Is It Just Plain Rational for Insurers to Pull Back from Coastal Markets?

Anyone interested in the topics of this blog is probably familiar with the media coverage of homeowners insurers raising rates and/or simply withdrawing from writing homeowners insurance in coastal regions, including not just in the traditional hurricane regions of the south but up through New England as well. Many stories are replete with sturm und drang about the issue, ranging from political criticism of insurers to questioning of the companies’ motives. Studies like this one here, however, suggest that it is instead entirely rational for insurers, who should have a long term perspective in mind, to substantially reduce their exposure to coastal risks. The long term potential loss exposure in those markets is clearly growing exponentially, and it would be fundamentally irrational for insurers not to recognize and respond to it.

I have written before about the idea of insurance and insurers as leading indicators, and that is what you are seeing in this scenario as well. If insurers are unwilling to expose themselves to the increasing risk posed by coastal development in the era of global warming, then it may be that they are on to something, and the political sturm und drang should be directed at ameliorating the risks they are forecasting and trying to avoid, rather than at them for doing so.