Insurance Politics at the End of the World
Shall we do climate change the hard way, or the harder way?
At its core, insurance is a simple business. Companies figure out how much they will likely have to pay out, and then set their rates to ensure they make a profit. Success is dependent upon the ability to accurately assess risk. There is a huge financial incentive to have the most clear-eyed possible understanding of reality. Wishful thinking or misguided ideology will do nothing except lose an insurance company money.
Because of this, insurance can tell you things about reality. It resembles global investment firms in this: The people running them may be greedy, and the clients may be evil, but the business is all about understanding the true and unvarnished state of the world in order to manage risk in order to protect wealth, and therefore these firms do their very best to operate according to what is true, whereas politicians, for example, often do their very best to lie. This is why every leftist and revolutionary should read the Wall Street Journal. There are far fewer lies when money is involved.
The insurance industry is going to serve a very useful role in the climate apocalypse. It is going to be the tip of the spear that punches through all of the bullshit of climate denialism once and for all. Indeed, the process is very much underway already. Politicians and oil lobbyists can lie all they want, but their homeowners insurance rates are going up.
Watching this process unfold is going to expose the hidden bedrock of many people’s belief systems in a rather violent way. That bedrock, in most cases, will not be “socialism” or “capitalism” but rather “whatever is good for me, personally, I don’t care what it costs, please god save me.” We are well on the road to the inevitable political crisis that will be sparked by insurance. State Farm just stopped selling home insurance in California, due to wildfire and other climate-driven risks. Coastal states in the path of hurricanes have seen tons of insurers pull out altogether in recent years, and the ones left are handing down eye-watering premium increases to homeowners. Florida property insurance rates are rising 40% in a single year(!). In Louisiana, it was even worse—the state insurance of last resort bumped its rates 63% this year. Increases like this prompt predictable outrage. “Louisiana needs a healthy, competitive insurance market,” a typical editorial went, “but not at the cost of making it difficult-to-impossible for Louisianans to remain in their homes.”
And sure, you don’t have to be great at math to see that an annual insurance bill that compounds at something like 50% a year is, in short order, going to make it economically stupid/ impossible to keep living in your hurricane/ fire-prone home. But banks won’t write mortgages on uninsurable property. This sure is a pickle! What to do? The states themselves, desperate to look like they are solving the problem, have their own (expensive) insurance, which they sell to homeowners who can’t get anything better. But these state insurance firms are, if we’re being honest, a comforting fiction. State governments do not possess enough money to make homeowners whole in the event of a really bad disaster, like a major hurricane plowing through South Florida. Just as a point of perspective, last September Hurricane Ian—which could have been worse!—caused $100 billion in total losses, $60 billion of which was insured. One hundred billion dollars is equal to the total budget of the State of Florida. Unless you think Ron DeSantis is going to be holding some very creative yard sales after the next hurricane, it is clear that the system is marching further towards absurdity with every passing year, as private insurers decide the risk is just not worth it.
This is an existential question for tens of millions of homeowners in America. It also sets up a very interesting political crisis that we will all get to “enjoy,” meaning “wage cutthroat battles on the road to the next civil war.” Because when you brush away the soothing fictions and political slogans, there are only a few ways to handle this:
You let private insurers set rates appropriate to the actual risk of insuring billions of dollars worth of property that is increasingly likely to flood, blow away, or burn up. Those rates are very high and getting higher. Every year, more homeowners will not be able to afford to stay in their homes. They will have to sell and move inland. Sooner or later there will be a tipping point where the pool of sellers far outstrips the pool of buyers. Real estate prices in all of these areas plummet to almost nothing, because only very rich or very insane people can afford to live there. This real estate value crash will cause state tax receipts to crash, meaning the states will be broke as hell at a time when millions of residents are squawking for help. Even more consequentially, a real estate crash will cause an enormous, widespread financial hit to basically everything, as the banks holding all of those mortgages get hammered. I am not qualified to “pencil out” the exact scope of such a financial crisis, but in Florida there is $2.9 trillion worth of insured coastal real estate. That is a lot. A 2020 McKinsey report guesstimated that some parts of Florida could lose as much as a third of their real estate value by 2050, but it is fair to say that that could turn out to be low. Regardless of the exact timeline, this is where it’s headed.
