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The Insurance Industry’s Brutal Climate Math

Cameron Parish, Louisiana, used to be a nice collection of little coastal towns where the shrimping was good and the stars at night were better, James Hiatt told me. Hiatt lives just up the river, in Lake Charles, but he comes down to Cameron to be near the Gulf. He remembers when there were 1,500 people, a grocery store, and a Family Dollar in Cameron, the parish seat. But that was before the storms started smashing through every year or two, and back when more commercial-insurance companies still covered homes here.

Eddie Lejuine, a trout fisherman living one town away, in Hackberry, used to pay $5,800 a year to a private insurer to cover the home he and his wife have lived in for decades, which now sits on stilts set at 16 feet above the water. The company dropped them in June 2021, right in the middle of hurricane season, Lejuine told me. The only insurer who would pick up their policy was the state insurer of last resort, Louisiana Citizens. This year, it cost them $16,000 to cover their home—a rate they can’t afford. They plan to cancel their insurance coverage altogether this year.

They’ve watched a lot of neighbors move north, to drier land. With the seafood market awash in shrimp from Ecuador and India, prices here are falling, and the math just doesn’t add up for shrimpers. Lejuine’s trout catch is going down too, maybe, he thinks, because of saltwater intrusion and channel dredging for gas tankers. Hackberry’s population is dwindling, and only a couple hundred people are left in Cameron, their houses lined up on stilts like rows of sleeping herons.

But insurers have found something worth underwriting in Cameron: a giant new liquefied-natural-gas export facility. Two other LNG terminals were already in operation in Cameron Parish when Venture Global’s Calcasieu Pass LNG terminal began exporting liquified gas in 2022. Shortages created by the war in Ukraine were helping to fetch record-high prices for American fuels that kept the heat on in Europe; several more are now proposed or permitted for the broader wetland region. Someone is presumably insuring the new facility—insurance is a must to get a project like that going, and many large insurance companies have different arms for major commercial projects versus homeowners’—but the identity of the company isn’t public information, and the company didn’t respond to my inquiry about it.

Even as climate change is remaking the American map, prompting insurance companies to shed the risk posed by rising heat and water, those same companies have not stopped underwriting the oil-and-gas projects that are stoking that risk. Understanding risk may be at the core of insurers’ business, but right now the reward for investing in fossil-fuel companies still overrides any pressure to avoid supporting the industries that make climate change worse.

The U.S. Senate has taken an interest in that contradiction, holding at least two committee hearings in the past several months on why the industry is refusing to insure homeowners for climate reasons while simultaneously underwriting—and heavily investing in—the oil, gas, and coal industries. At last month’s Senate Banking Committee hearing, Senator Elizabeth Warren warned of “real risks to our economy” in the insurance companies’ dealings: “The insurance companies have been playing every part of this game.” In June, the Senate Budget Committee opened its own probe into the matter.

The implication of mass uninsurability is, in the worst-case scenario, mortgage-market collapse: You can’t get a mortgage on a home you can’t insure. Already, the nonprofit First Street Foundation estimates that 39 million homeowners are paying insurance premiums that do not reflect the full risk to their house, in part because state regulators limit what insurance companies are allowed to charge. In response, insurers leave those markets, which sends home values plummeting. “We saw in 2008 what happens when mortgage markets crash, and the writing is on the wall for a climate-change-fueled repeat,” Senator Sheldon Whitehouse, the Budget Committee chair, told me in an email.

Already, Allstate, Nationwide, American Family, Erie Insurance Group, and Berkshire Hathaway have told U.S. regulators that they’re pulling back from offering homeowner’s insurance in some places because of rising severity and frequency of extreme weather events. Just this summer, State Farm stopped offering new policies in California, citing “rapidly growing catastrophe exposure”; Farmers Insurance pulled many of its policies in Florida for the same reason. Getting a commercial homeowner’s policy in wildfire-addled Colorado or flood-prone Louisiana is becoming more expensive, or impossible. With more and more homeowners turning to the high-cost, low-coverage state-run insurers of last resort, a major disaster outstripping a state insurer’s ability to cover the payouts is a real possibility. The insurance safety net is disintegrating, and what happens next is not at all clear.

