How Can We Reform Property Insurance to Adapt to Climate Change?
Climate change is fueling more frequent and extreme disasters, and insurance companies are responding by dropping communities and raising premiums. Here’s what an equitable, reformed property insurance model would look like.
By Caroline Nagy and Carly Fabian
The climate threat is growing. So is the cost of protecting our homes from its damage. Two weeks ago, Hurricane Milton rapidly intensified in Florida, demonstrating the terrifying magnitude that climate change-fueled extreme weather events can reach. One month ago, Hurricane Helene devastated areas like western North Carolina, where few people had flood insurance, a warning that even areas once considered “climate havens” are vulnerable. Across the country, the growing frequency and intensity of wildfires, hurricanes, and even thunderstorms will require a new approach to insuring homes and communities.
To shift costs to consumers, insurance companies have been raising premiums and dropping entire communities from coverage. When private insurers selectively retreat, they leave vulnerable communities to rely on expensive public last resort programs or single-peril programs that are proving to be unaffordable and unsustainable stopgaps. Even for those who have insurance, delays, denials and underpayments in the claims process can turn the post-disaster period into a secondary disaster. This trend is now developing into a national insurability and affordability crisis as homeowners risk mortgage default without insurance, while affordable housing providers struggle to get any coverage, let alone coverage they can afford.
While large insurance companies can continue to profit through this tumult, the costs will shift inequitably to low-income communities and Black, Latino, and Indigenous people. These communities are disproportionately exposed to climate-related hazards like flooding and wildfires and have less household wealth to help with recovery, due to the nation’s history of segregation and racist policies. They are also less likely to be able to adapt to meet rising deductibles, wait for long periods on their claims, or move nearly as easily as their insurance companies can drop them.
Property insurance is vital to the basic functioning of the U.S. housing market and has the potential to destabilize the broader financial system. While public awareness is growing, the federal government and most state governments are not moving decisively enough to protect us. That’s why we’re organizing grassroots and advocacy groups across the country to join the Equitable and Just Insurance Initiative to develop democratic, transparent solutions to the insurance crisis.
This coalition includes campaigners and policy thinkers, frontline leaders and communities, and grassroots and advocacy organizations. Because of the state-based nature of insurance regulation, we are also working to connect organizations, people, and ideas across state lines.
How We’re Approaching the Property Insurance Crisis
The property insurance crisis stands at the intersection of climate change, financial regulation, consumer protection, housing and community development policy, and racial justice. Its multifaceted nature means that no one person or perspective has all the answers: rather, we are seeking to bring leaders of affected communities together with experts in those fields to develop solutions.
These are the guiding principles for our work:
The people, not insurers, should decide. Insurance companies are not motivated to act in the public interest, but regulators have long had the mandate to oversee them in the public interest. Insurers should not be given free rein to dictate insurance policy, let alone to drive national housing or adaptation policy. Decisions about where we live and how we build housing should be decided by democratically elected governments in consultation with impacted communities, not subject exclusively to the short-term profit motives of private insurance companies.
This is a racial justice issue. Because of our nation’s history of segregation and racist housing and community development policies, climate hazards will not be felt equally. They will amplify existing racial disparities in housing affordability and household wealth. Low-income people are more likely to live in areas that are especially vulnerable to damage caused by climate change. So are Black, Latino, and Indigenous people. The racial wealth gap means that these groups are less able to financially recover from climate events compared with other groups. Therefore, any policy solution must explicitly center racial justice.
This is a housing justice issue. The availability and affordability of insurance will determine who can live where, and who will be best able to recover from climate-related natural disasters. Our lack of affordable housing in more climate-resilient areas is causing more people to move into harm’s way than out of it. Policy solutions must include a major investment in affordable, energy-efficient, and resilient housing in climate-safer areas.
This is a climate justice issue. Insurers have tremendous financial influence through both the insurance they provide and their investment decisions. Yet even as they drop vulnerable communities, some of the same insurers are not only investing policyholders’ premiums into the industries driving climate change, but also insuring new oil, gas, and coal projects. Any local, state, or national government support for the insurance industry must be contingent on the industry adhering to credible plans to phase out their fossil fuel investments and underwriting, and to scale up support for renewable energy.
