In the past we have seen financial crises from real estate lending and other financial arenas. Is insurance up next? Recently we have seen insurance rates in states like Florida rise to unprecedented levels and many homeowners unable to get coverage. The risks from natural disasters keeps increasing yet regulations in some states effectively limit the boosting of rates. Leading to a market where only thinly capitalized insurers exist in many states. All the while insurance payouts keep increasing. Many these thinly capitalized insurers are rated high by their industry's non-traditional rating agency. Yet by any standard measurement of risk these companies don't meet normal regulatory standards -- leading to high insolvency rates. In a market that involves property insurance, re-insurance and a lightly regulated interconnection of risk -- Is an insurance meltdown the next step? Does this set of dominoes topple the financial system? The Next Financial Crisis: Insurance Today on TAP: Increasing damage from fires, hurricanes, and floods will destabilize a lightly regulated industry—and spill over into broader financial markets. https://prospect.org/blogs-and-newsletters/tap/2025-01-10-next-financial-crisis-insurance/ The next casualty of the epic Los Angeles fires, appropriately, will be the casualty industry. What has gotten immediate press attention is the impact of the fires on local homeowners and on the California state insurer of last resort, the FAIR Plan, which only has about $700 million in cash. The Pacific Palisades alone has nearly $6 billion in insurance exposure, and the total L.A. losses are projected at $20 billion to over $50 billion counting spillover losses to economic activity. In addition, insurance companies have been raising rates, canceling or non-renewing policies, or pulling out of the state entirely. There will be massive pressure on the state to make up for these gaps one way or another, both for homeowners who have suffered uninsured losses and for others whose insurance is becoming unavailable or unaffordable. But that is only the beginning of the story. Basically, there is a massive disconnect between what is financially prudent and what is politically possible. Paradoxically, insurers haven’t been raising rates enough to cover risks. The ideal solution, from the perspective of prudence and loss limitation, as our colleague Harold Meyerson has suggested, would be to prohibit rebuilding in areas that are almost certain to burn again. But no California politician is going to do that. More broadly, insurance commissioners in climate disaster–prone states such as California and Florida, whether Democratic or Republican, have favored overly lenient regulation of insurers in terms of the adequacy of their loss reserves, in order to encourage them to keep providing insurance at all. The result is a serious disconnect between risks and rates. Measured against home values, insurance costs are cheaper in Pacific Palisades than in 97 percent of U.S. ZIP codes, according to a Reuters analysis of a national database. Homeowners in Pacific Palisades, Reuters reported, paid a median insurance premium in 2023 of $5,450—less than residents paid in Glencoe, Illinois, an upscale Chicago suburb where homes are two-thirds cheaper and the risk of wildfire is minimal. The broader risk to the financial system operates through several channels. One, as David Dayen recounts in this companion article, is through mortgage foreclosures on uninsured and lost homes, with resulting damage to bank balance sheets, as well as reduced mortgage lending generally. "Measured against home values, insurance costs are cheaper in Pacific Palisades than in 97 percent of U.S. ZIP codes." A more insidious trend is the rise of insurers that are not regulated at all. As regulated insurers have been quitting high-risk areas, a new kind of sketchy enterprise is filling the gap. According to former Federal Reserve governor Sarah Bloom Raskin, now at Duke University, where her research specialty is the impact of climate on finance, these are thinly capitalized companies that don’t meet normal regulatory standards. Detailed research in this Harvard Business School paper on “climate losses and fragile insurers” reports that the market share of homeowner insurance in Florida provided by these lightly regulated insurers grew to 50 percent by 2018. A new, nontraditional rating agency called Demotech gives these companies high ratings. Despite the fact that these companies were nominally regulated by the Florida insurance commissioner, presumably for capital adequacy, during the period of the HBS study, at least 15 of these Demotech-approved insurers became insolvent, according to professor Ishita Sen, one of the authors, “The fact that 20 percent of the Demotech insurers become insolvent,” she told me, “while none of the insurers rated by [mainstream rating agencies] AM Best or S&P did, shows that regulation has been inadequate.” Why would banks, which require homeowner insurance, accept this subprime (!) form of insurance? Because banks and other mortgage lenders seldom hold onto the mortgage paper. They stick someone else with the risk of loss. If this sounds like an echo of the subprime mortgage crisis and the 2008 financial collapse, the parallels are exact. The Harvard Business School paper also warns of the risk of the government-sponsored and -guaranteed secondary mortgage market institutions Fannie Mae and Freddie Mac getting stuck with this bad mortgage paper. That could require a taxpayer bailout, as happened in the 2008 collapse. And why do state insurance commissioners turn a blind eye to the balance sheets of these sketchy companies? Because in the near term everyone gains. Homeowners get their affordable insurance, even if the undercapitalized companies lack adequate loss reserves. Banks get to keep on making mortgages. The political pressure on the commissioners and the legitimate part of the insurance industry subsides. By the time the companies go belly-up, at the expense of policyholders and investors, their founders have made out well. In the run-up to the 2008 crisis, there was a cynical slogan among Wall Street innovators and traders: IBGYBG. When the whole financial house of cards collapses, I’ll Be Gone, You’ll Be Gone. We will have made our bundle and the ensuing mess will be someone else’s problem. The current insurance crisis, and the multiple flawed responses to it, are the next crash and bailout waiting to happen. “The short-term insurance problem,” says Raskin, “is making homeowners whole. The longer-term insurance problem, which can collapse quickly into the shorter-term one, is the risk to the entire financial system.” Fittingly, an insurance crisis worsened by the climate crisis is unfolding on the watch of the great climate denier, Donald Trump. He may also inherit a financial crisis.