Yet, at the same time, insurance companies are heavily invested in fossil fuels. “An insurance group is two businesses under one roof,” Carroll Muffet, the president of the Center for International Environmental Law, which writes reports on climate finance and corporate accountability, told me. One of those businesses writes insurance policies. The other manages the large pools of money brought in from premiums. That makes insurance companies some of the largest financial actors in the economy, Muffet said. A report released in August from the investor-advocacy group Ceres, the carbon-accounting group Persefoni, and the sustainability consultant ERM found that U.S. insurers held $536 billion in assets related to fossil fuels in 2019, a pattern of investing that is unlikely to have drastically changed since.

State Farm Insurance stood out for holding the most fossil-fuel-related investments of any insurance provider in the United States, including coal and tar-sands projects. Per the Senate Budget Committee, Berkshire Hathaway is the largest shareholder in Chevron, and it came in second for total fossil-fuel investments. AIG is one of the largest insurers of fossil fuels in the United States and collected some $675 million in premiums for covering the energy industry in 2021, underwriting tar-sands pipelines and LNG projects, including one in Freeport, Texas, that exploded in 2022, sending a 450-foot fireball over the facility.

AIG, State Farm, and Berkshire Hathaway did not respond to requests for comment; Liberty Mutual referred me to the American Property Casualty Insurance Association, a trade group that represents insurance companies. “Consumers, society, and the environment ultimately benefit through greater availability and affordability of insurance when insurers have the flexibility to conduct business in line with widely accepted actuarial standards and are free to pursue different risk-based investing and underwriting strategies,” Nat Wienecke, APCIA’s senior vice president of federal-government relations and political engagement, told me in an email, noting that, on average, fossil-fuel-related investments were a small part of a wider portfolio that includes clean energy.

Wienecke also said that policy makers need to focus on developing better building codes and land-use planning, and on “retrofitting existing infrastructure” against risks such as storms and wildfire. Over the past decade, in an effort to lower insurance rates, hurricane-prone Alabama has rolled out a program that offers grants to homeowners to wind-proof their house; one rosier view is that insurance companies are forcing states’ hand in that direction.

The companies also argue that they are hamstrung in some states, such as California, by regulations that prevent them from incorporating projections about future risk into the rates they set for customers. The intent of these rules was to keep models from overstating risk and pricing premiums too high. But California, facing the mass pullout of its insurance sector following years of catastrophic wildfire, has relented, announcing reforms last month to allow forward-looking catastrophe modeling that should start in December 2024. And “typically, as California goes, so goes the rest of the country,” says Lindene Patton, an attorney and the former chief climate-product officer for Zurich Insurance Group, one of the largest insurance companies in the world.

Premiums will likely go up—but that’s still preferable to losing the private-insurance option completely. Plus, no one is really paying for the externalities of climate change yet. The high-risk nature of a place should probably be better reflected in how much it costs to live there. And, yes, the U.S. will have to face the reality that some places are becoming too risky to live in, a reality fraught with disparities in who can afford to move. But that still leaves one-half of the insurance equation out of the conversation. Many industries are weighing their particular responsibility for dealing with climate change, but in this case, the question is even more pointed: What duty does the insurance industry have to mitigate, rather than exacerbate, the risks it insures its customers against?

Advocacy groups, recognizing the role that insurers play in the fossil-fuel business, have begun protesting them directly. Groups such as Insure Our Future and Greenpeace are now showing up at insurance-industry meetings and offices, demanding that companies divest their assets from fossil fuels and cease underwriting new projects. After all, no oil or coal project can go forward without an insurance policy. And Muffet expects that exact question of duty to spur a new wave of climate litigation of the likes recently seen focused on oil majors. This time, the target will be insurance. “It’s a virtual certainty,” he said.

While these fights play out, the climate risks are multiplying: Just in August, a drought-fueled wildfire raged through Cameron, leaving the new LNG facility right in the middle of a giant burn scar. Hiatt used to work at a refinery, like his dad did before him, but this year, he decided to start his own nonprofit, For a Better Bayou, to oppose the LNG build-out. He finds it hard to accept the current situation, “to be in a place that’s constantly being struck by climate disasters, and also to see that the industry contributing to climate disasters are trying to build themselves right at the mouth of the river that’s being struck.” One day, inevitably, if the world’s temperature continues to rise, those facilities will also be uninsurable—because they’ll be underwater, because the industry will calculate that the risk is no longer worth it, because in an act of self-interest the world will have finally moved away from natural gas—but for now, they are valued enough to persist here.

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