Climate Change and U.S. Property Insurance: A Stormy Mix

American homeowners already coping with extreme weather now face a new risk: disappearing property insurance. Private companies have increasingly reduced coverage, concluding that the risks—and potential losses—threatened by climate change outweigh probable profits. As of now, this primarily affects a handful of coastal U.S. states, including California. In other states, insurers have substantially increased the price of property insurance.

Investing in housing is how many Americans build wealth, with owner-occupied homes accounting for around a quarter of households’ net worth. But homes that carry high insurance costs can sell for lower prices, and when insurance costs become too high, homeowners may decide not to spend on insurance, making them vulnerable to major economic loss in the wake of a disaster.

Homeowners insurance does not reduce the physical losses caused by catastrophic events. Insurance does, however, better manage financial and economic losses, allowing large, one-off costs from disaster to be spread across smaller, annual premium payments. It helps reduce the broader economic fallout from disasters by helping people, businesses, and communities recover faster. The current trend of shrinking property insurance availability and affordability has profound implications for the economy at large, as spending on housing—including construction and services—accounts for about 17 percent of U.S. gross domestic product (GDP).

Does climate change increase the risk of property damage?

More than 65 percent of Americans own their own home. For many, their home is the most valuable asset they own. Property insurance protects the home against catastrophic damage, including from natural disasters. Insurance also protects mortgage lenders, ensuring they get repaid if the residence is harmed. According to a recent Insurance Information Institute survey [PDF], 88 percent of U.S. homeowners buy property insurance.

Private insurance companies charge premiums that put a price on risk: the higher the risk to a property, the higher the premium. If the risk grows too large, insurance companies can decline to write a policy altogether. Or, they can seek to raise the premium. Historically, insurers looked to past events to determine the risk of future damage occurring. Climate change, however, has brought new, unfamiliar extremes—longer heat waves that kink metal, sea-level rise that overtops seawalls to flood homes, higher winds that shred rooftops, deeper drought that buckles asphalt driveways, and wildfires that obliterate whole communities in mere hours.

In 2022, extreme-weather damages totaled over $165 billion. The reinsurer Swiss Re estimates that by 2050—under a scenario in which the global average temperature only increases by 2°C (3.6°F) above preindustrial levels—U.S. GDP could drop by close to 7 percent. The White House Office of Management and Budget (OMB) assesses that climate change could reduce U.S. GDP by as much as 10 percent by 2100. It also estimates that world GDP could drop by 14 percent if nations contain heating to a 2.6°C (4.7°F) increase, which is within the range of what current policies would lead to, or 11 percent if further mitigating actions are taken to limit heating to 2°C.

These new extremes pose significant risk to property. For insurance companies, looking to the past to set premium prices could result in losses. According to the actuarial firm Milliman [PDF], California’s unprecedented wildfires in 2017 and 2018, likely fueled by climate change, wiped out twenty-five years’ worth of profits for insurance companies in that state. Globally, just three years, 2016 to 2018, caused more than 70 percent of insured losses from wildfires for the period between 1980 and 2018.

Houston offers a troubling look at what shifting circumstances could mean. When Hurricane Harvey dumped approximately four feet of rain on the Houston area in 2017, eight out of ten homeowners whose properties flooded did not have flood insurance. Their homes flooded even though many sat outside the areas historically deemed most at risk. But climate change alters flood risk, with every additional degree of heat leading to 4 percent more moisture in the atmosphere. Recent modeling estimates that the likelihood of Houston’s one-in-a-hundred-year weather event has increased by 335 percent—making these storms a one-in-twenty-three-year event.

How are insurers responding?

In the face of growing climate risk, private insurance companies have reassessed. Some insurers have sought to raise prices on premiums, reducing insurance affordability for homeowners. According to the California Department of Insurance [PDF], climate-worsened wildfires have spurred insurers to seek rate increases amounting to $8.5 billion since 2015. Since January 2022, thirty-one states have witnessed double-digit rate increases. Six states saw increases of 20 to 30 percent.

Other insurance companies have simply declined to offer insurance. The two largest homeowners insurance companies in the United States, State Farm and Allstate, announced earlier this year that they would take a break from issuing new policies in California. Farmers Insurance has also decided to cap new policies in California. American International Group (AIG) has reportedly reduced property insurance coverage to homes along the east coast at risk of flooding and those in the western United States at risk of burning. Increased hurricane losses and litigation costs in Florida have driven close to a dozen insurance companies to go bankrupt, while other insurers, including Farmers and AAA, restrict coverage. In Louisiana, insurance companies have declined to write policies in hurricane-prone areas.

When property insurance becomes unavailable or too costly, some homeowners choose to go without. That means they bear the entire loss should disaster strike, unless government or philanthropic aid materializes. If the damage makes their home uninhabitable, families move away in search of housing. The flight of families can cause schools to close and businesses to shutter, creating a downward economic plunge that starves local governments of needed tax revenues. When it comes time to sell homes, high-priced insurance or the inability to obtain property insurance could depress the price of the home.

Can governments serve as insurers?

When private insurance companies stop offering insurance, the federal as well as state governments tend to step in to ensure insurance availability. More than fifty years ago, after a series of big floods along the Mississippi River, private insurers stopped offering flood protection. In response, Congress crafted the National Flood Insurance Program, which has become the primary provider of U.S. residential flood insurance. From the beginning, the program has struggled, racking up billions of dollars in debt because payouts for flood damage have exceeded what the program brought in through premiums. In recent years, the federal government has raised premium rates to bolster the program’s finances. In June 2023, ten states sued to stop the increases.

