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Should P&C Insurers Be Afraid of Climate Change?

The situation is complex, but ultimately we think investors shouldn't be overly concerned.

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While climate change is a major social issue, in this article we will focus strictly on assessing the potential implications for the property-casualty insurance industry. The negative impact of climate change on P&C insurers seems obvious at first glance, as much of their business revolves around protecting against property damage arising from extreme weather events. But while we believe climate change is a material issue for the industry, it should not deter long-term investors from holding P&C insurance stocks. In our view, the most likely long-term outcome is the exit of the most affected lines, which include homeowners insurance.

The combination of the potential for increased catastrophe losses and the increasing value of coastal property does paint a potential alarming picture: $1.5 trillion in home value in the United States is exposed to coastal storms, with more than $400 billion exposed to even a Category 1 storm. While this issue is localized, and only about 5% of U.S. homes are exposed to coastal storms, the trend toward higher coastal populations could increase the exposed property value over time. Over the past four decades, coastal shore counties have added 125 people per square mile, compared with 36 people per square mile for the U.S. as a whole.

Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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