One important thing to say about this scary scenario is: This is the free market functioning perfectly!!! This is actually how capitalism is supposed to solve problems. In this scenario, adaptation to climate change is induced by price signals. People are forced to move away from the coasts because it becomes too expensive. This is economically rational. The human pain of this enormous dislocation does not change that fact. Everyone who loves to celebrate the free market: This is what you’re asking for. Every time you hear a Republican frantically decrying this rational economic progression, you are hearing a hypocrite.
The second possibility—the one that will actually happen—is that the private insurance market collapses and then the emergency quasi-fictional state insurance market fills the gap but then it runs out of money at the first big disaster and then all of these states and their homeowners go to Washington for bailouts. Republican warriors for free enterprise quickly become socialists when their donors’ beach houses are at stake. Climate change deniers quickly turn into climatologists when they start asking for the government to build sea walls to keep their garages from flooding. One small consolation as this panic-inducing process plays out will be seeing all the bullshit pretenses of the people who were happy to deny climate change for their own gain blow away with their roof tiles. Unfortunately, good and bad people alike will be fucked, but at least you will get to watch your neighbor’s Ford F-150 with the “LIBERAL TEARS” flag float away too.
I do not think that red state politicians who can’t stop talking about love of capitalism and state’s rights will feel bad about the rampant hypocrisy of running to Washington for public bailouts. But it is worth thinking about this in advance. I love socialism, and I am fine with a socialist program of “supporting vulnerable citizens,” and citizens whose homes have been washed away in hurricanes are by definition vulnerable. Realize, though, that opening the pipeline of hundreds of billions of dollars of federal money to enable people to continue living as usual in these disaster-prone areas is to erase the only benefit of the free market insurance system—the way that it forces rational adaptation climate change. For a shitty Florida Republican governor, just to take one example, the ideal political solution is “I secured money for you to rebuild your garish beach house exactly where you had it and continue to live your tacky ass lifestyle just as before.” As a long term solution, this is the worst of both worlds.
The rational capitalism solution here is: We accurately price your risk and that risk becomes unaffordable and people move away from areas that are stupid to live in and therefore climate adaptation is achieved. The rational socialism solution is: We collectively embrace the idea that we need to adapt to climate change and the federal government creates long-term programs that incentivize moving away from areas that are stupid to live in and disincentivize “build as much crap in South Florida flood zones as you can now to take advantage of the real estate bubble” and generally cushion the economic blow for all the people whose lives will have to change. The first solution is harsher and more direct, and the second is perhaps slower and more human, but both achieve the necessary climate adaptation.
The path we are on today, though—the path that our current political system makes likely—is the path of Wholly Irrational and Completely Ad-Hoc Pirate Capitalism: Increasing climate change-induced disasters cause panic among homeowners as a class; politicians rush to grab dollars to enable everyone to live the same as they are now for as long as possible; and eventually the whole thing crashes into the wall of reality in a way that causes uncontainable, national pain rather than just the specific, regional, temporary pain of the smarter solutions. This pain will probably come in the form of 1) enormous economic and human losses and 2) a political crisis that will occur when all of the people living in other states finally say, “Why the fuck is so much of our federal budget going to protect these idiots’ beach houses?” Then things will get ugly.
We could at least have a productive debate about all this if our leaders would pick a lane and stay there. Instead, I expect Florida to reach a point where Republican governors are demanding that every Republican donor’s house be hoisted onto an impermeable private island built at government expense while everyone else drowns. Just remember that the insurance bill you got that made you vomit is telling you something real about the world—the sort of no-nonsense, suck-it-up, facts-don’t-care-about-your-feelings delivery of free market information that Republicans are so fond of celebrating. As long as they are not the ones getting it.
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Insurance apocalypse politics are fascinating! I also wrote about this topic here, and about the peculiar political nature of Florida here, and about the place where finance and risk management get so big they dissolve political boundaries here.
I am writing this post from Florida, where I am visiting my family, most of whom live by the beach. Does this count as on the scene reporting? I will say yes since I am the editor of this publication.
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I work in insurance and all you said above is so true. We constantly keep looking for trends, events around the globe and do everything to make risk assessment better.
My children are sick to death of me lecturing about the wisdom of the actuaries, but if there’s one thing I learned from a family in finance and a grandfather obsessed with proving the life expectancy tables wrong, it’s to listen to the damned actuaries.