Property Insurers Unable to Cover Climate Risks… Who Pays?
One of the world’s largest insurance companies has warned businesses that they simply can’t ignore the financial impacts of extreme weather any longer.
“Climate change is leading to more severe weather events, resulting in increasing impacts on economies,” Swiss Re’s group chief economist Jérôme Jean Haegeli said. “Therefore, it becomes even more crucial to take adaptation measures. Risk reduction through adaptation fosters insurability.”
Swiss Re posted a press release that detailed economic losses as a result of a warming climate. While the four weather perils described by Swiss Re (floods, tropical cyclones, winter storms in Europe, and severe thunderstorms) are not new, rising global temperatures are making these events longer, stronger and costlier.
In the U.S., Swiss Re noted there is a growing risk of tropical cyclones (aka hurricanes). The country’s annual economic loss as a result of extreme weather is about 0.4% of its annual gross domestic product, or around $100 billion. The United States dealt with a number of extreme weather conditions in 2024, including devastating hurricanes and wildfires.
The total economic impacts of Hurricanes Helene and Milton could reach $400 billion. In North Carolina, repairs for physical damage to buildings, homes, and infrastructure could hit $53 billion. Meanwhile, a 2023 study from economic software and analysis company IMPLAN found that wildfires cost the United States $89.6 billion in lost output. The 10 warmest years in 174 years of record-keeping all occurred in the last decade, and 2024 is on track to be the warmest year on record.
In October of 2024, for the third year in a row, the insurance giant AXA ranked climate change as the biggest risk facing the industry globally, above geopolitical instability, and cyber and AI issues.
It’s getting more difficult to find financial protection from extreme weather, with many insurance companies increasing the cost of coverage or pulling their offering entirely. That’s why adaptation is becoming more important.1
A mounting toll of severe hurricanes, floods, fires and other extreme events has caused average premiums to spike. Our climate crisis is causing an insurance crisis. Across all US counties, those in the top fifth for climate-driven disaster risk saw home premiums grow by 22% in just three years, compared to an overall average of a 13% rise in real terms.
There is a tight correlation between premium increases and counties deemed most at risk. People looking for home insurance, required for a mortgage, are now facing significant climate costs even before paying for flood coverage, which is typically separate from home policies.
If there is an epicenter of disaster risk and ballooning insurance in the US, it’s along the Gulf of Mexico coast and, in particular, Florida, the state where home insurance costs more than $11,000 a year on average, surging by 42% just in 2023.
More than a dozen insurers have left Florida in the past seven years amid a stampede of disasters, placing strain upon a state-supported backstop insurance system that is now “not solvent” according to Ron DeSantis, Florida’s governor.
DeSantis decided to pretend that a key driver of this problem doesn’t exist, by deleting mention of climate change from state law in May. Donald Trump is similarly expected to remove climate considerations from US government agencies and federally-backed projects that face higher risks due to our climate crisis.
Florida’s state Citizens Property Insurance Corporation has just over one million insurance policies on its books. Citizens wants to hike rates by 14%, and has denied nearly 30% of claims relating to Hurricane Helene and about 6% of the claims from Hurricane Milton – two major storms that recently hit Florida in quick succession.
“Though approximately 90% of all US natural disasters involve flooding, many homeowners still are unaware that a standard homeowners policy doesn’t cover flood damage,” said Dale Porfilio, chief insurance officer of the Insurance Information Institute.
Currently 10% of American homeowners are going naked (no insurance coverage) and a third of losses from natural disasters are uninsured. Will these pressures on the insurance market impact broader trends? Like the fact that the US population is generally shifting southwards towards warmer weather and lower taxes, even though these are places most at risk from our climate crisis.
There are two opposing trends in relocation: some studies suggest climate risks are often ignored by the public, while others point to a reverse “snowbird” effect where some retirees are fleeing the increasingly oppressive heat and storms.
(NOTE – we moved from Sarasota, FL to Portland OR after hurricane Irma. Other friends, relatives and neighbors put their properties up for sale after Helene/Milton).
Insurance cost is now a major consideration when buying a home. Sooner or later we are going to have to get serious about not building in climate vulnerable places because they are uninsurable.2
Fannie and Freddie: Facing a New Kind of Mortgage Crisis
The 2008 financial crisis revealed the dangers of unpriced risk. Today, rising property insurance costs linked to our climate crisis are creating a new wave of untenable mortgages. Fannie Mae and Freddie Mac, which guarantee most U.S. mortgages, are at the center of this emerging problem. As insurance premiums climb, loans that seemed stable are no longer anchored by a solid asset – the property.
In many vulnerable areas, this is already leading to declining property values. Insurance markets, more liquid and responsive than other financial sectors, are repricing risk in real time.
Last February, the Federal Housing Finance Agency took a step toward addressing this by requiring replacement-cost insurance coverage for homes with federally backed mortgages. The goal was to ensure borrowers and lenders faced the true costs of climate risks.
