Allstate Corporation (The) (NYSE: ALL), The Travelers Companies, Inc. (NYSE: TRV) – Forest fires, droughts and floods are here – how will that affect the economy and insurance stocks?
Insurance companies have received a lot of attention in recent years. This is in part due to more unpredictable – and exacerbated and deadly – climatic events that have plagued the United States.
What happened: Climate devastation is attracting increasing attention, mainly because of media attention and the economic toll it is causing the country.
According to the National Centers for Environmental Information, various devastating weather events – including floods, droughts, fires, frosts and storms – have caused trillions in damage. Specifically, 298 of these events cost America $ 1.975 trillion from 1980 to 2021. (And that only includes events that resulted in losses of over $ 1 billion each.)
The coming economic toll seems much worse. According to University of California, Berkeley Professor estimates Solomon HsiangAssuming the economy continues its forecast trend, an extra degree Celsius will result in a 1.2% decline in US GDP. In a 2019 congressional testimony, Hsiang stated that severe climate change could lose between $ 5 trillion and $ 10 trillion in value from income in over 80 years. At the global level, global growth could slow an average of 0.28% over the next eight years if warming continues unabated. The consequences are believed to be many, including a heavy burden on American financial institutions.
“These effects are likely to be felt in the US through its impact on financial markets, continuous adjustments to the global trading system and increased migratory pressure from both economic migrants and asylum seekers escaping political violence,” Hsiang said in the testimonial.
In addition to the personnel costs in the south and northeast Hurricane Ida is preparing for the most expensive storm that has ever struck New York, according to MarketWatch.
Related Link: 5 Insurance Stocks To Watch For After Hurricane Ida
Why it matters: Millions of people have insurance policies, especially those related to assets that are very valuable to them. Namely living. As the risks get riskier, insurance companies have to make tough decisions about what to do – many of them shut down because their payouts have become too high due to more drastic and frequent forest fires and floods, according to a report by Grist.
Insurance companies do not always adequately provide pricing information about certain risks. A 2020 economic study found that homes in floodplains in the U.S. are overvalued by a total of $ 34 billion.
One compensation strategy used by insurance companies is to simply raise tariffs or use government agencies to cover insurance claims, which means that taxpayers will pay for the larger risks.
Cities that live in higher climate risk areas – that is, areas along the coasts more prone to flooding and western areas more prone to runaway forest fires – are also seeing their municipal bonds becoming riskier. The result: municipal bonds are becoming more expensive. According to one study, a 1% increase in climate risk is linked to an increase in the “total annualized issuance cost of a bond” of 33.3 basis points.
This is how insurance companies hold up: While the industry was profitable in 2020, insurance stocks are forecast to be less profitable in 2021 due to natural catastrophe claims that hit a “decade high” of $ 42 billion in the first half of the year, according to the Insurance Information Institute.
But these predictions may not be in line with market trends. USAA Income Stock Fund (NASDAQ: USISX) has been on the upswing especially last year; The travel company, Inc. (NASDAQ: TRV) and The Allstate Corporation (NYSE: ALL) are both near all-time highs.
If you live in New York and your property is at risk of flooding or has already been flooded and needs help, you can visit FloodHelpNY.org.
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