This is an issue of major national importance. Insurance regulators operate at the state and territory level, with widely varying approaches. State mandates and incentives protect individual states, rather than center broader national and global concerns, but disasters and insurance crises will not be limited by state lines. Federal leadership and oversight are necessary.
Potential Policy Solutions
Without intervention, an approach to climate adaptation driven by private companies and short-term profit motives will inevitably lead to inequitable, unacceptable outcomes that could have widespread impacts on the financial system. We need equitable, transparent, and proactive policy solutions at the state and federal level. While some solutions will be most effective at the national level, states can also serve as important laboratories for innovation. The following examples highlight the range of issues and the expertise required for a comprehensive response.
Addressing the Insurance Crisis as a National Priority
Pursue robust legislative action through a special committee(s) on insurance reform: Lawmakers must focus on and prioritize legislative action to address the climate-driven insurance crisis and prevent its spillover into broader systemic instability. To that end, an initial step is to create a special committee of engaged members to hold hearings, gather information, and debate policy solutions in active dialogue with affected communities, advocates, and experts. National solutions will likely involve not just major investments in adaptation and resilience but also the development of a public backstop for the largest insured losses. Funding to participating states and insurers could be conditioned on meeting economic, racial equity, and climate justice criteria.
Invest in green housing and green infrastructure: Congress should massively expand federal funding for green affordable and social housing in climate-safer areas as well as disaster mitigation infrastructure. One option is tax credits, rebates, and direct payments for undertaking home mitigation measures to protect against wildfire, flooding, or wind damage, particularly for low-income and climate-vulnerable communities. Both the Housing Crisis Response Act and the Homes Act contain spending provisions that would further this goal.
Designate major insurers to be given enhanced supervision: Established in 2010, in the wake of the 2008 financial crisis, the Financial Stability Oversight Council (FSOC) is charged with identifying and responding to systemic risks and threats to the stability of the U.S. financial system. FSOC should push financial regulators to address systemic risk concerns emerging from the insurance crisis and designate major insurers such as AIG as systemically important financial institutions, which would enable their supervision at the national level by the Federal Reserve.
Mandate Transparency for Insurance Data and Modeling
Create a public database to track insurance markets: You can’t manage what you can’t measure, yet state insurance regulators have barely started to collect and have been unwilling to disclose the data necessary to evaluate climate impacts. Without data from insurers on race, it is also challenging to evaluate the potential for discrimination. We have less information on insurance trends now than regulators had on mortgage lending practices ahead of the 2008 financial crisis. This leaves the public dependent on selective disclosures from insurers that can just as easily be used to exploit a crisis as they can to solve it. States could act now to develop their own public insurance databases with premiums, claims, and deductibles. Through the Federal Insurance Office’s subpoena power, the federal government could establish a publicly available national database. As housing expert Gregory Squires described in a previous Shelterforce article, the Home Mortgage Disclosure Act—which allows the public to determine whether lenders are serving the housing needs of their communities by collecting and reporting information such as age, race and ethnicity, and income level—provides a model for insurance.
Provide public catastrophe modeling: Private insurers are increasingly using advanced catastrophe models to predict extreme weather events. But the only results from these models most policyholders will see are higher premiums, while the models’ proprietary nature raises risks of corporate conflicts of interest, bias, and price-gouging. Along with greater support for universities to help the public engage with these models, the development of public catastrophe models could provide greater transparency and insights for adaptation decisions. Florida has its own public model to address hurricane risks, California recently announced it would create a public wildfire model, and the federal government could coordinate across hazards with the development of a national catastrophic modeling platform.
Provide climate data as a public good: Significant federal investments have led to the development of global climate models, and a growing industry of private climate services offers proprietary modeling on physical risks, yet similar public resources for localized adaptation decisions have not kept pace with this trend. Much like weather forecasts, climate data should be valued as a “public good,” and used to help the public make informed decisions about adaptation. By integrating modeling and public data from the National Flood Insurance Program, the federal government could offer more detailed risk assessments to inform local adaptation efforts.
