Janet Yellen identifies a protection gap in insurance and climate change, with only 60% of last year’s $165 billion losses being covered.

Janet Yellen identifies a protection gap in insurance and climate change, with only 60% of last year's $165 billion losses being covered.

The Impact of Extreme Weather on Homeowners and Insurance Coverage

Extreme weather events have become increasingly common in recent years, causing significant disruption and financial strain for homeowners. Janet Yellen, who chairs the Financial Stability Oversight Council (FSOC), recently highlighted the challenges faced by American households as insurers raise rates and withdraw coverage in high-risk areas.

Heat waves have been particularly severe and persistent across the United States this summer, with approximately 170 million Americans under excessive heat warnings and advisories. Meanwhile, wildfires have ravaged western states and parts of eastern Canada, while floods have caused extensive damage in Vermont.

Yellen emphasized that the impacts of these climate-related disasters are being felt by households across the nation, even if their own homes have not been directly affected. As a result, more homeowners are turning to residual markets for coverage or forgoing insurance altogether. In fact, in 2020, only 60% of the $165 billion in total economic losses from climate-related disasters were covered by insurance.

The implications of these shifts in insurance coverage extend beyond individual households. Yellen believes it is necessary for the FSOC to examine how these changes may affect the wider financial system. She stressed the importance of understanding the potential consequences for real estate markets and the financial institutions that rely on insurers to manage risks effectively.

The FSOC, established after the global financial crisis, plays a crucial role in identifying and addressing systemic vulnerabilities in the US financial system. Comprising heads of various regulatory bodies, including the Treasury Department, Federal Reserve, Federal Deposit Insurance Corp., and Securities and Exchange Commission, the council aims to ensure stability and resilience in the face of financial challenges.

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Insurers have been forced to reevaluate their coverage policies due to the increasing frequency and severity of climate-related events. Extreme weather events have led to significant financial losses for insurance companies, prompting them to raise rates and reduce coverage in high-risk areas. In some cases, insurers have even withdrawn entirely from providing coverage in these regions.

While the primary concern for homeowners is the increased difficulty and expense of obtaining insurance, the wider implications are far-reaching. Real estate markets may experience fluctuations as insurers reassess their risks and pricing models. Financial institutions that rely on insurance coverage to manage their own risks may face higher costs and reduced levels of protection.

The changing landscape of insurance coverage highlights the urgent need to address climate change and to build resilience within communities. As extreme weather events become the new norm, it is crucial for homeowners, insurers, and policymakers to work together to find viable solutions. This may involve implementing effective mitigation strategies, improving infrastructure resilience, and increasing public awareness and preparedness.

Ultimately, the impacts of extreme weather events cannot be solely shouldered by individual homeowners. Collaborative efforts, involving both the public and private sectors, are necessary to navigate the financial, social, and environmental challenges posed by climate change. By addressing the root causes and consequences, we can pave the way for a more secure and sustainable future for homeowners and the broader population alike.