Whether it's wildfires in Southern California or tsunamis in Peru, homes and lives around the world are being threatened by natural disasters seemingly every week. With these risks — and their associated costs — skyrocketing, the home insurance industry is struggling with how to proceed.
What's happening?
A recent review from the Insurance Council of Australia addresses the weather-related issues in the industry, Insurance Business reported.
The Extreme Weather and Disaster Response Planning Guide highlights the industry's "significant gaps" in disaster response, with some insurers unprepared to address the large-scale damages and claims that follow a natural disaster. The report follows catastrophic flooding in Australia in 2022, which resulted in payouts of over 6 billion Australian dollars (almost $4 billion U.S. dollars).
One of its key recommendations was to introduce a "baseline category" for weather-related disasters in order to "align industry practices." This means defining what constitutes a weather-related disaster — including incorporating climate data into actuarial modeling — and improving communication with customers in the event of a disaster.
Why does the insurance industry need to change?
While home insurance providers have historically structured their coverage to handle predictable issues, such as regular wear-and-tear and infrequent accidents, the number of weather-related claims has risen so dramatically in the last several years that the industry is feeling the pressure to adapt.
Human-caused emissions have created an atmospheric greenhouse effect, which in turn has amplified the severity and frequency of weather events, from prolonged droughts to more severe hurricanes. Unless those emissions are drastically reduced in the coming years, the threats to homeowners will only continue, making home insurance financially infeasible in many cases.
But leaving homeowners without an option is far from ideal. For providers looking to adapt, groups like the ICA are urging companies to restructure their coverage to incorporate climate risk.
What should homeowners expect?
The ICA's report doesn't impose a one-size-fits-all approach; instead, it encourages continuous improvement and iteration as new data is received. This isn't a comprehensive solution, the ICA clarified, but Insurance Business did label it a "practical starting point" for the industry.
Many homeowners in the U.S. have been forced to turn to state-backed "plans of last resort," though these — as their name suggests — are already reaching a breaking point for capacity. Others have opted for nonadmitted providers, which many experts warn are much riskier due to their lack of regulation.
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Move somewhere else 🌎 And where insurance is falling short, communities are looking for ways to protect and support one another, from building buffer zones and break walls to investing in community solar to keep the power on during disasters.
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