Risky Business: Insurance in the Era of Climate Change

The Environmental and Energy Study Institute (EESI) held a briefing about Congress’s role in bolstering the long-term resilience, investability, and insurability of U.S. communities. Insurance premiums have increased by an average of 21% since 2015, and almost 67% of U.S. homes are underinsured. This raises significant questions about the ability of American households to affordably manage the risks they face from increasingly severe and frequent disasters like wildfires and storm-induced flooding.

This briefing explored the basics of property insurance and how it functions in the United States, including the challenges faced by individuals, businesses, insurers, and reinsurers. It also featured existing and emerging tools—from parametric insurance to climate endorsements—that are reshaping how insurance products can better serve communities. Panelists described the role of federal policy in advancing these new ways of thinking about insurance.

At this briefing, Woodwell Climate Research Center also be launched a new report, Rebuilding Insurance for a Climate Future: A Policy Guide to Understand Tools, Address Inequities, and Find Solutions.

Highlights

KEY TAKEAWAYS

Rebuilding Insurance for a Climate Future: A Policy Guide to Understand Tools, Address Inequities, and Find Solutions is a new resource from the Woodwell Climate Research Center to help policymakers navigate insurance in the era of climate change. Climate change is affecting many households first through their insurance premiums. The insurance industry is responsible for pricing risk accurately, and that is directly affecting household finances.  Insurability has technical and economic limits. Technically, climate change is changing loss distributions and making some risks too frequent and severe to cost-effectively insure property. The economic limit is reached when the cost of coverage exceeds what anyone is willing to pay. Economic limits are reached before technical limits.  Risk is borne by communities. Reducing community level risk through pre-disaster projects that increase resilience is essential to relieve burdens on individuals.

 

Senator Sheldon Whitehouse (D-R.I.)

• The United States is now in the era of experiencing the consequences of inaction on climate change.
• One of the first major consequences the country is experiencing is in the insurance sector. The insurance industry makes trillion-dollar bets anticipating what is going to happen in the world. Legally, the insurance industry is obligated to be truthful about the future. The future does not look good.
• If insurance companies cannot predict the risk, then they cannot offer insurance. Without insurance, people cannot get a mortgage to buy a house. When people cannot afford to buy houses, property values drop and there is a danger of recession.
• According to a Senate Budget Committee analysis published in 2024, people are losing the ability to get insurance (i.e., experiencing nonrenewals) along the coasts and in wildfire-prone areas. A nonrenewal is when a previously loyal and paying customer is dropped by an insurance company. This is unusual but becoming more prevalent as risk increases.
• In Miami-Dade County, Florida, the average home insurance cost is $17,000 per year. First Street, a public benefit corporation that does climate risk financial modeling, predicts that cost could triple over the course of a 30-year mortgage secured in 2025. Major insurance companies have left Florida, and small pop-up companies are interested in, but unable to fill the gap. These small, pop-up companies are defaulting to the government to pay claims when they go bankrupt. In the case of one recent storm, 75% of claims were rejected by insurers.
• Researchers at Deloitte found that if the world successfully mitigates climate change by 2070, economic growth would improve by $43 trillion. However, if the global community fails to reduce greenhouse gas emissions, then global gross domestic product would suffer a $178 trillion cut.
• The climate crisis is fueled by continued subsidies to the fossil fuel industry. The International Monetary Fund found that the fossil fuel industry benefits from a $700 billion implicit annual subsidy in the United States. The fossil fuel industry does not have to take responsibility for the negative externalities of burning fossil fuels. This is a “free to pollute” business model.

