As climate change accelerates, the crisis in home affordability worsens with insurers raising rates, withdrawing coverage, and underpaying for damages. This issue affects not only homeowners but extends to renters and the broader housing market, influencing local economies significantly.

In a media briefing on June 7, hosted by Ethnic Media Services, a panel of experts discussed the impact will affect lives and explored potential solutions involving the insurance industry, government, and individual citizens.

Speakers

  • Vickie Kilgore, Assistant Vice President, The Insurance Research Council
  • Jordan Haedtler, Climate Financial Strategist with the Sunrise Project and Climate Cabinet
  • Carol Kousky, Associate Vice President for Economics and Policy at the Environmental Defense Fund (EMS)
  • Ricardo Lara, California Insurance Commissioner

Climate Risk and Insurance Unaffordability

A report from November 2023 by the Insurance Research Council analyzed the affordability of home insurance across the nation up to 2021. The study found that the affordability index, determined by dividing the average insurance premiums paid by homeowners by the median household income, highlighted significant disparities.

In 2021, Utah emerged as the most affordable state, with homeowners spending less than 1% of their income on insurance, while in Florida, the least affordable state, at over 4%.

“Natural hazards, especially weather hazards, are at the top of the risk list,” said Vicky Kilgore, pointing to the impact of hurricanes, hail, flooding, and storms on the frequency and severity of claims.

Illustrating her point, heavy rains inundated South Florida this week, leading to widespread damage and significant travel disruptions, including the cancellation or delay of over 1,200 flights.

Kilgore noted that from 2001 to 2021, insurance expenditure growth outpaced income growth considerably, rising from 1.27% to 1.99% of household income. “We predict that this number will surpass 2% when we get updated data,” she added.

A Potential Climate-Induced Financial Crisis?

Jordan Haedtler warned, “challenges that climate risk is creating for insurance companies are creating the possibility of another big financial crisis like in 2008.”

He highlighted recent warnings from the Financial Stability Oversight Council about the risk of an insurance-related crisis. A U.S. Senate Budget Committee hearing even drew parallels between the current housing and insurance markets in Florida and the subprime mortgage crisis of 2008, suggesting that credit rating agencies may be overstating the financial health of small insurers entering the Florida market.

Haedtler emphasized that the public could face significant risks from mortgages that may soon be underwater due to these market pressures.

The economic crisis risk is further exacerbated by what the U.S. Treasury Secretary calls the “protection gap,” where uninsured or underinsured households and businesses unable to cover rebuilding costs may abandon bank-held mortgages and loans.

The Consumer Federation of America says that about 6.1 million U.S. homeowners, representing $1.6 trillion in property values, currently lack insurance. This number is expected to rise as climate disasters become more frequent and more insurers withdraw from the market.

“This is a major, arguably the primary way, climate change is becoming a pocketbook issue,” Haedtler explained. “Earlier this year, Federal Reserve chair Jay Powell confirmed that insurance prices are driving up housing costs, a big part of why inflation remains above the federal target.”

“This is not just a problem on the coasts,” Haedtler continued. “Some of the most dramatic hazards have been from wind and hail storms in states like Iowa and Minnesota, not just hurricanes in Florida or wildfires in California. And this is not just a problem for homeowners; landlords can and do pass on insurance costs to renters.”

He pointed out that in a special Florida election last January, insurance was the key issue, leading to a Democratic win in a district previously carried by Ron DeSantis by 12 points.

Possible Solutions

Carol Kousky noted that while a lack of insurance exacerbates economic inequality after climate disasters, “disaster insurance often fails to deliver financial benefits” equitably.

“We find that lower-income households are less likely to report finding insurance useful,” Kousky said, citing challenges such as steep rates, unfair claim payouts, and exclusions of certain disasters or post-disaster needs like temporary lodging.

Kousky emphasized that the destabilization in the insurance market due to rising climate risks can only be stabilized through significant investments in risk reduction. For example, building homes to storm and fire safety standards can reduce losses and insurance costs.

She also recommended legislative policies and insurance market reforms to mitigate a climate risk-induced economic crisis, including measures such as mandatory baseline coverage policies, “micro-insurance,” community-based insurance models, simplifying the claims payout process, and federal means testing for flood insurance discounts.

Kousky added that state and federal policies are crucial as “Risk is now migrating from the private market into our public sector programs,” which are designed to supplement coverage as insurers raise rates, withdraw from high-risk areas, or go bankrupt.

California’s Approach

“Insurance can no longer be an afterthought in discussions around climate and development,” said Ricardo Lara. He highlighted the state’s Sustainable Insurance Strategy, the largest reform in over 30 years, set to be fully implemented by December 2024.

Lara explained that this plan aims to strengthen the Insurance Commissioner’s authority to protect consumers and hold insurers accountable by expanding data used in the rate review process, improving the California FAIR Plan, modernizing pricing and risk assessment tools, and incorporating future climate risk projections alongside historical data.

“We’re already seeing results,” Lara said. “Farmers Insurance, the state’s second-largest insurer, announced that it will reopen several of its commercial coverage lines, including for HOAs, apartments, and condos … Mercury Insurance is working with Tokio Marine to pick up the bulk of its personal homeowners insurance business … and this week my department authorized State Farm to offer a difference in condition policy so non-renewed policyholders have more comprehensive options than the FAIR Plan.”

Lara emphasized that part of addressing climate insurance involves strengthening natural defenses. “It’s much less expensive to prevent damage than to have to fix it after a disaster,” he said. He proposed that local communities could insure natural assets like wetlands and restore them quickly after damage, a strategy yet to be implemented in the U.S., with California aiming to lead.

“Climate risk is really a global phenomenon,” Lara added. “We’ve had town halls in every county in the state, and people are scared. They don’t think about insurance until they need it. But when you talk about how climate is disrupting every part of our life and health, and why it’s risky to live here … We all have to come together and figure out how we bring down the risk.”