Micah Woolstenhulme hadn’t seen much Midwestern weather before moving to Cedar Rapids. Four months after he arrived, the August 2020 derecho happened.
“That was an entirely new experience,” Woolstenhulme said. “I’d never experienced anything like that before. We saw what a storm that size looks like.”
Woolstenhulme, who grew up on the East Coast, had just taken the job of chief risk and reinsurance officer for Cedar Rapids-based UFG Insurance. The massive, powerful windstorm that swept across five states was a dramatic demonstration of the unpredictability of climate change.
“The whole industry is investing heavily in (computer) modeling” to assess risks posed by more frequent violent weather events, he said.
“The main risk is the claims that come along with that,” said Thomas Berry-Stoelzle, associate professor of finance at the University of Iowa’s Tippie College of Business. “It’s become an increasing trend, and it’s not going away.”
Drawing on state regulators’ reports, Berry-Stoelzle recently found that insurers are more likely to address climate-related weather threats when a disaster strikes the state where they’re headquartered.
At UFG, which writes policies for business and commercial property in 32 states, Woolstenhulme and his staff must ensure the company has the reserves to pay claims by managing risk and through reinsurance – essentially insurance for insurers that shifts risk to another company to reduce the chance for large payouts.
While events like hurricanes and earthquakes are relatively easy to model, convective storms – think traditional Midwestern summer thunderstorms – are becoming more frequent and are occurring in places they hadn’t been.
“Hail, tornadoes, straight-line winds are probably the most-sore points for the industry, in that it’s been underpriced for a long time,” Woolstenhulme said. “They’re generally not able to be covered by standard reinsurance. The rates are coming up in the property space mostly for that reason.”
The impact
The tumult in the insurance industry caused by climate change — once concentrated in high-risks states like Florida, California and Louisiana vulnerable to catastrophic hurricanes and wildfires — has now spread to the Midwest.
A May report from Moody’s Ratings says more than 90 percent of the country experienced double-digit rate increases from 2019 through 2024 as the industry faces soaring costs. In some states, rates jumped up to 60 percent over the five-year period. And in 2023 alone, some states saw rates increase as much as 30 percent.
The report notes that from 2014-2023 insurers paid out more for claims than they earned in premiums.
The U.S. property and casualty insurance saw an estimated $21 billion in underwriting losses in 2023. Underwriting losses in 2022 totaled $24.8 billion, according to analysis by data analytics and risk assessment firm Verisk and The American Property Casualty Insurance Association.
It’s likely the 2024 figure will be even higher, given the destruction of Hurricane Helene, which reached far inland, leaving a path of destruction from Florida to North Carolina in September, with a monster storm, Hurricane Milton, headed toward Florida this month.
The U.S. property and casualty insurance saw an estimated $21 billion in underwriting losses in 2023. Underwriting losses in 2022 totaled $24.8 billion, according to analysis by data analytics and risk assessment firm Verisk and The American Property Casualty Insurance Association.
According to the association, 2022 was the eighth year in a row the U.S. suffered at least 10 catastrophes causing more than a billion dollars in losses. Natural disaster losses from 2020 to 2022 in the U.S. exceeded $275 billion in 2022 dollars — the highest ever three-year total for U.S. insurers.
According to the association, 2022 was the eighth year in a row the U.S. suffered at least 10 catastrophes causing more than a billion dollars in losses. Natural disaster losses from 2020 to 2022 in the U.S. exceeded $275 billion in 2022 dollars — the highest ever three-year total for U.S. insurers.
In Iowa, the homeowners insurance market had been profitable for years, followed by losses in 2020 to 2022 because of severe storms, according to Iowa Insurance Commissioner Doug Ommen.
“We have strung together some pretty tough years — 2021 and 2022 were also really difficult years,” he said.
In 2020 alone, the year of the derecho, insurers in the state lost a combined more than $1 billion, according to the Iowa Insurance Division.
At least four companies — IMT Insurance, Secura, Celina and Pekin Insurance — have dropped Iowa customers, impacting tens of thousands of policyholders in the state.
‘No free lunch’
Insurance companies cope with climate risks by adjusting underwriting standards, investigating technologies and practices for mitigating weather damage, or by dropping some policies altogether, said Martin Grace, a UI finance professor who studies how insurance companies deal with climate change.
“We used to insure these risks, now we don’t, but maybe we’ll come out and give you some advice on making your property more resilient, and if you do that, maybe we’ll insure you,” Grace said of the companies’ approach. “It’s a lot about risk avoidance and risk reduction.”
“You have somebody from the company studying and recommending risk mitigation actions,” Woolstenhulme said. “We and other companies are certainly upping our game in that area.”
More frequent and widespread dangerous weather inevitably mean higher premiums for property insurance.
“The cost for tornado, hail, and straight-line winds is being pushed on the policy holders themselves,” Woolstenhulme said. “That’s why you see rates increasing. The reinsurance market has decided that’s a cost that should be priced into the original policy.”
Coverage of residential property is complicated by homeowners locating in disaster-prone areas like the Gulf Coast or mountainous region with wildfire risk. Home insurance costs went up 21 percent between 2015 and 2021, according to a LexisNexis trend report. Premiums in hurricane-prone Florida are more than 3.5 times the national average.
“There’s no free lunch here,” Grace said. “People are going to have to pay the price of risk, and if you live in a risky area there’s a price.”
‘Doesn’t look good’
UFG divested its residential-property business to Nationwide in 2020, and virtually all flood coverage is now written by the federal government.
Insurance companies often seek to diversify their markets geographically, offsetting risky areas by writing policies in places with less exposure. But there are fewer of those less-risky areas, and state regulators may take a dim view of sharing costs, Grace noted.
“That makes a lot of sense, but the Kansas regulator says, ‘You operate in Florida. We don’t want any of that (risk) creeping into the prices of policies here,’” he said.
Berry-Stoelzle doesn’t think the situation threatens the insurance industry’s overall health. He noted that while banks may be forced to write down the value of properties in a 30-year mortgage, insurance companies have the flexibility to negotiate policy terms every year.
“The contracts have a much shorter duration,” he said. “I don’t think we see insurance companies going bankrupt. They can negotiate contracts much more dynamically.”
Meanwhile, climatologists and actuaries at UFG and its competitors will try to keep up with changing climate and its unpredictable weather.
“The modeling is not static, and the climate continues to change,” Woolstenhulme said. “It’s very evident in the weather patterns that the losses are increasing. Companies are starting to project not just what the risk is now, but what they think it will be based on the way it’s heading over the last few years. It doesn’t look good.”
Tom Barton of The Gazette contributed to this article.
