Climate change and generations of U.S. housing and development policies are increasing the risk of insurability for homes, neighborhoods, and entire municipalities, eroding Americans’ ability to live where they choose.
The current challenge of this crisis is that the insurance industry is retreating nationwide from areas threatened by wildfires and hurricanes, particularly along the Gulf Coast and California.
Although other factors are at play, this setback is primarily driven by the conflict between climate change and the federal government’s long-term decision to encourage more expensive housing in high-risk areas.
But insurance is just one manifestation of a larger problem, experts told The Hill. A canary falls from its perch in a coal mine, warning him that there is a greater danger lurking somewhere out of sight.
And in countries where the economy is in decline, among the most unequal people In wealthy Western countries, the cost of that risk increasingly falls on those who cannot bear it.
A record number of $1 billion-plus weather disasters hit the United States in 2023, with 28 such disasters totaling nearly $100 billion in damage. according to National Oceanic and Atmospheric Administration. The previous record was set in 2020 with 22 disasters with 10-digit tabs.
But the scale of these disasters is only part of the story of climate change. In a world where America’s coastline was dominated by wetlands and mangrove swamps, where coniferous forests were regularly burned by low-intensity fires, and where the housing stock was built for resilience, these numbers would be much lower. .
But for decades, state, federal and local governments have encouraged both large-scale suppression of low-intensity fires and a boom in expensive coastal real estate, often on barrier islands. These trends are exposing more people and more insured home values to worsening fires, floods, and storms.
The home insurance industry has lost money every year for the past five years, part of a broader crisis in the industry, according to a March report from insurance ratings site AM Best.
In the broader category of personal insurance, the industry suffered losses of more than $20 billion for the third year in a row.
“That’s why companies are exiting and cutting jobs, because they’re incurring huge losses,” Robert Gordon, senior vice president at the Property Casualty Insurance Association of America, told The Hill.
When insurance companies are faced with increased risk, they have several options. They can raise deductibles, raise premiums, exclude the most at-risk homeowners from insurance companies, or leave the state altogether.
They are increasingly doing all of the above, but the most dramatic is state secession.
Last month at State Farm. announced The company announced it would not renew insurance policies for 72,000 homes and apartments in California, about 2% of all policies.
This announcement followed the company’s May 2023 decision It echoed the move, calling for a halt to new policy development in the state due to the “rapidly increasing risk of catastrophe.” allstate and American Insurance Group.
California is a particularly difficult market for the insurance industry. A wave of high-dollar development in the fire-prone hinterland is a state where risks, and therefore insurance costs, are rapidly increasing. Due to state policies aimed at protecting consumers, insurers often have to wait up to a year for rate increases and another year for them to take effect.
But the problem goes far beyond California.State Farm’s March retreat followed February. withdrawal He hails from nine states prone to extreme weather, including California, Colorado, Louisiana, and the Dakotas, and hails from American National, which is headquartered in Texas.
In Louisiana, Over 20 insurance companies Became bankrupt or left the state after 2020.florida lost more than 30There are signs that insurance premiums will rise. drive homeowners out of state. And while insurance companies haven’t pulled out of Texas yet, Insurance premiums are rising after the disaster.
In these cases, too, the industry points to other compounding factors, particularly the unusually high rate of litigation over insurance claims in Florida and Louisiana.
“We’re well on our way to a future where there’s no insurance in many parts of the country,” said Dave Jones, former director of the California Insurance Commission. Said last year.
Anne Perrault, Public Citizen’s senior fiscal policy councilor, told The Hill that this is an alarming development because if communities are uninsured, they become “uninhabitable.”
Taxpayers are covering the cost of increasingly common disaster subsidies, but the continued trend of building more expensive housing in ever-more dangerous areas is likely to make them even more expensive. I am.
In states like Texas, California, Louisiana and Florida, homeowners who can’t find insurance elsewhere can turn to state-run “insurance companies of last resort” that offer coverage but at a high price.
But these agencies can’t say no to homeowners, so the cost of insuring the most dangerous properties is the cost of insuring a vacation home on the shifting sands of a barrier island borne by people inland. and are essentially socialized.
For banks and the federal agencies that regulate them, the downstream risk is that a collapse in insurance prices could lead to a wave of mortgage delinquencies and a drop in home prices.
Also, because insurance companies are regulated by the states, it is difficult for federal authorities to assess the collective risks facing the United States. The Ministry of Finance has begun the process of summarizing the national situation; faced resistance from the state Despite the increased risk, Louisiana officials told The Hill they are keeping an eye on the call. The same goes for the companies themselves.
Gordon, of the insurance company trade group, said such consultations are expensive and time-consuming and end up telling federal regulators what they already know: land use and home construction standards. They argued that decades of poor planning around the country had heightened the risks.
