Climate Change, Disaster Risk, and Homeowner’s Insurance
Extreme weather events fueled by climate change are driving significant changes in the property insurance market. A recent report by the Congressional Budget Office (CBO) analyzes these shifts and considers potential policy responses.
Climate change contributes to a rise in natural disasters, including wildfires, hurricanes, and floods. As a result, insurers are facing increased payouts and greater uncertainty about future losses. This has led to challenges for homeowners and renters in high-risk areas, making it difficult to obtain or afford insurance coverage.
As the risks and associated costs grow, insurance premiums are likely to rise. This could further decrease affordability. If state regulators do not allow insurers to increase premiums appropriately, companies may reduce their presence in those high-risk areas, limiting the availability of insurance.
The CBO report examines these recent changes in the property insurance market. It also assesses alternative insurance products and explores policy approaches designed to improve the availability and affordability of insurance for both homeowners and renters.
Key Findings from the CBO Report:
- Climate Change Impacts: Rising temperatures, drought, sea level rise, and extreme precipitation are all contributing to an increased risk of natural disasters.
- Insurance Market Responses: Increased uncertainty stemming from climate change can cause insurers to limit coverage, particularly for risks that are hard to quantify or when regulatory constraints limit their ability to set risk-based prices.
- Underinsurance: Households may be underinsured due to factors such as lack of information about the risks and the potential for government assistance after a disaster.
- Policy Approaches:
- Means-tested subsidies could make coverage more affordable for low- and moderate-income households, but managing costs and implementation could present difficulties.
- Other approaches include easing regulatory restrictions on risk-based pricing by states.
- The federal government could expand its role as a catastrophic risk reinsurer or insurer, similar to its role in flood insurance, to absorb more disaster costs.