Proactively Protect Marginalized Communities
Prohibit proxy discrimination: Without stronger oversight, the rising costs of climate change could also provide cover for unfair discrimination. While regulators prohibit insurers from unfairly discriminating against customers based on race, the majority allow insurers to use factors like consumer credit history with a similar outcome. Some states are banning insurers from considering these factors. Recently, New York State banned insurers from discriminating against affordable housing, including banning consideration of residents’ source of income.
Provide subsidies: Providing subsidies for residential insurance could create a more equitable transition while avoiding rate suppression that could obscure the risk. Low-income families have the least ability to adapt, despite bearing the least responsibility for climate change. At the national level, several options have been proposed for means-tested assistance for federal flood insurance, and states can also step in to offer subsidies. The Affordable Care Act, which has successfully used subsidies to reduce the population without health insurance, could act as a model.
Address equity in buyout programs: In some areas, it will become unsustainable and unsafe to continually repair and rebuild. Buyout programs, which allow residents to sell their homes to the government to be turned into public spaces, offer one alternative but require significant and proactive attention to equity and justice considerations, including more sustainable funding, shorter wait times, greater support for renters, and more comprehensive services for participants navigating a complex process. In addition to reforming federal buyouts to address these issues, states can also adopt or improve programs. New Jersey’s Blue Acres program, for example, which is supported by a corporate business tax, converts flood-damaged properties into public recreational green spaces, with support for renters and case managers assigned to participants.
Require Insurers to Invest in Communities, Not Climate Change
Incentivize home mitigation investments: While insurers and consumers alike can benefit from reduced losses through mitigation efforts, homeowners and taxpayers should not be left to foot the bill while insurers pocket the savings. California requires insurers to offer discounts to homeowners for taking steps to mitigate wildfire risks, while an Alabama program uses an insurer licensing fee to provide grants for roof upgrades that make participants eligible for a 20 percent (or higher) discount on their insurance premiums.
Design a Community Reinvestment Act for insurance: States and the federal government could take inspiration from the Community Reinvestment Act, created in the 1970s to oblige banks to reinvest in the communities they serve. Banks undergo examinations to assess whether they are fulfilling these obligations. Insurers would need similar incentives to comply. The Community Reinvestment Act rules were recently amended to add weather resilience and disaster preparedness to its approved community development activities. Several states, including Massachusetts, Illinois, and New York, have their own state-level versions of the Community Reinvestment Act that offer models.
Require carbon emissions mitigation: The New York State Insurance Fund, which provides workers’ compensation coverage, recently launched an incentive program for policyholders to reduce their carbon emissions in exchange for lower premiums. The program is currently open to corporate hospital system policyholders but is intended to expand to additional corporate policyholders over time. In 2023, Connecticut lawmakers proposed a surcharge on fossil fuel companies’ insurance premiums. The resulting funds would have gone to climate resilience and insurance assistance. Likewise, states can incentivize or require private insurers to provide credible plans to engage their clients, policyholders, or the companies they invest in to lower their overall carbon emissions. Connecticut’s insurance commissioner, for example, is required to incorporate state emissions reduction targets into its supervision and regulation, and a bill introduced in April in New York would require insurers to begin to phase out their oil, gas, and coal investments and underwriting.
We’re Taking Action
Through the Equitable and Just Insurance Initiative, advocacy and community groups are developing a national policy platform. As we align on the most urgent priorities, our coalition will begin to advocate together for regulation and legislation at the local, state, and federal levels. As Helene has tragically demonstrated, no place is safe from climate disasters. We are all in this together and must work accordingly. Our racial, economic, and climate justice movements must come together to develop and demand policy solutions that address the deep-rooted inequalities and vulnerabilities in our housing, insurance, and disaster response systems.
Fill out this form to learn more about the Equitable and Just Insurance Initiative.
Caroline Nagy is the associate director for housing at Americans for Financial Reform/Americans for Financial Reform Education Fund. Her research and advocacy work focuses on housing displacement, housing finance, tenants’ rights, climate change, affordable housing, and consumer financial protection.
Carly Fabian is a senior policy advocate at Public Citizen, where she specializes in the intersection of climate change and insurance markets. She advocates for equitable policy solutions to protect policyholders and to address insurers’ contributions to climate change through their investments and underwriting.
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