The Next Financial Crisis: Insurance -- The American Prospect

[erronis]

https://prospect.org/blogs-and-newsletters/tap/2025-01-10-next-financial-crisis-insurance/

Increasing damage from fires, hurricanes, and floods will destabilize a lightly regulated industry—and spill over into broader financial markets.

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.

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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.