Insurance Politics at the End of the World

Hamilton Nolan, May 30, 2023 [How Things Work]

Shall we do climate change the hard way, or the harder way?

…insurance can tell you things about reality… The people running them may be greedy, and the clients may be evil, but the business is all about understanding the true and unvarnished state of the world in order to manage risk in order to protect wealth, and therefore these firms do their very best to operate according to what is true….

The insurance industry is going to serve a very useful role in the climate apocalypse. It is going to be the tip of the spear that punches through all of the bullshit of climate denialism once and for all. Indeed, the process is very much underway already. Politicians and oil lobbyists can lie all they want, but their homeowners insurance rates are going up….

Watching this process unfold is going to expose the hidden bedrock of many people’s belief systems in a rather violent way. That bedrock, in most cases, will not be “socialism” or “capitalism” but rather “whatever is good for me, personally, I don’t care what it costs, please god save me.” We are well on the road to the inevitable political crisis that will be sparked by insurance. State Farm just stopped selling home insurance in California, due to wildfire and other climate-driven risks. Coastal states in the path of hurricanes have seen tons of insurers pull out altogether in recent years, and the ones left are handing down eye-watering premium increases to homeowners. Florida property insurance rates are rising 40% in a single year(!). In Louisiana, it was even worse—the state insurance of last resort bumped its rates 63% this year….

Just as a point of perspective, last September Hurricane Ian—which could have been worse!—caused $100 billion in total losses, $60 billion of which was insured. One hundred billion dollars is equal to the total budget of the State of Florida….

…when you brush away the soothing fictions and political slogans, there are only a few ways to handle this:

1. You let private insurers set rates appropriate to the actual risk of insuring billions of dollars worth of property that is increasingly likely to flood, blow away, or burn up. Those rates are very high and getting higher. Every year, more homeowners will not be able to afford to stay in their homes… in Florida there is $2.9 trillion worth of insured coastal real estate. That is a lot. A 2020 McKinsey report guesstimated that some parts of Florida could lose as much as a third of their real estate value by 2050, but it is fair to say that that could turn out to be low….

One important thing to say about this scary scenario is: This is the free market functioning perfectly!!! This is actually how capitalism is supposed to solve problems. In this scenario, adaptation to climate change is induced by price signals. People are forced to move away from the coasts because it becomes too expensive. This is economically rational. The human pain of this enormous dislocation does not change that fact. Everyone who loves to celebrate the free market: This is what you’re asking for. Every time you hear a Republican frantically decrying this rational economic progression, you are hearing a hypocrite.

2. The second possibility—the one that will actually happen—is that the private insurance market collapses and then the emergency quasi-fictional state insurance market fills the gap but then it runs out of money at the first big disaster and then all of these states and their homeowners go to Washington for bailouts. Republican warriors for free enterprise quickly become socialists when their donors’ beach houses are at stake. Climate change deniers quickly turn into climatologists when they start asking for the government to build sea walls to keep their garages from flooding….

I expect Florida to reach a point where Republican governors are demanding that every Republican donor’s house be hoisted onto an impermeable private island built at government expense while everyone else drowns….