Guy Carpenter Helps Public Sector Clients Understand and Address US Property Insurance Challenges

Alarming trend of Americans’ largest assets going unprotected

Earlier this year, the Consumer Federation of America (CFA) released its findings that there is an estimated USD 1.6 trillion in property value of uninsured homes across the country, equating to 1 in 13 homeowners across the United States being uninsured.¹ The CFA reported that those making less than USD 50,000 a year are twice as likely as higher earners to be uninsured.

This significant protection gap can be driven by lack of risk awareness, decision-making biases, cost and/or limited availability of coverage options. Mainstream media have increasingly reported on availability and affordability concerns. Recent headlines include:

“Fannie Mae CEO: Beyoncé is right. Climate change has already hit the housing market—and homeowners aren’t prepared” – Fortune Magazine, May 8, 2024.²

“The Possible Collapse of the US Home Insurance System” – New York Times, May 15, 2024.³

“The Uninsurable World: Rethinking How to Cover for Climate Damage” – Financial Times, August 12, 2024.⁴

Harmful knock-on effects on communities

Forgoing coverage, by one’s own choice or not, is a problem because, time and time again, research has demonstrated that a lack of insurance coverage can exacerbate existing inequities in low-income communities and slow economic recovery post-disaster. Drs. Carolyn Kousky and Xuesong You’s 2023 publication in the Journal of Risk and Insurance looked at communities after four land-falling hurricanes and found that:⁵

Insured households were less likely to report experiencing high financial burdens in both the short and longer run post-disaster.

Visitation rates to local businesses were higher in areas where there were greater flood insurance take-up rates.

The authors of the CFA report highlight that “being uninsured leaves these homeowners vulnerable to having to live in unhealthy and unsafe housing conditions, such as with damaged roofs and mold exposure. Uninsured homeowners also run the risk of losing their homes altogether, due to disasters or unexpected, costly repairs stemming from more localized damage, such as a kitchen fire.”

For small businesses, the protection gap is also a concern, as many without insurance do not reopen post-disaster, which can harm employment, tax revenues and the vibrancy of localities.

Guy Carpenter and Marsh McLennan colleagues comprehensively tackle existing market issues

Given our unique vantage point across the (re)insurance market, we have heard from a growing list of government and public entity clients who are concerned and feeling pushback from constituents regarding solutions. Regulators and political leaders want to measure the protection gap and assess trends on the availability and affordability of property insurance coverage for certain perils and geographies. Harnessing public data on rate filings and carrier surveys, as well as our risk analytics expertise, we aim to empower evidence-based policy and decision making.

As an example, after record-breaking wildfires in Colorado sparked growing concerns about the availability and affordability of homeowner’s insurance, the State reached out to our sister company Oliver Wyman to conduct a data call and market assessment. The market assessment was focused on identifying affordability and availability trends as well as understanding underwriting, pricing and catastrophe modeling practices in the state. Guy Carpenter’s wildfire risk scores allowed Oliver Wyman to measure how findings correlated with exposures and to jointly craft potential (re)insurance solutions for the State.

By utilizing natural catastrophe and climate models, we can develop an informed view of the risk, estimate potential economic impacts and propose a rigorous risk management strategy. We do this for the many states that have a residual market (a plan created to provide consumers with insurance when coverage is unavailable on the traditional private market). In recent years, given market conditions, these residuals have seen significant growth across the United States for peak perils of hurricane and wildfire. We have seen this for larger plans in states like California, Florida and Louisiana, while also seeing impacts on a smaller scale in states like Oregon, New Mexico and Ohio.

Guy Carpenter works alongside residuals to optimize their view of risk management, identify areas of continued stress and access reinsurance and capital market capacity. In 2023, just over USD 23.7 billion total of catastrophe treaty limit was placed by 19 residual market plans into the reinsurance marketplace. That number continues to increase in 2024 as exposures continue to rise.

Deep dives into specific state insurance market variables and risk transfer strategies help states foster a strong local insurance market, but these efforts need to be complemented with investments in risk mitigation, risk education and, in some cases, alternative risk transfer options like parametrics. Marsh McLennan works across this spectrum of risk management services to help communities become truly resilient to the complex challenges in today’s environment.

Beyond traditional market solutions to protect remaining risks

Impediments for vulnerable and/or high-risk groups trying to access comprehensive coverage will remain. For these segments of the population, policymakers and local leaders should evaluate what else can be done – potentially providing subsidies where appropriate or building community-based insurance programs that speed up recovery in an inclusive manner.

In 2023, Guy Carpenter partnered with several organizations^* to structure and implement a parametric flood cover for a local nonprofit, the Center for New York City Neighborhoods. This coverage, if triggered, would provide emergency cash funds to individuals in need immediately following a major flood.⁶

Innovations like this, coupled with strengthened homeowners’ insurance markets, can help get all populations protected so that, when the inevitable extreme weather events occur, individuals and their communities can bounce back. These types of public-private partnerships can foster less reliance on debt, taxes and post-event financing from federal entities and shift the trajectory away from an unrelenting, unsustainable strain on disaster spending.

Contact

Bridget Carle
Senior Vice President, Public Sector
Bridget.Carle@guycarp.com

*Partner organizations included Environmental Defense Fund, SBP, Swiss Re Corporate Solutions, NYC Mayor’s Office on Climate Resilience, and Center for NYC Neighborhoods