For many reasons, 2021 was an abnormal year -perhaps best illustrated by changes within the insurance industry, which shouldered an unprecedented burden. There were unusually-high loss trends across both years, with the property and casualty industry serving as a “first responder” to an economy in freefall, still reeling from the onset of the COVID-19 pandemic. I’m trying to answer this question: what can we, as individuals, learn from these extreme loss patterns of the last two years? And how should we set our expectations for insurers’ behavior in 2022?
The change in the industry boils down to two significant trends:
1.) A sharp uptick in weather-related natural disasters
2.) A growing number of impossibly-large civil liability settlements.
In this article, I’ll discuss the impact of the former.
Climate Disasters
Most parts of the country experienced wild, fluctuating temperature extremes in 2021. Just one month ago, in early December, it was a balmy 60 degrees in Bismarck, ND. Less than a month later, Bismarck recorded a record low: -24 below zero on New Year’s Eve. Many cities, globally, recorded both their highest and lowest temperatures on record within the same year.
These wide temperature fluctuations are responsible for equally strange precipitation trends. Weather events are happening in places that they’ve never happened before. After all: who could forget the devastation of Texas wrought by the freak winter storm Uri, responsible for 210 deaths and over $100 Billion in damage? Certainly not the 70% of the population that lost their power and water…
Another consequence of a worsening climate: increasing cases of outright default within the insurance sector. As a result of Hurricane Ida – a $40 billion disaster – two Louisiana insurers and one Florida insurer failed outright – leaving the states to develop their own insurance guarantee funds to pay out the hundreds of millions in uncovered claims. It’s been an excruciatingly slow process for the many, many individuals who lost their homes. But because the cost responsibility left behind by insolvent private insurers is so enormous, only a State itself has the resources and funds to clean up the mess. And with a dozen more Florida insurers joining the FOIR’s watch list this year, the problem does not seem to be improving.
And finally, the last days of 2021 were punctuated by an enormous wildfire in Boulder County: a popular, affluent area of Colorado. No fatalities occurred, but hundreds of homes were destroyed. And the very next morning, 10 inches of snow fell on the scorched community.
Images of the smoldering, snow-covered remnants became, for many, an unsettling and tragic reminder of our ongoing climate emergency. Weather patterns are changing faster than we can adapt. And “seasonal” disasters now occur at all points on the calendar. The World Meteorological Organization reports that the past seven years were the warmest on record. Sea levels rose by almost a quarter inch in the last decade alone, at more than double the rate of the previous century -evidenced by a threefold increase in coastal flooding over the same period. And the unanimous consensus in the scientific community is that humans are causing these destabilizing changes.
As a result, insurers are looking at natural catastrophes in a new light. All the events that were once considered “secondary peril” – that is: flood damage, atmospheric rivers, bomb cyclones, heat, drought, severe storms, hail, mudslides, avalanches, and extreme cold – they’re becoming more frequent, more powerful – often exceeding the losses incurred in the “primary perils” of the past: hurricanes, tornados, and earthquakes.
In terms of the individual and adjusting one’s expectations, we must see how our worsening climate is causing financial strain on insurers. I don’t mean to sound pessimistic – but things do not look good. The ongoing and worsening climate emergency is a serious problem for legislators and regulators, businesses and employees, and ultimately insurers and individuals. People need to understand that the losses experienced in 2021 have pressured the insurance industry to change everything about the way they write their policies. With a high degree of certainty, we should expect a future in which insurance premiums are higher for everyone, fewer claims are paid across the board, and municipal disaster relief funds run out of money.
