponsored by two conservative Republicans to overrule a Supreme Court decision which held that the federal government under the Commerce Clause of the Constitution could regulate insurers, including subjecting them to the antitrust laws.
One small but important exception to the lack of federal insurance regulation is that under the federal Fair Credit Reporting Act of 1970 (the work of my former boss Sen. William Proxmire), consumers do have the right to challenge their inclusion in the CLUE database, if they have reason to think they were put into it based on spurious information. And the federal agency to which they can complain is—thank you once again, Elizabeth Warren—the Consumer Financial Protection Bureau.
Here’s what’s tricky. At some point, it doesn’t make sense to keep rebuilding in areas prone to repeated floods and massive tropical storms. But the question of which areas are likely to keep flooding as sea level rise worsens and hurricanes become more intense is an issue for public planning, not for unaccountable and self-interested private insurers to decide via padded rate increases and sneaky coverage exclusions. It makes even less sense for insurers to cover increased risks from hurricanes by raising premiums in other areas where the weather has been benign.
In California, the public-interest group Consumer Watchdog keeps track of unjustified cancellations or rate increases. The stories are gut-wrenching. In 2023, Ann Mitchell, who lives in Altadena, paid Farmers a $3,467 annual home insurance premium. Upon renewal last July, her premium nearly quadrupled to $12,149.
“What I have heard was Farmers had oversold insurance in the foothill areas and so they said, uh oh we have way too many insurance policies along this fire lane and so they jumped it up on some people,” Mitchell told Consumer Watchdog. Her house faces the wooded Eaton Canyon Natural Area and Nature Center. But Eaton Canyon last had a wildfire three decades ago. Insurance companies get to make these decisions unilaterally, without review from state commissioners.
California’s insurance commissioner, Ricardo Lara, caved in to insurer threats to leave the state. Lara agreed to further deregulation of insurance in exchange for an industry commitment to keep selling homeowner’s insurance at all in areas deemed risky. There will be no review of rates. His deals with insurers have been criticized by consumer groups and by congressman and former insurance commissioner John Garamendi.
According to Douglas Heller, the insurance director of the Consumer Federation of America, stories of the insurance industry incurring large losses because of hurricanes, floods, or wildfires are highly misleading. For starters, most homeowner’s policies have flood exclusions. Using Allstate as an example, Heller cites that company’s 10-K filings with the SEC to show that in the 2021–2023 period, just 3 percent of reimbursed losses were due to hurricanes or tropical storms and only 5 percent were due to wildfires, including the Maui fire and the Colorado wildfires. The rest were payouts for wind and hail damage or for ordinary casualty events.
In the past five years, according to industry data cited by Heller, the property and casualty industry has released about $34 billion from reserves on the premise that they had more loss reserves than they needed to pay anticipated claims. Some of this money was used to pay for dividends and stock buybacks.
Since categories of insurance are not accounted separately in these data, Heller cautions that some of this supposed surplus came from lower-than-expected payouts of claims in other categories of insurance, such as workers’ compensation and auto insurance. But insurers, by their own accounting, by their dividends and stock price, and by their anti-consumer tactics, are well bolstered—too well bolstered—against losses due to hurricanes.
So don’t cry for the insurers. Cry for the homeowners. And cry out against captured state insurance commissioners. It’s time for serious federal re-regulation of this predatory industry.