Insurance here in Florida is bonkers and they don't pay out. DeSantis bid for the presidency handed them the silver plater.
That is the crux of the problem here in California. The real problem in CA is no one really pays the true cost of living here. You got boomers who pay $500 for property taxes while their neighbors pay $10K thanks to the idiocy of Proposition 13 passed by greedy landowners in 1979. CA has price controls in the insurance industry so most of the insurer are leaving the state soon if they haven't already. So to compensate CA has a crazy tax structure where the taxes are paid by SiliValley IPOs every few years & the rest of the time CA is borrowing money to balance the budget. The long term liabilities aka public pensions are unsustainable just like in Illinois & NY. Newsom spends money like a drunk sailor out on leave. His handling of the utility crisis aka PG&E bribe money that he & his wife have pocket is scandalous. But no one seems to care here in the land of corruption. He's got the Gekko hairstyle to match.
If you have the perspective that the entire insurance industry in the U.S. is going to endure significant downside then you could take a broad perspective and short U.S. Insurance ETFs such as IAK (iShares U.S. Insurance ETF) or KIE (SPDR S&P Insurance ETF). I am not aware of any insurance sector Bear 3X ETF. However you would probably be better off identifying individual publicly-traded U.S. property insurance companies that are the weakest financially and have the most exposure -- and get short. Here are a couple of resources on obtaining financial strength information for insurance firms with information from the leading insurance rating agencies: How to check an insurer’s financial strength https://uphelp.org/buying-tips/how-to-check-an-insurers-financial-strength/ How to assess the financial strength of an insurance company https://www.iii.org/article/how-to-assess-the-financial-strength-of-an-insurance-company Additionally it would be best to look for publicly-traded insurance companies which have the largest exposure in states (like Florida and California) with the most risk for large-scale losses from storms, wildfires, and other natural disasters. Some lists of U.S. property insurance companies can be found here, here, and here. A Fintel search provides a list of public-traded insurance company instruments across all insurance sub-industries. State Farm is the largest P&C insurance company in the U.S. and the rating firms such as A.M. Best and others have been negative on them since 2023 or so due to their possible cat losses and regulatory issues. Unfortunately State Farm Insurance is not publicly traded. However I expect there are some smaller (and weaker) property insurance companies that are publicly traded. One can take a look at All State (All), Progressive (PGR), or Chubb Limited (CB) -- but all of these are looking sufficiently strong in my opinion (at a quick glance). There is a need to investigate and find a publicly-traded insurance company that is a real weakling -- and can still be shorted. At the low end -- pink-sheet stocks are difficult to short. Another angle to look at is re-insurance bonds. There are now some catastrophe (CAT) bond funds such as Pioneer CAT Bond Y (CBYYX). There has to be some possible way for a retail investor to be able to short individual CAT bonds (or groups on bonds by credit rating) that are the most exposed -- but I don't know what that is.
Bloomberg is NOW hosting a live Q&A with a panel of experts on if the risks to the U.S. insurance markets. Currently they are discussing State Farm and state-backed insurance companies of last resort. Live Q&A: Will Climate Disasters Topple US Insurance Markets? https://www.bloomberg.com/sessions/...climate-disasters-topple-us-insurance-markets '
Reap what you sow. IOW carbon burning (crude oil) begets .... more carbon burning (trees). Homes, etc