In American states such as California, Florida and Louisiana, it is becoming more difficult to get insurance for properties in danger zones. Regulations are playing a negative role in this. The state is increasingly stepping in.
Destroyed house in Arabi in the American state of Louisiana: Tornadoes cause great damage in the United States.
Bryan Tarnowski / Bloomberg
Natural disasters such as hurricanes, earthquakes, storms and floods have become more frequent around the world in the past year. Many of the losses were uninsured. According to a study by the reinsurer Swiss Re, the total global loss volume in 2023 was $280 billion, of which 62 percent was uninsured.
Such insurance gaps – known in the industry as “insurance gaps” – exist not only in emerging and developing countries, but also in the Western world. The situation in the real estate market in American states such as California, Florida and Louisiana is causing a stir. “Large US insurers such as State Farm and Allstate are currently reducing the number of insurance policies for properties in danger zones,” says Michael Stahel, partner at the investment company LGT Capital Partners.
Risk of termination of the mortgage
Some property owners no longer receive any private building insurance at all. In the worst case scenario, a downward spiral could set in, says Stahel. “If you finance your house with a mortgage and no longer receive building insurance, the mortgage could be canceled,” he says.
It might then be necessary to sell the property – but given the difficult insurance situation, demand is likely to be very limited. “Many property owners in such areas simply no longer insure their house or apartment,” says Stahel. In the event of a natural disaster, however, the financial consequences could be disastrous.
Various reasons for insurance gaps
The reasons for the insurance gaps in the US real estate market are varied – some of them are home-made.
The role of climate change: There is a consensus among climate scientists that global warming may have played a role in the frequency and severity of some natural disasters, according to a publication by LGT Capital Partners.
Climate change is becoming an increasing concern for the insurance industry. 2023 was a record year for heat storms in the USA. For some local insurers in the USA, premium income in recent years has not been sufficient to cover the increased claims burden, says Stahel. They have no choice but to pull the ripcord.
Nevertheless, these are more likely to be extreme cases in highly exposed areas, says Balz Grollimund, head of the catastrophe risks division at reinsurer Swiss Re. The ratio of insured to uninsured losses has not shifted significantly in the USA.
Strong regulation in the American market: “The main reason why insurers are withdrawing from certain regions in the USA is the over-regulation that makes it impossible to demand premiums that are appropriate to the risk,” says Eduard Held, a natural hazards expert at the Swiss Insurance Association (SIA).
This requires a look at the peculiarities of the American insurance market. As Grollimund explains, insurance prices in some American states are regulated by the state. Direct insurers therefore have to have price increases confirmed – and they do not always get the corresponding approval. “So if the risks increase and insurers are not allowed to adjust their prices, this can be a reason for some providers to exit the market in certain regions,” he says.
Claudia Cordioli, CFO of the Zurich Group, also says that the insurance gap in the USA has been exacerbated by strict regulations in various states, which in some cases do not allow premium increases despite the increasing costs of claims. For example, Farmers Insurance, an American insurer and important partner of the Zurich Group, decided to withdraw from Florida last year.
Greater vulnerability of real estate: In addition, the exposure of real estate to natural disasters has also increased. The study by LGT Capital states that new properties are now often built in regions that were previously sparsely populated. Urbanization in areas where there is a high risk of natural disasters – for example in coastal regions or flood areas – is also a cause for concern.
“There is an unfortunate combination of the effects of climate change and urbanization, which is causing the increasing development of exposed areas,” says Cordioli. The problems have also been caused in part by the fact that more has been built in vulnerable places.
Higher costs: In addition, higher costs for building materials, labor and legal disputes are making it more expensive for insurance companies to pay for damages to insured properties, according to the LGT publication.
Customers report damage quickly: Insured losses have increased for a variety of reasons, says Held. One of these is the American legal system. Insurance customers now often report losses very quickly and are supported in this by lawyers in the USA who advertise their services with posters. “The legal costs alone drive up the amount of losses,” he says.
The state intervenes
In the USA, this development has now led to politicians offering less well-off customers state solutions to the problem. In this context, Stahel mentions fallback insurance such as Citizens of Florida and California Fair Plan. Such “insurers of last resort” have grown massively in the USA in recent years.
Traditional reinsurance, meanwhile, has become increasingly expensive and scarce. In some regions of the USA, insurance of insurance is increasingly becoming a state-provided public good, says Cordioli. This makes it difficult for insurers to do business, and they often have no choice but to withdraw from such states. This development has not yet been observed in Europe, Asia and Latin America.
However, it is not a phenomenon that is unique to the USA. In Australia, too, there are government-run reinsurance solutions for hurricanes, as Stahel explains. The initiative is intended to help improve access to insurance for those living in at-risk regions.
