Climate Change and the Crisis in Disaster Insurance
Disaster insurance is facing a critical test as the impacts of climate change intensify. Across the United States, we’re seeing firsthand how rising costs and reduced availability are shaking up the property insurance market.
Rising Premiums and Reduced Options
Homeowners are experiencing a tangible impact of climate change through higher premiums and fewer insurance options. The escalating costs of rebuilding, alongside the growing expense of reinsurance and ongoing development in areas prone to disasters, are key factors in this trend. Many areas are experiencing hardship, especially those most vulnerable to climate risk.
“Insurance is where many people are feeling the economic impacts of climate change first,” explained Carolyn Kousky, an economics researcher at EDF, in an interview with The New York Times.
Insurance Companies Pulling Back
Insurance providers are increasingly withdrawing from high-risk regions. For example, State Farm has ceased offering new homeowners’ policies in California due to wildfire concerns. Several insurers have become insolvent, especially in states like Louisiana and Florida after extreme weather events. Furthermore, the quality of coverage is also declining, with some standard policies now excluding damage from wind and fire, or increasing deductibles.
Reliance on Insurers of Last Resort
When the private market fails to provide coverage, a safety net is often offered via “insurers of last resort,” programs established by states to protect homeowners. While these programs vary in structure, they share the common goal of providing access to insurance. When disaster strikes, the costs can be assessed broadly across the state, impacting policyholders and insurers alike, as seen in Louisiana post-Hurricane Katrina and in California with the FAIR plan.
Increased Risk for Homeowners
Disasters are financially devastating. From lost income to repair and rebuilding costs, households face significant burdens. As premiums skyrocket and coverage becomes more limited, some homeowners are forced to forgo insurance altogether. This is especially critical for low-income families, who often cannot afford it and become vulnerable to economic setbacks and potential loss of assets.
Finding Solutions
EDF researchers are studying the impact of climate stress on insurance markets, to find methods to make catastrophe preparedness more effective and more equitable. The key is to reduce risks by implementing strong building codes, fortifying existing structures to better withstand hazards, and rebuilding to high standards in safe areas. Also, to invest in our future by cutting climate pollution now.
