Do you ever feel bombarded by the same story over and over again? Lately, I can't dodge stories highlighting insurance's growing costs due to climate change.
In his annual letter, Warren Buffet started sounding the alarm on wildfires and their risk to investment in utilities that were once considered safe bets. He wrote, "Certain utilities might no longer attract the savings of American citizens," as Berkshire Hathaway faces over $8B in claims from fires in Oregon and California.
These claims lead to rising insurance rates and rightfully require significant investments into disaster mitigation efforts. It’s a catch-22, utilities need the insurance and must prevent disasters where they can because the humanitarian tolls are too great. However, the costs are large and raising rates to cover them is an uphill battle.
Yet, abandoning utilities as an investment class would be disastrous. We need them to maintain the aging infrastructure we already have. A lack of investment into utilities will also hinder their ability to build the infrastructure we so desperately need as renewables further penetrate the grid.
Speaking of renewables, insurance has grown into one of the major headwinds hindering the deployment of utility-scale solar in the US. These projects need guarantees for up to 40 years, and recent hailstorms and floods drove premiums to unprecedented heights.
A few extra percentage points make all the difference in a sector with razor-thin profit margins.
These businesses aren't the only ones facing rising insurance premiums. Consumers are getting crushed, too.
Some insurance companies have left states like California and Florida altogether. This departure creates a void of competition, which compounds as the remaining insurers can and must raise prices to account for the risks they are taking.
Insurance will define the housing bubble in these states, not interest rates.
So, what do we do? Unfortunately, this feels like one of those situations where there's not much we can do, and I hope I'm wrong. Extreme weather will likely continue, and those who insure assets with higher risk will command higher prices.
We've seen many startups tackling the consumer space with new business models, and I'm hopeful they'll succeed. But, scale and capital are insurance’s advantage so starting them from scratch is hard.
New tools for existing insurance firms exist as well.
Insurance companies have more access to data and simulations than ever, too. But the thing is, they're already good at predicting disaster - the hard part is paying for them.
That's one thing innovation won't solve overnight. We can mitigate the risks caused by climate change, but we can't eliminate them; even the mitigation will take time.