A central theme of our practice in the climate change area is that there are certain to be lots of opportunities created. The renewable energy sphere is one, carbon trading is another. Niche insurance coverage is a third.
There will be exotic products addressing the viability and deliverability of carbon and renewable energy credits. And extensions of typical products to cover things like green buildings. But even something as prosaic as basic property insurance will see innovation and opportunity precipitated by climate change risks.
We have written before of the potentially dire situation in Florida regarding property insurance. See Feb. 5, 2009 blog. The exit of State Farm at the beginning of this year was a significant blow. More than 1,000,000 homeowners are scrambling for coverage. A new report this week assesses how Florida domestic insurance companies have attempted to fill the void left by the major insurance companies' hesitation to insure in Florida. Andrew G. Simpson, Insurance Journal (May 7, 2009).
Fifty-nine Florida domestics rely on the Florida Hurricane Catastrophe Fund to back up their policies as reinsurer. The unique difference is that, unlike a typical reinsurer, the FHCF is likely to have to fund its liabilities after the event. So, these companies rely on a government guarantee as a central element of their business plan (and join those entities needing to address nuclear power risks, terrorism risks and flood risks in bringing the government into the insurance picture).
The auditor of these companies, Demotech, reports that the majority are doing well. Still, it is expected that over 10% are going to be downgraded. Id. Of note, the majority of these companies are not rated by A.M. Best. See Florida Trend (June 1, 2008). Still, it is a niche where some are doing exceedingly well. And are certainly doing better because the major insurers (like State Farm) choose not to write.
To be sure, the Florida domestic insurance industry got its start following 1993's Hurricane Andrew - before climate change was a household word. Nevertheless, the continuing pressure on homeowners caused by increased hurricane losses - consistent with climate change theory of more severe storms - has increased the need for, and circumstances favorable to, these new market entities. Will this hurricane season be the one that tests the staying power of the Florida domestic insurers? We defer our answer till next December.