Climate change is stressing our fragile property insurance system. We’ve been here before.
By Katherine Hempstead
As a changing climate increases property damage from hail, water, wind, and fire, insurers around the nation are raising rates, dropping customers, and exiting markets altogether. In a growing number of states—extending far beyond usual suspects like Florida and California—homeowners are increasingly presented with coverage options that are unaffordable, inadequate, or nonexistent. In 2023, property insurers reported losing money in close to 20 states. A growing share of homeowners are going without coverage. Meanwhile, insurers have resorted to flying drones over their policyholders’ rooftops, looking for reasons to drop them.
The recent instability in the home insurance market raises troubling questions for homeowners and policymakers alike. But although the context has changed, these problems are not new. We are witnessing another episode in a long narrative that has played out repeatedly throughout our history, whenever the gap between what people demand and what insurers are willing to provide becomes unacceptably wide and spills out into the public square. Over time, nearly every line of insurance business has faced a crisis over access and affordability.
Unfortunately, we have not been particularly adroit at addressing these problems when they emerge, and many remain unresolved. This is in part a by-product of the fragmented nature of insurance regulation, which is largely conducted by states. There, differences in political values, financial resources, and exposure to risk prevent a uniformly robust approach. Yet it also reflects the American mindset about insurance. Historically, we have started from the premise that insurance is a private transaction, where price and quantity can be best determined by market forces. Yet these private transactions have enormous social consequences—especially when they do not take place. We have entrusted what is in many ways a public service to private companies that owe their primary allegiance to investors.
In life and health insurance, some public coverage has emerged to fill part of the yawning gap between what people need and what they can afford, albeit incompletely and agonizingly slowly. Yet in property and casualty markets, the presumption of privateness is far stronger. When margins tighten, insurers naturally assert their prerogative to drop customers or exit markets altogether. State regulators have found themselves limited to unattractive options: accepting large rate increases, facing insurer exits, or creating subsidized insurers of “last resort,” which in some cases have mushroomed far beyond the original intent, creating unanticipated liabilities for taxpayers. Progress has been further hindered in states where policymakers are prone to dismiss insurers’ consideration of all-too-real environmental factors as a manifestation of “woke capitalism.”
In the past, property and casualty market problems got better because losses declined. As fire departments, water supply, and building codes improved, losses from fire began to drop in the 1930s, reducing the cost of home insurance. Mid-century pressure in the auto market eased as traffic enforcement, driver education, and safety improvements began to catch up with the volume of cars. Reducing losses will again be critical to containing the scope of our current dilemma, though the challenges are greater in the face of a changing climate. Mitigation programs have emerged in some states to incentivize home modifications that can reduce storm damage. So far, these programs are not adequately funded or sufficiently available to all who could benefit from them. Some states and localities have begun efforts to relocate homeowners and are taking more action to disincentivize building and rebuilding in hazardous areas. Yet these efforts too are underpowered and lag badly behind actual need, and too many places permit rebuilding without protective modifications in areas that have been subjected to repeated flooding.
The US approach thus far has been reactive, and overly focused on relief. Disaster relief is a tool of last resort for dealing with catastrophic events. National flood insurance was created in part to offset what was seen as a mounting federal burden after a series of mid-20th-century hurricanes. Yet the National Flood Insurance Program has not provided sufficient protection, and enrollment has even been declining in some flood-prone areas. Nor is flooding the only significant peril. Meanwhile, spending on disasters has only grown.
The fragmented nature of our state-based system of insurance regulation has impeded the development of a truly national approach. When special appropriations are sought for massive events such as Hurricane Sandy, regional and partisan ill will are often on display. This lack of unity has repeatedly throttled attempts to create national disaster insurance, sometimes described disparagingly as a “beach house bailout.” Earlier this year the Federal Insurance Office abandoned its attempt to collect detailed climate risk data from insurers after facing howls of protest from the insurance industry, state regulators, and conservative members of Congress.
Nevertheless, at all levels of government there are signs that a more proactive response is emerging. Individual states are trying to increase mitigation and promote access to affordable coverage. For example, Pennsylvania’s recently convened task force recommended tax incentives and other strategies to boost home improvements and increase enrollment in flood insurance. The National Association of Insurance Commissioners (NAIC) recently adopted a national climate resilience strategy, a major component of which is a process of data collection and analysis designed to improve the ability of regulators to understand risk and conduct solvency analyses. The NAIC is advocating for more federal mitigation funds and collaborating with FEMA and others to increase mitigation and preparedness. FEMA is raising its resiliency requirements for rebuilding with their funds. There are even calls for federally funded reinsurance, modelled after the federal terrorism insurance created after the World Trade Center attacks.
The accelerating pace of catastrophic weather events is a powerful force for change. Disasters cause insurers to raise premiums, withdraw from markets, exclude certain types of perils, and develop new models to forecast the future. International reinsurers have raised their rates considerably in response to events around the world and have signaled that climate risk is still not adequately priced into the market. To insurers, higher prices are an important and necessary signal that will drive prudent choices about mitigation and rebuilding, and they are wary of attempts to increase affordability that may undermine incentives to prevent losses.
Disasters can be unifying and can promote a sense of a shared fate, hopefully compelling a new and more collective mode of risk sharing. How will repeated and escalating cycles of severe weather events affect our approach to sharing risk? With the accelerating frequency of deadly storms and fires, the question is hardly theoretical. There are signs of positive momentum, but also rapidly growing vulnerabilities. The pressure of natural events should push us to create a more robust strategy for risk sharing. In the meantime it will likely subject us—or at least some of us—more fully to the shortcomings of the fragile systems that are currently in place. It’s not clear when, whether, or how we will rise to this inescapable challenge, but as we emerge from a summer of record storms and temperatures, we are surely getting closer to finding out.
Katherine Hempstead C’85 Gr’94 is the author of Uncovered: The Story of Insurance in America (Oxford University Press, 2024).
