Published July 23, 2024
By Lindsay Fenlock, Senior Researcher at the Center for International Environmental Law, Charles Slidders, Senior Attorney, Financial Strategies at the Center for International Environmental Law, and Nikki Reisch, Director of the Climate & Energy Program at the Center for International Environmental Law.
This is the second in a multi-part series analyzing the intersection of the climate emergency and the insurance crisis.
On July 1, Progressive Insurance pulled renewals for around 100,000 homes on Florida’s coastline. On July 3, State Farm began to pull wildfire insurance for approximately 70,000 homeowners in California, a plan it announced in March. As insurers seek to limit their exposure to climate-induced weather events like hurricanes and wildfires, insurance premium increases and policy nonrenewals have become a summer norm in the United States (US), making housing more unaffordable in the process.
This vicious seasonal cycle — where insurers increase premiums and withdraw coverage after a summer of climate disasters — has become entrenched as climate change worsens extreme weather. Insurers look to recoup profits from their customers, foisting the cost of the climate crisis onto homeowners and renters. Insurance companies — now raking in record-breaking profits — then turn around and reinvest money earned through their exorbitant premium increases into fossil fuel companies, exacerbating the climate crisis and triggering more disasters, the cost of which insurers then attempt to evade the next year.
While insurers line their pockets by playing both sides of the climate crisis, their unconscionable behavior is spurring a nationwide housing affordability crisis in the US, threatening the human right to adequate housing. Because securing a home mortgage nearly always requires home insurance, the sudden unavailability or unaffordability of home insurance can force people to leave their homes or default on their mortgages. In time, the flow-on effect of the insurance crisis on the residential mortgage and home property markets may precipitate a financial catastrophe.
No Insurance = No Mortgage = No Home
A recent Consumer Federation of America report highlights that, for most American homeowners, their home is not only their greatest financial asset but also “a key source of financial stability, community, and personal pride.” However, the continued burning of fossil fuels presents a physical threat to homes, exacerbating climate change and intensifying risks such as flooding, storms, and wildfires. For instance, researchers documented that wildfire damage increased in the western US by 246 percent from 1999–2009 to 2010–2020, largely due to climate change.
Home insurance is vital to protect homeowners’ assets from climate change, thereby preserving the benefits of homeownership to society more broadly. But according to one report, one in thirteen US homeowners is uninsured, and many are struggling with higher premiums. People of color and homeowners earning less than $50,000 annually are more likely not to have home insurance.
While homeowners are generally required to retain property insurance as a condition of their mortgage, private insurers are withdrawing from areas vulnerable to climate disasters. This has left many homeowners relying on state-sponsored “insurers of last resort,” such as California’s Fair Access to Insurance Requirements (FAIR) Plan or Florida’s Citizens Property Insurance Corporation. These plans are more expensive and typically provide less coverage. As a result, insurers of last resort in California and Florida have seen exposure for their plans rise from $160 billion in 2017 to $633 billion in 2022.
Facing other rising costs, many homeowners must face a difficult choice: they can forgo insurance, a breach of their mortgage contract that can lead to foreclosure, or they can sell their home, likely being forced to leave their community for more affordable rates. In some areas vulnerable to climate disasters, the insurance affordability crisis has decimated communities by forcing out longtime residents.
Even homeowners who are forced to sell their property may not be made whole. The inability to renew property insurance reduces the value of the home and has a devastating impact on the resale value of the property. In California, a nonrenewal notice can immediately reduce the home’s value by 12 to 39 percent. As a result of the climate change-induced nonrenewal of more than 100,000 policies, homeowners could face losses ranging from $9.87 billion to $32.1 billion in property value.
The Widespread Impact of the Climate Change-Induced Insurance Crisis
While media reporting of the insurance crisis has focused on California, Louisiana, and Florida — where “insurance of last resort” options are under strain — no part of the US is immune to skyrocketing insurance rates, which have climbed dramatically since 2019 and are projected to continue increasing.
As climate change continues to worsen, extreme weather events are becoming more frequent and severe. All over the world, communities are facing weather events that they are unprepared for, or that are much more severe than expected.
In the US, these extreme weather events are a major factor in insurance rate hikes as well as nonrenewals. Texas, like Louisiana and Florida, is subject to hurricanes as well as severe storms and drought. California’s susceptibility to wildfires is well-known, but Colorado, Washington, and Oregon have also incurred significant losses and damage from wildfires. Tornadoes and hail recently caused substantial damage in Oklahoma, while the Midwest has been increasingly subject to storms marked by intense winds, known as derechos, as well as tornadoes and hail storms. Insurers are displaying reluctance to write and renew insurance policies in Iowa, Minnesota, Indiana, and Ohio. Even bucolic Vermont experienced catastrophic flash flooding and river flooding in “The Great Vermont Flood of 10–11 July 2023.”
