Significant price changes may represent much more than short-term tactical adjustments in a market. Sometimes, they are ominous signals that a market is facing fundamental problems that may require radical solutions if buyers, sellers, and other stakeholders do not heed the warnings.
The current market for homeowners insurance in the United States might be sending such a signal right now, as the New York Times podcast The Daily analyzed in-depth last month. In this week’s newsletter, I use that market and some insights from that podcast to help illustrate what companies and customers can do when they realize that pricing is not the solution to what superficially looks like a pricing problem.
The Insurance “Canary” in the Climate “Coal Mine”
Powerful hurricanes in Florida, flooding in Texas, and wildfires in California are among the weather events that cause billions of dollars of damage annually and generate dramatic headlines and video images.
But as the podcast pointed out, the problem is more widespread than in those populous states. The home insurance industry in the US lost money in 18 states in 2023, according to a New York Times analysis of data from the ratings agency AM Best. Many of those states are in the Midwest, not along sea coasts.
The reason for the losses is more frequent and stronger storms that are causing so much damage that insurance companies no longer want to bear the risk of insuring homes, even in areas that have yet to be hit directly. According to the report, if insurers are not cancelling policies outright, they are raising premiums, implementing higher deductibles, and reducing the level of service.
These pricing responses may have unintended consequences. Certain regions of the country – where millions of people live – may become financially unlivable before permanent damage from floods, fires, or storms makes them physically unlivable.
The New York Times team on the podcast floated two solutions. The first was to fix the problem in situ by building stronger houses or shoring up existing ones. The second was to have the government sell homeowners insurance. Neither of those solutions addresses the root causes of the problem and that latter solution would not only take years to come into existence at scale, but would potentially make matters worse.
What are the root causes?
Too many Americans live in areas vulnerable to climate impacts, and those impacts will continue to worsen. Focusing on these root causes helps reframe the choices and give rise to more radical solutions. Americans need to start the process of fundamentally rethinking where they live, as more areas become vulnerable to the effects of climate change. The sooner they start applying their imaginations to this challenge, the less disruptive the transition will be.
What could the United States look like if such a major migration takes place? Chicago Magazine looked at scenarios in a 2018 article which creatively described Chicago as a prosperous city of 20 million people by the year 2068, up from fewer than 3 million people today. It is one of many possible scenarios that we can only begin to imagine right now. But that is why we have to start imagining.
Prices can help facilitate such transitions. As my co-author Arnab Sinha and I point out in Game Changer, pricing is how a business creates and aligns incentives, grows its market, and escapes the high–low constraints of a zero‐sum mentality. High premiums in some areas can serve as an incentive for people to relocate, and it may be possible for insurers to offer incentives for people to relocate to regions where the risks of the effects of climate change are projectably lower in the medium or long term.
The second tranche of incentives would be to help directly reduce behaviors that contribute to climate change. In Game Changer we devote a chapter to price-based incentives that can encourage lower carbon emissions.
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