The Insurance Climate Change

During the nine years she's lived in her historic sea captain's house on Cape Cod, Mass., Paula Aschettino never filed a claim against her homeowner's insurance policy. But last year she received a letter from her insurer, Hingham Mutual Group, canceling coverage on her nine-room, $600,000 oceanfront home, which has withstood its share of hurricanes since 1840. She and her husband, Michael, scrambled to find other insurance but were repeatedly denied. "They just said we are in a high-risk area," she says. A spokesman for Hingham, which canceled 9,000 Cape Cod policies, says that the company's own coverage--known as "reinsurance"--had doubled in the past year, making it necessary to withdraw from the coastal market.

The Aschettinos finally found other insurance, but only for nearly double their old premium of $1,800, and with a sky-high deductible of $12,000 against wind damage. Incensed, Aschettino circulated a petition among her neighbors demanding price reform from industry regulators. "People feel they are being totally ripped off," she says. "People are afraid to even make claims, because they are afraid they're going to be dropped."

Up and down the Eastern Seaboard, hundreds of thousands of policyholders like the Aschettinos are being dropped by their insurers; many more have had to swallow double-, even triple-digit increases in premiums and deductibles. While discontinued policies and rate hikes are nothing new in hurricane-battered Florida and the Gulf Coast, insurers are now dinging homeowners in the Northeast and mid-Atlantic states. Allstate Insurance recently announced it wouldn't take new homeowner policies in New Jersey, Connecticut and Delaware--or the five boroughs of New York City. The company also won't renew 30,000 of more than 600,000 policies it carries in and around New York City. A host of other firms are refusing to insure properties along the Atlantic coast from Maine to the Carolinas.

Why the sudden rash of cancellations? An increase in "extreme weather events" that many scientists--and now insurers--believe are linked to climate change. It's not just Category 4 hurricanes that have insurers worried. Around the country, companies have been racking up record property losses from freakish weather, such as the ice storms last week that paralyzed much of the Great Plains and froze California's citrus crops. In recent years, wildfires in the Northwest, drought and hail in the Midwest, windstorms, lightning strikes on power grids, soil subsidence and other calamities of nature have led to cumulative property losses that exceed those caused by hurricanes. "There's a shift going on to more frequent, extreme weather events," says Evan Mills, an environmental scientist at the U.S. Department of Energy's Lawrence Berkeley National Laboratory. "It's as much an issue in the heartland as on the coast."

Global warming is the culprit, claim many--including several insurers who are canceling policies. While scientists cannot determine whether a single weather event is caused by a natural cycle, or is evidence of more permanent, malignant climate change, the pattern of mounting losses is clear. According to Mills, weather-related catastrophe losses have increased from about $1 billion a year in the 1970s to an average of $17 billion a year over the past decade. In 2005, the year of Katrina, that figure reached $71 billion.

Even before Hurricane Katrina--an event that has yet to be conclusively linked to climate change--catastrophe modelers had begun to look at the probability of a Category 3 or higher storm hitting the Eastern Seaboard. What they found was terrifying: because of increasing temperatures in the Atlantic, along with changes in air and sea currents, a major storm in the densely populated and highly priced Northeast would dwarf the $45 billion in insured losses wrought by Katrina. One study found that a repeat of the "Long Island Express," the Category 3 storm that plowed through New England in 1938, killing 600 people, would cause $200 billion in damage today. (For the record, the Aschettinos want it known that their house survived the Long Island Express.) The damage from a Category 5 storm directly hitting a major city, could, researchers say, "exceed the total capacity" of the U.S. insurance industry. Before he retired earlier this year, National Hurricane Center director Max Mayfield issued a final warning: "We're setting ourselves up for a major disaster."

For many homeowners, the disaster has been financial. Stanley Dutton, a retiree from Ft. Walton Beach in Florida's panhandle, saw premiums on his 1968 ranch-style house increase from $394 in 2000 to $5,479 this past November. "I just can't put up with this anymore," says Dutton, who is selling his home and moving to Alabama. Consumer advocates, and more than a few politicians, suspect that insurers are using the fear of global-warming-related catastrophe to shuck risk onto policyholders and the taxpayers who fund the government insurers of last resort. Despite huge Katrina-related losses in 2005, the Consumer Federation of America estimates that in 2006, the insurance industry cleared profits of nearly $60 billion, its highest ever. (The figure includes not just property but life and auto lines combined.) Industry representatives say that although 2006 was a light storm year in the United States, they have to incorporate climate risk in their rates to remain stable--and profitable--in the future. "We believe what the scientists are telling us," says Michael Treviño, a spokesman for Allstate, which paid $5.7 billion in catastrophic losses in 2005 and has sharply cut back its coverage. "The country is in the beginning of period where we've sustained more frequent and more intense hurricanes," he says. "We believe it would be bad business to continue to add to our risk."

Whether companies are price gouging in the name of global warming will become clear only in retrospect. Regardless of who pays for the damages, climate change means tough economic choices for all Americans, 54 percent of whom now live within 50 miles of a coastline. Industry experts interviewed by NEWSWEEK were unanimous in their insistence that land-use policies and lax building standards must be reformed. "As a society we have to decide: do we want to pay for people to have that ocean view?" asks Tim Wagner, director of the National Association of Insurance Commissioners. Rather than pulling back, some insurance companies are creating incentives for customers who build with climate change in mind. Fireman's Fund Insurance offers discounts to commercial owners who rebuild damaged property using "green" building practices, which tend also to improve building safety.

Still, denial persists. In Florida last week, the legislature convened a special session to tackle the state's home-insurance crisis. One lawmaker tried to persuade his colleagues to exempt the state's panhandle from stricter--and more expensive--building codes by arguing the region's ubiquitous pine trees were "strong enough" to shield buildings against hurricane-force winds. There were guffaws on the Senate floor as another senator invoked the "Three Little Pigs" before rejecting the measure. Little is certain in the insurance world, except for this: no one will be laughing when the Big Bad Wolf blows the house down.