The growing frequency and severity of many extreme weather conditions — due primarily to climate change — has been a major factor in the enormous growth in the cost of natural disasters to homeowners and renters in the US, as well as their insurance companies. As losses for insurance companies mount, they look to recoup that money from customers. In June, California’s largest insurance provider, State Farm, submitted a request to the Department of Insurance for a “seismic-level” rate increase averaging 30 percent for homeowners, on top of the 20 percent rate increase approved earlier this year. Though many insurance companies claim that these increases are necessary to offset their insurance payouts and remain in business, the insurance industry brought in record-breaking profits in recent years while raising rates.
Renters — Not Just Homeowners — Are Also Hurt by the Insurance Crisis
The climate change-induced insurance crisis is increasing housing unaffordability and exacerbating homelessness in the US.
It’s not just homeowners who are hit with higher insurance costs. Landlords are passing on their increased insurance costs to renters, contributing to a 24 percent average rent increase over the last three years. Forty-four million households rent their homes, and for tenants with low incomes, rent is consistently more than one-third of their total expenditures. Premiums for rental insurance have also risen: State Farm is seeking a 52 percent increase in rental insurance premium rates!
For housing to be considered affordable, the rent or mortgage payment must be less than 30 percent of the average local monthly income. In 2023, only 15.5 percent of homes listed for sale were “affordable,” and in 2022, half of renters paid more than 30 percent of their income toward rent. Homeownership — perceived as an essential element of the financial security of the American middle class — and renting are both becoming increasingly unaffordable.
Insurance costs are a major factor driving up housing costs for both homeowners and renters, taking up an increasing portion of total household incomes. These rising costs are worsening the existing affordable housing crisis and contributing to homelessness in the US. Between 2022 and 2023, homelessness in the US rose by 12 percent, with approximately 653,100 people experiencing homelessness on any given night. The number of families with children experiencing homelessness also rose by 16 percent.
To ease the growing homelessness emergency, some cities rely on organizations that build subsidized affordable housing. However, these organizations have also been hit with rising insurance rates. According to the New York Times:
“From Rhode Island to Louisiana, and Texas to Washington, developers of affordable housing have been reeling from exponential surges in property insurance premiums.”
For 2022–23 policy renewals, 29 percent of affordable housing providers experienced increases in insurance premiums of at least 25 percent, compared to increases of 17 percent the previous year. To address the rate increases, 93 percent of affordable housing providers indicated that they would increase insurance deductibles, decrease operating expenses, and raise rent. But raising rent is not available to all affordable housing providers — often rents are set by the government — nor is it compatible with the goal of providing affordable housing. The increased costs of insurance may lead to the closure of affordable housing developments.
The inevitable consequence of increasing housing unaffordability and, in particular, the closure of affordable housing developments is that more people will end up on the street.
Rising Insurance Costs Could Trigger Financial Catastrophe
As more American homeowners become unable to afford insurance, they are more likely to default on their mortgages. Increased rates of home mortgage defaults were a key factor in the 2008 financial crisis, and large numbers of defaults could have ripple effects throughout the economy.
In addition to protecting homeowners, insurance also protects lenders against mortgage default or delinquency, and the rising level of uninsurance leaves financial institutions exposed. In the US, banks demand that borrowers take out property insurance to protect the bank’s collateral from physical damage. Increasing un- and underinsurance devalues the lender’s security, jeopardizing the repayment of home loans due to the physical risks of climate change.
American insurance markets are dysfunctional. The dysfunction of US insurance markets, as Janet Yellen, Secretary of the Treasury, noted to the Federal Advisory Committee on Insurance, “can have cascading effects on the financial system.” Anything that cascades through the US financial system is likely to have a global impact.
US Senator Sheldon Whitehouse, in June, during his opening statement as Chairman of the Senate Budget Committee hearing “Riskier Business: How Climate Change is Already Challenging Insurance Markets,” neatly summarized the issue:
“This isn’t complicated. Climate risk makes things uninsurable. No insurance makes things unmortgageable. No mortgages crashes the property markets. Crashed property markets trash the economy. It all begins with climate risk.”
And climate risk all begins with the continued burning of fossil fuels.