How Does Climate Change Create Financial Risk? Ask Insurance Companies.
Thursday, June 1, 2023

Much of the current debate about ESG initiatives and how companies consider the impact of climate change on their operations appears to operate in a vacuum, untethered to the real world, where pundits and politicians opine on how climate change might theoretically influence economic activity or a company's decision-making.  But, as reflected in today's headlines, the impact of climate change is significant and affecting corporate decisions--and the lives of ordinary citizens--now. 

As reported by the New York Times, "the largest homeowner insurance company in California . . . announced that it would stop selling coverage to homeowners."  And why has this company gotten out of the home insurance market in California? Because "of 'rapidly growing catastrophe exposure' . . . after wildfires became more devastating than anyone had anticipated . . . [due to] the effects of climate change."  And California is not the only market for home insurance so impacted--in Florida, "private insurers [have] [] struggle[d] to pay their claims [and] some went out of business [and] [t]hose that survived increased their rates significantly," and in Louisiana "[t]he state recently agreed to new subsidies for private insurers, essentially paying them to do business in the state . . . [and] [t]he high cost of insurance has begun to affect home prices."  Insurance companies have considerable expertise in assessing risk--and many have now concluded that the risk created by climate change is sufficiently acute to necessitate changes in their business practices. 

Companies are already beginning to incorporate the impact of climate change, and the risks associated with climate change, into their economic decision-making, as evidenced by these latest publicly-reported decisions by insurance companies.  Such a decision raises a pertinent question for certain anti-ESG legislation propounded recently: how can pecuniary impact be segregated from climate change concerns?  

The climate crisis is becoming a financial crisis. This month, the largest homeowner insurance company in California . . . announced that it would stop selling coverage to homeowners. That’s not just in wildfire zones, but everywhere in the state. Insurance companies, tired of losing money, are raising rates, restricting coverage or pulling out of some areas altogether — making it more expensive for people to live in their homes.

 

 

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