Opinion: Insuring Against Climate Change – An Obamacare-Inspired Solution for Homeowners
In the wake of recent devastating hurricanes and other extreme weather events, it’s becoming increasingly clear that the financial security of millions of Americans is threatened not just by the elements, but by the instability of the current homeowners insurance system.
These climate-driven disasters are pushing insurance markets to the breaking point. Wildfires in the West, hurricanes along the Gulf Coast, and flooding in inland areas are causing unprecedented disruption. The situation is worsening, and homeowners are feeling the pressure.
Insurers are retreating from states like Florida and California. This leaves homeowners struggling to secure coverage. Even when coverage is available, costs are soaring, leading to premiums that make homeownership a precarious financial risk for many families.
This is not a crisis that will resolve itself. To avoid a catastrophic fallout—one that could crash real estate markets and destabilize local economies—the U.S. must take bold steps to overhaul homeowners insurance markets and build resilience to climate change.
What’s happening in the homeowners insurance market today echoes issues we saw in health insurance markets before the Affordable Care Act (ACA), often called Obamacare. Before the ACA, millions of people faced rising costs, denials of coverage for pre-existing conditions, and inadequate health plans. The law tackled these problems with a cooperative strategy that combined state and federal expertise to create affordable, accessible health coverage. It’s time we took a similar approach with homeowners insurance.
Like health insurance, there’s a national interest in stabilizing the homeowners insurance market. Uninsured homes can’t be sold, and uninsured homeowners can’t rebuild after a disaster. This triggers a series of damaging effects, undermining real estate markets, and leaving taxpayers to cover disaster recovery expenses through programs like the National Flood Insurance Program and FEMA assistance. States are ill-equipped to handle this crisis. Current state regulations, like pre-approval of premium changes, can backfire by driving insurers out of the market. For example, insurers like State Farm and Allstate have left the California market, largely due to the state’s regulations that don’t reflect the new realities of climate risk.
That’s why a federal intervention modeled on the ACA model makes sense. The solution lies within cooperative federalism: establishing nationwide standards for homeowners insurance, while allowing states the flexibility to adjust these standards to account for their unique risks. (I describe this proposal in detail in a forthcoming Harvard Environmental Law review article.)
Similar to the ACA, federal standards should mandate comprehensive coverage, including climate-related risks from floods and wildfires. They should also ensure affordability with subsidies for low-income households. Also like the ACA, federal reform should encourage competition among private insurers, which can be achieved by creating state-run insurance exchanges where insurers can offer standardized coverage.
While this market-based approach would increase insurance rates for those with fewer options or those who live in at-risk areas but do not qualify for income-based subsidies, accurate risk-based pricing is essential to communicating the true risks of climate change. When state regulations artificially keep premiums down, the true cost of living in disaster-prone areas is hidden, which encourages ongoing development in these at-risk regions.
If insurance rates accurately reflected climate risks, homeowners would be more likely to make better choices about where and how to build. They might even consider relocating to safer areas. Over time, a risk-based approach could discourage risky development and promote more climate-resilient communities.
Such reforms would face major political and logistical challenges. However, federal involvement is essential when the stakes are this high, as we learned with Obamacare. When it comes to homeowners insurance, the stakes are rising rapidly. Without action, millions of Americans will be priced out of coverage, with devastating consequences for real estate markets, the financial system, and our capacity to adapt to climate change.
A national crisis requires a national response. Just as Obamacare transformed health insurance for millions, a similar solution is needed now to fix the broken homeowners insurance market. It’s time to act before it’s too late.
