By: Nathaniel J. Greene, Community & Culture Reporter

The landscape of homeowners’ insurance in the United States is undergoing a seismic shift, driven by the intensifying effects of climate change. As extreme weather events become more frequent and severe, insurers are grappling with escalating risks, leading to higher premiums or, in some cases, complete withdrawal from the market. This crisis extends beyond individual homeowners, impacting housing and mortgage markets and local economies, signaling an urgent need for comprehensive solutions involving the insurance industry, government, and the public.

Unveiling the Data

Vickie Kilgore, Assistant Vice President of the Insurance Research Council, kicked off the June 7 Ethnic Media Services briefing on the topic by sharing crucial data from a recent study on homeowners’ insurance affordability.

“Homeowners’ insurance is less affordable than it was 20 years ago, with premiums growing significantly faster than median household income,” Kilgore stated. She highlighted that from 2001 to 2021, the affordability index, which measures the share of household income spent on homeowners’ insurance, rose from 1.27% to 1.99%.

Kilgore also emphasized the geographical disparities in insurance affordability, pointing out that states like Florida, Louisiana, Mississippi, Oklahoma, and Texas face the highest costs. “In Florida, the least affordable state, homeowners spend over 4% of their income on insurance, compared to less than 1% in Utah,” she explained. This disparity is largely driven by natural hazards, such as hurricanes, wildfires, and floods, which significantly increase the risk and cost of insurance.

A Potential Financial Crisis

Jordan Haedtler, Climate Financial Strategist with the Sunrise Project and Climate Cabinet, drew parallels between the current insurance crisis and the 2008 financial meltdown.

“The climate crisis is becoming a financial crisis,” Haedtler warned. He cited the Financial Stability Oversight Council’s identification of climate change as an emerging threat to financial stability, noting that insurance could spread risk throughout the financial system, similar to mortgage-backed securities during the 2008 crash.

Haedtler also highlighted the growing issue of underinsurance, with 6.1 million homeowners in the U.S. lacking adequate coverage. “This protection gap leaves households vulnerable to rebuilding costs they can’t afford, potentially leading to widespread mortgage defaults and economic instability,” he said. He called for federal and state regulators to adopt more stringent measures to ensure that insurance companies have the resources to handle the increasing claims from climate disasters.

The Broader Economic Impact

Carol Kousky, Associate Vice President for Economics and Policy at the Environmental Defense Fund, expanded on the economic implications of the insurance crisis.

“Insurance plays a critical role in recovery after disasters, and those without it are much more likely to face severe financial burdens,” Kousky noted. She cited research showing that communities with higher rates of disaster insurance experience faster economic recovery and less income inequality post-disaster.

Kousky underscored the need for inclusive insurance solutions that cater to underserved communities.

“Many households are priced out of disaster insurance, particularly lower-income families,” she explained. Kousky advocated for a range of policy reforms, including federal means-tested flood insurance discounts and state mandates for baseline coverage in homeowners’ policies. She also highlighted innovative approaches like microinsurance and community insurance models to bridge the insurance gap.

California’s Bold Reforms

California Insurance Commissioner Ricardo Lara outlined his comprehensive strategy to address the state’s insurance crisis, which he described as “the largest reform in more than 30 years.”

Lara emphasized the urgent need for modernizing insurance regulations to reflect the realities of climate change. “Insurance cannot be an afterthought when planning for the future. We need to integrate it into our climate and development strategies,” Lara asserted.

Lara’s plan includes improving the rate review process, enhancing the California Fair Plan (the insurer of last resort), and implementing home-hardening programs to reduce wildfire risks. He also called for federal action to manage forests better, increase funding for home-hardening grants, and amend the federal tax code to support state risk mitigation efforts.

The Path Forward

The briefing concluded with a call to action for policymakers, insurers, and the public to collaborate on addressing the insurance crisis. As Kilgore, Haedtler, Kousky, and Lara emphasized, the escalating costs and decreasing availability of homeowners’ insurance are symptoms of a broader problem: the increasing frequency and severity of climate-related disasters. Without significant reforms and investments in risk reduction, the financial stability of households and the broader economy will remain at risk. The message was clear: climate change is not just an environmental issue but a profound economic challenge that requires immediate and coordinated action.