Charles Hugh Smith's Substack
I ask the question, "is the world becoming uninsurable?" not as an expert on the insurance industry but as a homeowner who can no longer obtain hurricane insurance, and as an observer of long-term trends keenly interested in the way global risks pile up either unseen, denied or misinterpreted until it's too late to mitigate them. The probability that we're entering an era of globally higher risks is increasing, and this is awareness is visible in headlines such as these: Home Losses From the LA Fires Hasten 'An Uninsurable Future' (Time) The Age of Climate Disaster Is Here: Preparing for a Future of Extreme Weather (Foreign Affairs) 'We're in a New Era': How Climate Change Is Supercharging Disasters (New York Times) This is not an abstraction, though many are treating it as a policy debate. As noted previously here, the insurance industry is not a charity, and insurers bear the costs that are increasing regardless of opinions and policy proposals. Insurers operate in the real world, and their decisions to pull out of entire regions, reduce coverage and increase premiums are all responses to soaring losses, a reality reflected in these charts.
This raises a point few seem to ponder: the world isn't simply a political structure, yet virtually all the proposed solutions to every problem are political or technological in nature: we can solve this or that politically, or with AI. That the private-sector can trigger crises that have no political or technological fix is on very few pundits' radar. Uninsurable risk is one such problem. Like virtually all problems, it's been approached as a problem with a political solution: the state or federal government can force insurers to continue offering policies that put them on the hook for additional catastrophic losses, and / or become "insurers of last resort." That neither is a solution to the actual problem is glossed over, because as a society, we've become accustomed to the idea that there is a political solution to all problems. So the California authorities have prohibited insurers from cancelling coverage within the fire zones: " California Insurance Commissioner has issued a mandatory one-year moratorium that will prohibit insurance companies from enacting non-renewals and cancellations of coverage for home owners within the perimeters or adjoining ZIP Codes of the Palisades and Eaton fires in Los Angeles County regardless of whether they suffered a loss. The moratorium will expire on Jan. 7, 2026." As for becoming the "insurer of last resort," states are finding providing such coverage is a financial black hole: The wildfires lay bare an insurance crisis in California. "Even before this week’s wildfires, officials in the region had warned that the California FAIR plan, a state-run insurer of last resort that has increasingly become a main source of coverage for residents, was "one bad fire season away from complete insolvency." The FAIR plan’s exposure soared by 61 percent year-on-year to $458 billion by the end of September, according to Mr. Heleniak. Driving that is the flight of insurers from the California market: Between 2020 and 2022, private insurers dropped coverage for 2.8 million home insurance customers, Mr. Heleniak wrote. One problem for insurers and Californians: Unlike hurricanes, wildfires are harder to model, ratcheting up the risk." The problems being exposed do not lend themselves to tidy political / policy fixes that magically return the world to a past era of lower risks. Risks and losses cannot be extinguished, they can only be transferred to others. This is the intrinsic limit of political fixes: we take the risks and losses and transfer them to others lacking the political power to contest the transfer. Or we transfer the risks and losses to the entire system, increasing the potential for a systemic collapse. Consider the realities of acting as the "insurer of last resort." The insurance industry is built on a foundation of a handful of re-insurance companies that provide insurance to insurers should losses overwhelm the expected norms. If re-insurers decide not to offer coverage due to high risks or risks that cannot be estimated with any reliability, then the "insurer of last resort" is self-insuring all potential losses, meaning if the house will cost $500,000 to rebuild, $500,000 in cash must be kept in reserve, because there is no guarantee a lender will risk offering a mortgage without conventional insurance. If the state or federal government offers an open checkbook--we'll pay any and all losses, no questions asked--then those ultimately paying these astronomical bills--the taxpayers--will reasonably ask: why are we subsidizing people to rebuild in places that are clearly no longer habitable due to the probabilities of another fire, flood or hurricane? In other words, the entire idea of being an "insurer of last resort" is based on an unlimited supply of money to fund losses that no longer make financial sense. If rebuilding a house destroyed in a "100 year flood" once made sense, now that there's a "100 year flood" every five years, rebuilding in that locale no longer makes sense. So why should taxpayers absorb the costs of this selective blindness to the realities of rising global risks? This is not the first time climate change has impacted civilization in ways that are not visible to or accepted by those living through the transition.
