Data Snacks

Natural disasters are disastrous for consumers’ financial health

  • 2 in 5 Americans live in states where losses due to natural disasters are higher than the national average.
  • But those in high-loss states are not covered by residential insurance at the same rate as those who live in low-loss states, which may leave consumers more financially vulnerable in the event of a natural disaster.

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Natural disasters are disastrous for consumers’ financial health

For the past five years, the US has been confronted with an average of 18 natural disasters per year. This year, as of August 15, natural disasters have already racked up losses of more than $1 billion each. With the climate changing, these events are becoming more frequent and with each event, many Americans take on financial damages.

Currently 2 in 5 Americans live in states where losses due to natural disasters are higher than the national average, according to a new research. Residents of these “high-loss” states are less likely to carry residential insurance, which can intensify the negative effects of these residents in the aftermath of a national disaster.

Bar charts showing the percentage of homeowners and renters covered by residential insurance living in high-loss versus low-loss states. 74% of homeowners/renters are covered by residential insurance in high-loss states as opposed to 81% of those living in low-loss states.
The percentage of homeowners and renters covered by residential insurance living in high-loss versus low-loss states, Source: FHN

Low insurance coverage is driven by the proportion of renters in these high-loss states. 37% of people in high loss states rented their homes in comparison to only 27% in low-loss states, and renters are less likely to purchase home insurance, according to the research. As renters are more likely to have lower household income, a lack of insurance only compounds the likelihood of financial vulnerability after a disaster, the research states. 

In order to help their customers to prepare for natural disasters, FIs can undertake a few steps to ensure consumers are better prepared in the event of a natural disaster. For example, FIs can include information about insurances as part of their exit strategy for their mortgage customers. Moreover, insurance providers can continue to offer incentives on home insurance as well as weather-proofing homes. 

As prudent as these recommendations are, there is also the worrying trend of insurers stopping their coverage in certain areas due to increasing frequency of weather events and rising costs. Both State Farm and Allstate have pulled out of insuring properties in California due to “historic increases” in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market, stated State Farm. 

As the number of disasters increase, the insurance business becomes less lucrative, leading to an increase in areas of the country that cannot be insured.  Hence, climate change is not only bad for small businesses and roadside shops but also affects whole sectors and the consumers that depend upon them with their business. 

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