For mortgage lenders, the issue of insurance company withdrawals is worrying. “What we don’t know is whether this cycle will normalize and level out, or whether it will continue. So there’s a lot of unknowns on that front,” said Mortgage Bankers Association Housing Policy Director. Vice President Pete Mills told The Hill.
Looking more broadly, Mills acknowledged that there is an oversupply of anecdotes, but added, “I don’t know if everyone is collecting data properly, but it’s necessary to do so to understand the problem.” “There is,” he added, calling on both the industry and industry. The government will fix it.
In disaster-prone areas like California’s Sierras, where state and federal policies have created a wildfire problem that climate change is now exacerbating, the disjointed response of financial institutions and local governments is forcing heartbreaking choices and community failures. This has led to a dramatic restructuring.
For example, in the fire-ravaged town of Paradise, California, homes were once available for $60,000 and served as a haven for seniors and young families leaving the increasingly unaffordable California coast. But since the devastating 2018 Camp Fire, home prices have soared and investors are paying little to rebuild the affordable housing stock.
Sheena O’Shaughnessy of the Community Housing Improvement Program, which builds affordable housing in the area, told The Hill that this has pushed the community “into the depths of unaffordability.” . Rising insurance premiums and home prices have left many fire survivors feeling “unable to stay in their homes,” O’Shaughnessy said. Anyway, their community is here. ”
Similar trends continue in other disasters.Federal Reserve System Research found Post-disaster federal aid provided by the Federal Emergency Management Agency tends to be “regressive” and is more likely to benefit homeowners with more money, and less likely to benefit homeowners with less money. This means that people are more likely to go bankrupt.
February report According to real estate site Redfin, about 1 million people died between 2021 and 2022 in areas with poor air quality, mainly due to wildfires, and the main cause was runoff due to rising housing prices. There was found.
And, as The Hill reported, Americans are increasingly abandoning areas at high risk of flooding in favor of areas with less chance of flooding.
Policymakers sometimes discuss a big-picture solution to this problem as “managed withdrawal.” This is the often controversial idea of a planned withdrawal from zones, such as barrier islands, that are too weak to be continuously defended.
But housing policy advocates argue that in the absence of a coherent federal housing policy or a clear understanding of where insurers will retreat, what the U.S. is getting instead is an unmanaged setback: They argue that insurance and lending decisions are quietly piecemeal and chaotic readjustments. As the planet warms, the country’s human geography is being reshaped.
In many areas, these choices reinforce old prejudices. Because today’s risky areas are often yesterday’s zones of historic divestment.
Jesse Keenan, a real estate professor at Harvard University, told The Hill about a conversation he had with a loan officer at a major bank who took out a blue marker and drew an outline of all of Florida.
“He said he wasn’t going to lend here anymore,” Keenan recalled.
For Keenan, that blue marker reminded him of the old concept of “redlining,” the process by which mortgage lenders and real estate agents deny service to families in majority-minority areas. The federal government banned redlining in his 1970s.
In the 2020s, the municipalities most vulnerable to climate change will likely be those that have historically received low levels of investment, says housing policy analyst at the left-leaning research nonprofit Center for Progress (CAP). Michela Zonta told The Hill.
“We find that formerly redlined areas are exposed to contaminated facilities and high temperatures, which are among the most common causes of health-related problems,” she says.
These communities are less likely to have access to heat mitigation measures, such as modern materials to protect residents and green spaces to cool entire neighborhoods.
CAP report found Black communities are concentrated in areas often exposed to heat and flooding, primarily along the southern and eastern coasts.
“Many insurance companies are moving away from flood-risk areas with high concentrations of Black communities,” Zonta said.
These regions pose a “wicked problem” for federal policymakers, Keenan said. This is where the federal government’s goals for redressing historical injustices come into direct conflict with the worsening reality of climate change.
In these zones, “we want people to adapt, but we don’t want to throw them to the wolves. We don’t want redlight communities that have been ruined by history to be ruined again.”
Further complicating matters is that many zoning decisions are made locally.
Keenan said all government officials, including the Department of Commerce and the Department of Housing and Urban Development, will come together to solve this problem.
Zonta added that government-backed financial institutions like Fannie Mae and Freddie Mac have an important role to play here. She argued that loans to people of color to buy homes in underserved areas should be avoided.
CAP research found that 30% of loans made to black borrowers in 2022 were made in areas at high risk of heat damage and flooding.
“We can’t promote access to ownership in these areas. People will continue to buy there, but unless the housing is climate-resilient, it’s not a long-term solution,” Zonta said. says.
Without such a plan, families settling there, often with federal aid, would “just rack up financial losses,” she said.
Ultimately, markets and local governments alike will need to adapt, Keenan said. “If you have an area that’s redlined, that means it’s really marginalized. You can try to provide some protection.”
“But when you’re on the edge of a delta like New Orleans, the question becomes, ‘Do I take my medication now or do I delay the inevitable?'”
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