Wildfires, Droughts and Floods Are Here — How Will That Impact the Economy & Insurance Stocks?

In the last couple of years, insurance companies have received a lot of attention. That’s in part because of more unpredictable — and more exacerbated and fatal — climatic events that have struck the United States. 

What Happened: There has been an increasing attention on climatic devastation, mostly because of the media’s attention to it and because of the economic toll its taking on the country. 

According to information gathered by the National Centers for Environmental Information, a variety of destructive weather events — including floods, droughts, fires, freezes and storms — have created trillions of dollars of damage. More specifically, 298 of these events from 1980 to 2021 have cost America $1.975 trillion. (And this only includes events that accumulated losses of over $1 billion each.)

The economic toll that is coming appears much worse. According to estimations accumulated by University of California, Berkeley Professor Solomon Hsiang, assuming the economy continues its predicted trends, one added degree Celsius will lead to a contraction of U.S. GDP by 1.2%. In 2019 Congressional testimony, Hsiang explained that over 80 years, anywhere from $5 trillion to $10 trillion of value from incomes could be lost to severe changes to the climate. On the global level, if unmitigated warming continues, global growth could slow by .28% on average over the next eight years. The consequences are thought to be many, including weighing heavily on America’s financial institutions. 

“These effects are likely to be felt in the U.S. through their impact on financial markets, continuous adjustments in the global trading system, and increased migration pressure from both economic migrants and asylum seekers escaping political violence,” said Hsiang in the testimonial. 

In addition to the human costs in the south and northeast, Hurricane Ida is gearing up to be the most expensive storm that has ever hit New York, according to MarketWatch. 

Related Link: 5 Insurance Stocks To Watch In The Wake Of Hurricane Ida

Why It Matters: Millions of people have insurance policies, particularly related to assets that are deeply valuable to them. Namely, housing. As risks get riskier, insurance companies are having to make difficult decisions about what to do — many of them have gone out of business because their payouts have become too high due to more drastic and frequent wildfires and floods, according to a report from Grist. 

Insurance companies don’t always adequately include price information regarding certain risk. One 2020 economic study found floodplain homes in the U.S. to be overvalued by a total of $34 billion. 

One compensation strategy of insurance companies is to simply raise rates or have state agencies cover insurance claims, which means that taxpayers are paying for the more expansive risks. 

Cities that reside in more climate risky areas — that is, areas along the coasts more likely to be subject to flooding as well as western spots more likely to be hit by out-of-control wildfires — are also seeing their municipal bonds becoming riskier. The result is that municipal bonds are becoming more costly. According to one study, a 1% increase in climate risk is associated with a 33.3 basis point increase “in the total annualized issuance cost of a bond.” 

How Insurance Companies Are Holding Up: While the industry was profitable in 2020, insurance stocks are predicted by less profitable in 2021 due to the natural catastrophe losses that have reached a “decade high” of $42 billion in the first half of the year, according to the Insurance Information Institute.

But those predictions might not match the market trends now. USAA Income Stock Fund USISX is on an upswing, particularly in the last year; The Travelers Companies, Inc. TRV and The Allstate Corporation ALL are both near all-time highs.  

If you live in New York and are in danger of having your property flooded or it’s already been flooded and need help, you can go to FloodHelpNY.org.