CoreLogic® identifies how climate change compounds labor market pressures in the insurance claims industry
With the recent announcements from several high-profile property insurance carriers that they will no longer accept new homeowners insurance applications, questions have been swirling about the extent to which natural disaster risks drove those decisions.
“When repeated catastrophe events create a sustained increase in demand for a supply of labor, supply tries to match that of demand but is perpetually racing to catch up.”— Jay Thies
The geographic concentration of “policies in force” is a major consideration for all property insurers. So, states with reoccurring risk exposure, like California and Florida, present a certain balancing act for those organizations. While risk profile and concentration are major concerns for insurers, these are not the sole considerations when determining whether to continue writing business in a particular jurisdiction.
The regulatory environment of a particular state also plays a major role in determining whether to offer policies. Adding to the complexity of the regulatory environment in which insurers operate is the continued pressure within the construction labor market. Since the Great Recession of 2006 – 2010, there has been a persistent reduction in employees entering the construction trades.
How Does Climate Change Affect the Insurance Industry?
When a particular geographic area is repeatedly impacted by natural disasters such as hurricanes or wildfires, a pattern of predictable social, demographic and economic consequences begins to manifest. While the social and demographic consequences immediately impact those directly experiencing these events, the economic consequences yield unintended impacts on a far greater scale.
Take, for example, the impact and pressures that repeated exposure to wildfire events may have on the cost of roofing.
In a strict supply-demand equation, a particular geographic market will support only a certain number of roofing contractors to maintain regular roof replacements resulting from non-catastrophe losses. Factor in a single catastrophe event though, and there is a temporary increase in demand that is met with a temporary uptick in the supply of new contractors servicing that geographic area.
However, this equation becomes complex when repeated catastrophe events create a sustained increase in demand for a supply of labor. The result is that the pace of labor attempts to match demand but is perpetually racing to catch up. While temporary increases in materials pricing may also occur, these demand forces are generally tempered by nationwide material supply logistics that are capable of meeting regional demand fluctuations.
Regulatory Policymakers Grapple With Climate Change Impacts
As geographic regions experience these demand surges for both material and labor, regulatory bodies generally respond by enacting controls on the segments of the business sectors impacted by these catastrophes.
“Legislative requirements have created a difficult dynamic for insurers with exposure to geographic concentrations of policies that have the potential for repeated catastrophe loss.”— Jay Thies
In the case of California, perennial wildfires gave the state’s legislature fuel to strengthen building codes in 2008, which has since led to beneficial improvements. These code improvements include requirements for fire-retardant roof coverings, exterior walls and decks.
The effects of these requirements for insurers are a net positive, as implementing these changes reduces the likelihood and severity of loss. More recently, the California Department of Insurance announced it would require insurers to offer discounts to property owners who implement wildfire safety and mitigation measures outlined in the state’s Safer From Wildfires guidelines.
However, other legislative requirements have created a difficult dynamic for insurers with exposure to geographic concentrations of policies with the potential for repeated catastrophe loss. One of the primary tools that insurers use to buffer their risk is the purchase of reinsurance. In the case of California, regulations do not allow the costs associated with this reinsurance to be passed to policyholders; this is in addition to effectively capping annual rate increase requests.
In conjunction with these unrecoverable costs, insurers also lack the ability to use predictive wildfire modeling in California to assist with underwriting decisions. Under the current regulations, only historical wildfire exposure can be considered in insurance models. A change to allow predictive wildfire modeling in California would allow insurers to anticipate potential risks and make decisions to balance the overall exposure within a particular geographic region.
The Future of Bottom-Line Costs in the Insurance Industry
In summary, as population growth in catastrophe-prone regions such as Florida, California and even Texas continues, the geographic concentration risk that insurers face will continue to compound. While the supply-and-demand curve for labor resources will attempt to intersect and normalize in these regions, markets facing repeated natural disasters will struggle to bring these economic forces into balance.
Nationwide, construction trades remain under pressure due to retirements from baby-boomer employees and the overall lower numbers of workers entering these positions. This problem is not a simple manner of worker relocation. There is a systemic worker shortage contributing to these challenges, which will likely take the better part of a generation to correct. To help right this imbalance, there must be a targeted nationwide effort to incentivize more workers to enter construction trades.
Concurrent with these labor shortages, if insurers continue to face regulatory headwinds that disincentivize participation in these specific markets, consumers will ultimately face increasing premium costs and reduced property insurance options.
To understand the costs contributing to your bottom line, follow the CoreLogic® Quarterly Construction Insights reports.
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