Is ESG Driving Florida’s Homeowners Insurance Crisis?

I am an attorney who writes about ESG policy, laws, and regulations.

Homeowners in Florida are facing significant rate increases to their homeowner's insurance, with some projections predicting a statewide increase of 50%. Industry experts and elected officials have speculated various causes for the price jump including Florida's soft litigation market, reinsurance, hurricanes, abuse of assignment of benefits, and rising cost of construction supplies. There is another factor which may be contributing to the increase: ESG.

Environmental, social, and governance is a type if financial investing in which non-financial factors are a consideration in investment choices. In theory, it gives investors the option to invest in companies which promote their values. You can choose to invest your retirement savings in green companies, accepting a lower rate of return, but feeling better about how your money is being used. However, the lack of reporting standards, and general lack of regulation of ESG, has resulted in confusion and accusations by the right that ESG is being used by fund managers to force liberal values on businesses. ESG reporting standards are being developed in the European Union, but the United States is only beginning to move in that direction.

The impacts of ESG are far reaching, but are felt most by publicly traded companies who can be more influenced by the investment strategies of fund managers. However, privately held companies may voluntarily comply for visibility or to meet other pressures.

The insurance industry is a mix of publicly traded and privately held companies. Allstate is traded on the NYSE. State Farm is publicly held. Both have readily available ESG policies and annual reports.

Industry experts have stated that ESG is a natural fit for the insurance industry, as their calculations of risk already include environmental considerations. However, there is a question as to if those calculations are going beyond known risk and moving towards pushing environmental action onto consumers.

The idea that insurance companies should be advocates for resiliency and climate action is not a new or hidden concept. A 2017 article in the Harvard Business Review argued for more action by insurance companies to push governments and consumers for action on climate change. As You Sow, an environmental advocacy group, is actively using shareholders to attempt to force insurance companies to comply with the Paris Accord standards.

We do not have to look at outside influences or advocates, the companies tell us their goals. Allstate's 2020 Sustainability Report states "We incorporate ESG considerations and climate-specific metrics in our asset management decisions." The specifics of those ESG considerations are vague. While there is a logical connection between environmental concerns and the insurance industry, ESG is not limited to environmental factors and can include social factors that blur into political stances. There is also a question as to if insurers are using ESG to justify higher rates or to pressure municipalities to take certain actions.

Insurers have frequently relied on the position that climate change has and will continue to result in stronger and more frequent storms. This line has become so standard in the dialogue over climate change that is considered accepted fact. However, the studies from where this theory arises are not as certain as the advocates.

A heavily cited study from February 2023, that projected an increase in sequential hits by hurricanes, stated "it is still unclear whether the occurrence rate of sequential TC hazards in the historical period shows any trend, whether we can make robust projections of such events considering the uncertainties in TC frequency projection." In other words, they don't have enough information to make an accurate prediction. Other studies have faced similar struggles and disclosures which are often ignored for the more attention-grabbing narrative.

Texas is currently considering legislation which would prohibit insurance companies from considering ESG factors, an action which some in the industry have decried as a threat to the stability of the industry. Those experts argue that ESG is so inherently a part of their risk considerations that they will be unable to provide accurate risk assessments without it. Surprisingly, Florida's anti-ESG legislation avoids the insurance industry, despite being the forefront of both the anti-ESG movement and insurance rate crisis.

Whether ESG is a major factor in the rising costs of insurance, or just another piece in a larger puzzle, has yet to be fully realized. As insurance is heavily regulated as the state level, expect further legislation addressing ESG in insurance within the next year.