Late last month, flooding from Hurricane Helene killed over 200 people across western North Carolina, South Carolina, Georgia and parts of Florida, and left several areas entirely underwater. Less than two weeks later, Hurricane Milton – already being described as the “storm of a century” – is currently making landfall in Florida, with expected flooding of up to 4.5m.
Such “natural” disasters are happening more frequently in the US, and becoming more devastating, thanks to climate change – and yet only about 2% of homes in the counties hit hardest by Helene had flood insurance. The rest are facing massive bills; according to one estimate, the hurricane could cost US property owners over $47bn. Worse still, the entire home insurance industry in the US – which we’re made to believe will help us recover after disasters like these – is in freefall.
Across the country, insurance companies are refusing to renew policies, scaling back coverage, and stopping underwriting new policies. This has left many people with bare-bones coverage – which wouldn’t even begin to cover catastrophic losses like those caused by Helene – costly insurer of last resort programs, or even “going bare” with no insurance at all. Many Americans are one storm or wildfire away from financial ruin.
While the collapse of the home insurance industry has garnered increasing attention from the media and politicians – even Vice-President Kamala Harris noted the problem at the recent presidential debate – that attention has failed to produce adequate solutions. This is in part due to a collective and fundamental misunderstanding of the problem.
Stories about the upending of home insurance markets by increasingly frequent extreme weather events often blame the increasing gap between insurer revenue from premiums and payouts from claims. Such stories miss how the industry has contributed to a crisis of its own making.
Take for instance insurers’ earnings on investment income (which includes fossil fuel investments, the top driver of climate change) or the hedging insurers do using tools like reinsurance (insurance for insurers) and financialised products like catastrophe bonds. Omitting these factors sidesteps how insurers still enjoy record share prices and profits while homeowners suffer.
What’s more, the media’s focus on insurer finances prioritises the wellbeing of insurance companies above that of ordinary people. The danger of these analyses is that they will inevitably lead to policy solutions focused on “de-risking” for insurance companies, not households.
The supposed purpose of home catastrophe insurance is to share and spread the risk of home damage. The earliest insurance schemes were essentially mutual aid societies –
but as those societies became private companies, their focus shifted from spreading and reducing risk to increasing profits. As the insurance industry grew, companies would find more ways to pick and choose whom to protect, introducing practices such as redlining, where certain areas were designated too high-risk or undesirable to insure.
More recently, industry actors have sought to offload their share of responsibility for keeping homes safe through practices like selling securitised financial products like catastrophe bonds (which shift risks onto other financial market participants) and stopping business in certain areas. Meanwhile, policymakers in some states have created policies to protect insurer profits: Florida, for example, requires the state’s insurer of last resort program to hike rates to avoid competing with private insurers, and has set aside $2bn as rescue funds for insurers that fail.
We shouldn’t for a moment believe that insurance companies have the best interests of homeowners, affordable housing developers, renters or indeed anyone but their shareholders at heart. With this in mind, the policy question we should be asking when considering how to respond to today’s home insurance crisis should not be “How do we save the home insurance industry from collapsing?” but rather “What role should insurance markets play in the suite of policies necessary to keep people safely housed?”
A fair share of risk.
The answers to this question require responses focused on prevention; that provide affordable and stable public insurance to spread the risk of non-preventable disasters; and that ensure equitable post-disaster recovery. Under our current system, the vast majority of disaster risk reduction and response for households is left up to insurance markets. Yet their profit-seeking and risk-transfer approach is patently not up to the task.
The cost of the damage from losses that private insurers cannot or will not insure is either being borne by households – leading to individual financial ruin and contributing to the risk of financial system collapse we saw in 2008 when mortgage markets collapsed – or being socialised onto public disaster response programs that are reactive and therefore not planned into public budgets.
We must reimagine our disaster risk finance system as one that reduces risk and provides protection equitably – because our fates are shared, especially as climate change makes disasters more frequent and severe.
Consider disaster loss prevention. Insurance pricing is often held up by industry and policymakers as a way to prevent and mitigate disasters. The argument is that premium prices, or even the lack of insurance availability, are a sufficient signal to people about where they should or should live, and to incentivise them to reinforce their homes. However, evidence gathered by the Climate and Community Institute, where I am a research fellow, shows that’s not how it works in the real world.
People make decisions on where to live for all kinds of reasons, including the signals sent by a city with the placement of roads and schools. Price signalling is too limited to adequately reduce climate risk for households. Instead, we should ask ourselves what other tools, like stricter building codes, could do a better job.
As the insurance industry’s collapse worsens, many are relying on state insurer of last resort programs when they can’t find insurance in private markets. Flood insurance has long been sold separately from the rest of home insurance through a public-private partnership known as the National Flood Insurance Program. However, these programs tend only to cover one or two kinds of disaster and often only in the riskiest areas, which goes against the fundamentals of good insurance design – it’s like a health insurance program only providing coverage to the sickest cancer patients. The insurer of last resort programs also tend to provide only the most basic coverage and in some states are required to be more expensive than private coverage so the private insurers don’t have to compete.
This system is clearly not working. We need to provide public disaster insurance that offers protection for all kinds of disasters, coupled with comprehensive, community-oriented disaster mitigation to reduce the harms of disasters before they strike. Doing so would address existing market failures by providing coverage for oft-neglected sectors such as multi-family housing providers, mobile home dwellers, and heirs properties and avoid privatising the profits and socialising the losses from future disasters.
To confront the growing housing safety and affordability crisis under climate change, we need public programs that provide fair and equitable disaster insurance protection, coupled with coordinated, comprehensive disaster risk reduction. Time is running out – the next wave of “natural” disasters is just around the corner.