State governments have also created backstop property insurance programs. Since the 1960s, state governments and quasi-governmental organizations have stepped in when access to private insurance has shrunk, resulting in state programs becoming the insurers of last resort. With worsening extremes driving higher claims, these backup programs have seen their rolls swell in the past four decades. According to the Insurance Information Institute, the aggregate value of all insurance in force in FAIR Plans—state-created property insurance plans focused on providing coverage to high-risk homes—almost doubled between 2013 and 2022.

After hurricanes pummeled Louisiana in 2020 and 2021, the number of homeowner policies issued by Louisiana’s state-run program more than tripled. This prompted the state’s insurance commissioner to call the situation a “crisis.” California, which has also seen a massive increase in government-issued policies, has temporarily banned insurance companies from refusing to renew policies in areas near those recently burned. This year, insolvencies of property insurers in Florida and Louisiana forced those states to borrow hundreds of millions of dollars to make sure claims got paid.

How are land-use choices adding to the challenge?

U.S. communities have failed to require building and land-use practices that reduce the risk. State and local governments, which control decisions about where and how to build, have not adopted codes that account for the risk of climate change. That means that even if a house is built to comply with the latest version of the building code, it could encounter stresses brought by climate change that exceed what the code anticipates—for example, higher wind speeds or more rainfall that overwhelms drainage systems.

To make matters worse, most states do not even adopt model building codes that offer significant protection against disasters. According to the Federal Emergency Management Administration [PDF], or FEMA, over two-thirds of states have weak disaster codes or none at all, including some that face growing threats from worsening storms and sea-level rise, such as Alabama, Mississippi, and Texas.

Nor have communities discouraged development in risky areas. According to the National Oceanic and Atmospheric Administration (NOAA), 40 percent of Americans live in coastal counties, which make up just 10 percent of U.S. land mass. Meanwhile, the populations of southern states vulnerable to hurricanes and sea-level rise, including Florida, Georgia, North Carolina, and Texas, are increasing. To make matters worse, government programs encouraging people to move away from risky areas cannot keep up. A study by researchers at the University of North Carolina of that state’s buyout program, which uses government funds to purchase high-risk homes, found that the state had ten new homes constructed in the floodplain for every property removed from 1996 to 2017.

Those Americans who do not gravitate to the coasts often live in what is known as the Wildland-Urban Interface (WUI), which FEMA defines as “the zone of transition between unoccupied land and human development.” The WUI is at increasing risk of climate-fueled wildfires. Between 1990 and 2010, the WUI was the fastest growing land-use type in the lower forty-eight states, with nearly thirteen million new homes added. During the same period, the WUI grew from around 144 million acres to over 190 million. By 2010, the population living in the WUI reached ninety-nine million people [PDF], around a third of the U.S. population. Many of those people face a heightened risk from climate-fueled wildfires.

No state has yet developed a comprehensive plan to tackle the issue of building and land-use practices in a warming world. Nor has the federal government developed a strategy. With little planning in place, homeowners in risky areas or poorly constructed homes face the risk that their primary asset becomes uninsurable.

What should be done?

Few countries have been able to provide a template for disaster insurance support, but the following steps could help bolster the increasingly shaky U.S. landscape: 

Reduce economic loss from climate-fueled extremes. State and local governments can do this by regulating how and where people build, reducing development in the riskiest areas, and requiring stronger building practices to improve the durability, and therefore the insurability, of homes. The federal government can reduce the amount of disaster-recovery dollars available to state and local governments that have not adopted disaster-resistant building practices. It can also prohibit using federal taxpayer dollars to build or rebuild in high-risk areas, such as floodplains or fire-prone forests, and adjust federal flood insurance premiums to reflect the actual risk of flooding. Finally, investments in natural infrastructure, such as wetlands and trees, can reduce harm from storm surges and heat at a lower cost than more carbon-intensive “gray” solutions, such as concrete sea walls.

Encourage best climate practices among insurance companies and regulators. The National Association of Insurance Commissioners (NAIC), a group of state insurance regulators, can work with state, local, tribal, and territorial governments, as well as insurance companies, to identify land-use practices that increase the insurability of property. State commissioners can also encourage using models of future risk to inform premium pricing in ways that protect the interests of homeowners and insurance companies.

Create community insurance models. Community-based insurance plans could aggregate insurance purchases for many households and incentivize community-wide risk reduction measures, such as elevating homes to protect against flooding and removing dry vegetation to reduce wildfire risk.

Develop innovative private insurance products. Insurance companies can identify innovative products that provide additional protection. Examples include pre-disaster insurance that offers a payout before disaster strikes, allowing homeowners to take measures to protect their homes, and multiyear insurance contracts that reduce pricing volatility.

Lower greenhouse gasses. The best insurance policy against uninsurable catastrophes is the rapid reduction of the harmful pollution and heating caused by fossil fuel use. Insurance companies can assist in encouraging these efforts by reducing insurance for industries that contribute significantly to climate pollution, also known as greenhouse gas emissions, and by adjusting their own investments to help drive greater emissions reductions.

In 2015, the head of Axa, one of the world’s biggest insurance companies, made headlines by proclaiming that a world that had warmed by 4°C (7.2°F) would be “uninsurable.” As it turns out, it takes a lot less heat to make places uninsurable. In 2023, the president of Aon, a risk-mitigation consulting firm, testified before the U.S. Congress that climate change is already “destabilizing” the insurance industry—in a world that has warmed only approximately 1.2°C (2.2°F) since preindustrial times. A 2021 survey of insurance risk managers found that 60 percent feared climate change would make certain geographic areas uninsurable.

Avoiding dire predictions on insurance will not come easy, particularly when a deep political divide exists over whether climate change is even a significant problem. But if policymakers continue to sit on the sidelines, an environmental emergency could morph into an economic one.

Editor’s note: Author Alice C. Hill is on the board of directors of the U.S. subsidiaries of reinsurer Munich Re. The views expressed in this article are her own.