But the insurance industry pushed back, citing state regulations and threatening delays. This pause in enforcement highlights the systemic inertia at play. Unlike many other industries, the insurance industry cannot simply pretend that climate change doesn’t exist. Its business model is to price risk. If it gets pricing risk wrong, it pays out more in claims than it brings in in premiums.
And now, in climate-stressed states like Florida, Texas and California, home insurance rates are skyrocketing. More and more of the burden of insuring homeowners at risk is falling on state budgets.
Most discussion around this issue has focused on how to solve the immediate problem (i.e. insurance for at-risk homeowners). But beyond that looms the larger question of whether people should be living in these areas at all, and if not, who is going to help them relocate, and who is going to pay?
Most people look at this issue and think the problem is that insurance rates are going up, but if you look at it from the other end… risk is increasing much faster than premiums.
The fundamental issue is that the insurance industry underlies investment in and development of most things in the built environment. Property insurance was designed for a stable climate. The models that insurance companies are using to determine risk only look backward, only look at history, and what we are experiencing with our climate crisis is unprecedented. We can no longer predict the future by extrapolating the past.
Insurance is a prerequisite to being able to buy a house, or construct a bridge (really all infrastructure). Everyone has been treating this system as if we have a stable climate. The reality is that weather events are more frequent and severe, and everyone knows that (including the insurance companies). They know they need to be able to accurately model the risk. And if the risk is too high, it doesn’t make any financial sense for them to be in a market.
So how do we keep things insured? There’s a lot of discussion about how to keep things insured by making insurance prices affordable. There is still not enough of a conversation about how to lower the risk itself.
At the federal level there’s the Federal Flood Insurance Program. It’s funded by taxpayers. There’s no magic tree of money that funds these things. It always falls on the people. The county usually comes in and has to do the immediate cleanup, and then waits to be reimbursed by the state or federal governments. Then the state needs to pony up unemployment insurance and relocation support. There’s a huge increase in safety net programs. Local, state and federal governments are creating systems of last resort for disaster response and recovery.
What happens if the insurance companies leave those states? What happens to the insurer of last resort? Governments will take money out of other critical programs. Municipal and county governments are the first line of defense. And county governments are the first ones to deliver disaster response. Even if they get reimbursed by FEMA, it takes years. And in that time period, they are dipping into other discretionary funds to bridge the gap.
Adaptation is going to need more and more of the money, so we are going to have less and less for mitigation. Political will goes totally against doing the rational thing in this situation. Because if I’m a mayor or a governor, my whole focus is going to be on helping voters and donors to get back on their feet. So, 10 to 20 year resilience frameworks that move the risk towards something manageable (what we should be doing) are not going to happen.
And it’s not only climate-battered states that are affected. There are also national impacts. The National Flood Insurance Program (NFIP) is 97% of national flood insurance. The NFIP is subsidizing climate risk by charging low rates. And that is enabling people to move into high risk areas.
What do we do with existing people who are in homes that have been built in places that weren’t at risk when they were constructed? Some of the most sensitive areas are also some of the hottest real estate markets in the country. We’re currently increasing the risk by building (or rebuilding) in vulnerable locations.
Community Scale Coverage
With floods and fires, it’s much harder to do property-level underwriting. These are community-scale issues. Could insurance regulators ask insurers to establish community scale resilience, not just individual property resilience? That would make a big difference. Communities that are resilient to climate change effectively prepare for and recover from severe weather events. Communities can build resilience by:
- Absorbing rainwater via permeable surfaces and natural green spaces to reduce flooding and replenish aquifers.
- Building social networks to support people in need.
- Establishing safe and durable shelters to house people during and after extreme weather events.
- Generating and storing renewable power at a scale sufficient to meet the minimum needs for the community.
- Planting diverse types of flowerbeds, hedges and trees to provide shade and improve air quality.
- Providing healthy, local food by planting community vegetable gardens and fruit trees.
- Raising the plant beds to enable senior citizens to participate… providing exercise, social contact and nutrition.
The regulators could work with insurers to establish resilience guidelines and determine premium reductions dependent on how climate resilient a community is.
What else can regulators do? Transparency modeling is important. Models still miss, to a great extent, the effects of adaptation. Most of the models have an asterisk somewhere in small print that says, “absent adaptation.”
Yet adaptations of myriad types are taking place all over. Humans are super adaptive because we’ve had to be in order to survive…
“It is not the most intelligent of the species that survives; it is not the strongest that survives; but the ones best able to adapt and adjust to the changing environment in which they find themselves.” – Charles Darwin
We need to model adaptations and reward them.3
Even if you have not been directly impacted, our climate crisis is coming to your community and your family. It’s unfortunate that it’s going to be via disasters and the inevitable fights over who gets what money after disasters. Yet it’s coming in a way that nobody’s going to be able to avoid.
Plant fruit trees and vegetable gardens and get to know your neighbors. You want them to be friends not enemies… colleagues and collaborators not competitors.
1 https://www.yahoo.com/news/one-worlds-largest-insurance-companies-103058480.html
2 https://www.theguardian.com/environment/2024/dec/05/climate-crisis-insurance-premiums
3 https://www.volts.wtf/p/climate-change-and-insurance-a-growing
