What happens when insurers can't get insurance?

STEVE INSKEEP, HOST:

All right. When some kind of disaster strikes and destroys your home, property insurance is there, hopefully, to help people rebuild their homes and their lives. But what happens when insurers decide they cannot do that anymore? Adrian Ma from NPR's daily economics podcast The Indicator from Planet Money has the story.

ADRIAN MA, BYLINE: The property insurance market is like a big game of hot potato where the potato is risk. That is how Melanie Gall thinks about it, anyway. She co-directs the Center for Emergency Management and Homeland Security at Arizona State University.

MELANIE GALL: Let's assume you have a mortgage. Your mortgage holder is not willing for you to take that risk, so they force you to have homeowner's insurance coverage.

MA: There is another participant in this game of hot, risky potato, something called reinsurers.

GALL: So reinsurers are insurance companies who insure insurance companies. They passed on the hot potato to the reinsurer.

MA: But lately this potato has just been getting too hot. The cost of reinsurance has skyrocketed in the past year or so, as much as 30, 40%. And that's partly why State Farm said it would stop writing new policies in California recently.

GALL: The likelihood of a home being affected by wildfire has increased, in some areas, exponentially.

MA: This seems to be a trend. If you look at Florida, Texas, Louisiana, insurers have been calling it quits in those states.

GALL: I think the insurance market will only get more challenging going forward because climate change is going to increase the risk for more severe flooding, hurricanes, wildfires, etc.

MA: So why would insurers quit instead of just, I don't know, raising their premiums? Melanie's guess is that insurers - for one thing, they have to think about how competitive they are. If their premium is a lot higher than a competitor's, who's going to buy a policy from them? So what does that leave homeowners with? For California, Texas, Louisiana and Florida, they have a safety-net option set up by their respective governments, what they call insurers of last resort. The problem is that it is generally a lot more expensive than the private market.

GALL: So there is a somewhat societal and ethical problem if you think about it because these homes were allowed to be built. And it might have been safe to build in that area a few decades ago, but it's no longer safe because of the change in climate.

MA: So we got people stuck in high-risk homes. We got a huge demand for insurance that some insurers don't even want to touch. This is what you call a market breakdown. But Melanie believes that there are ways to try and mend it. She says you got to reduce the amount of risk that is out there, you know, cool down that potato. On the government side, the state could try and discourage development in hazard-prone areas. But Jim Donelon from Louisiana's Department of Insurance, he says there are places where people have to live despite the risk.

JIM DONELON: Understand this about our coastal area. It's a working coast. We don't have any pristine, white beaches with high-rise condominiums. We supply a huge portion of the seafood that's consumed nationwide, and we supply a huge portion of the energy. All of that requires schoolteachers, firefighters, hospital personnel who have to live in the same vicinity where those activities are taking place.

MA: To try and lure those insurance companies back, the state is offering up to $45 million in incentives. So far, Jim says about eight small insurance companies have shown interest in this, and he says, hopefully, others will follow. Adrian Ma, NPR News.

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