 

Dominick Dusseau, Research Associate, Woodwell Climate Research Center

•  Rebuilding Insurance for a Climate Future: A Policy Guide to Understand Tools, Address Inequities, and Find Solutions is a new resource from the Woodwell Climate Research Center to help policymakers navigate insurance in the era of climate change.
• Insurance premiums are calculated by adding together the average expected annual losses, the administrative costs to issue insurance, and the risk load, which includes capital to cover catastrophic losses and make a profit.
• Catastrophe models are used to calculate the average annual loss and the risk load. Catastrophe models are complex software tools that integrate expertise from atmospheric science, computer science, actuarial science, and engineering to estimate risks beyond historic patterns.
• Catastrophe models have broad uncertainty ranges, meaning that insurers can justify many premium rates depending on the model they choose, underscoring the need for clear regulatory oversight.
• Many insurance companies provide insurance coverage across the United States, but insurance is regulated by states, and regulations vary significantly. High-risk states like California impose tighter controls on insurers increasing rates. As a result, in high-risk states, premiums do not rise proportionally to increasing climate risks and are effectively subsidized by those in lower-risk and less-regulated states.
• One possible solution is an Optional Federal Charter, which would allow insurers to choose if they want to be regulated at the state or at the federal level. This could help reduce cross-subsidization and regulatory costs, potentially lowering premiums while better reflecting climate risks.
• Home insurance does not cover damage from flooding, which is why the Federal Emergency Management Agency (FEMA) plays that role.
• The Risk Rating 2.0 methodology introduced actuarial pricing to the National Flood Insurance Program (NFIP) in 2021.
• NFIP offers discounts to communities that undertake flood risk reduction measures, such as preserving open space or maintaining levees. This is called the Community Rating System (CRS). Policyholders receive a double discount—once through reduced premiums and again through the FEMA CRS credits—because these risk reduction efforts are already factored into the premium calculations based on catastrophe models.
• To recover the double discount, FEMA carries out cross-subsidization across states. The outcome is that rural communities with less risk are paying more for insurance to subsidize the discounts of high-risk communities.
• Congress could recalibrate these subsidies to maintain the benefits of the CRS without the financial inefficiencies of cross-subsidization. Reforms would need to ensure that premiums more accurately reflect risk levels while offering support to low-income households.

 

Benjamin Keys, Rowan Family Foundation Professor of Real Estate and Finance, The Wharton School, University of Pennsylvania

• A homebuyer needs insurance to take on a mortgage. Homebuyers typically make a down payment of 10%, leaving 90% of the exposure with the mortgage industry.
• Insurance markets are highly liquid and highly responsive, so annual insurance contracts indicate initial climate risk signals.
• Public data about insurance markets has previously been very limited. Senator Whitehouse and the Senate Budget Committee have compiled unprecedented levels of data about nonrenewals where insurers are canceling policies.
• Mortgage payments typically cover the principal, interest, taxes, and insurance. New data about insurance premiums are derived from mortgage escrow payments. The research uses 84 million premium estimates across the country from 2014 to 2024. Data are available down to the ZIP code level.
• Coastal states like Florida have high insurance rates, and inland locations are unexpectedly suffering from increased costs due primarily to hail storms.
• Premiums have increased by about 48% between 2020 and 2024. High-risk ZIP codes have seen a disproportionate increase in their insurance premiums: the top 20% are paying at least $1,100 more than before. There is no indication of what coverage these homeowners have, but homeowners are likely opting for less comprehensive coverage to manage premium increases.
• Researchers are now exploring how much of this cost increase is due to capital markets and the cost of reinsurance (i.e., insurance for insurance companies). Reinsurance companies are having a harder time meeting their costs of capital due to rising interest rates. They are reducing the types of policies available to insurance companies in the United States, making them more expensive, or not writing them at all.
• In southwest Florida and the Gulf Coast of Louisiana, there are increases in home inventories because more homes are failing to find buyers and sales are falling through. This is a predictor of subsequent home price declines.
• Regulating insurance markets on price alone is ineffective because insurers simply leave and push risk onto state-backed plans.
• We need better models and data, weather and climate forecasts, and investments in resilience efforts.
• There is $35 trillion of home equity in the United States. Encouraging homeowners to borrow money against home equity to pay for measures that increase resilience would decrease losses when impacts do happen.

 

Carolyn Kousky, Associate Vice President, Economics and Policy Analysis, Environmental Defense Fund; Founder, Insurance for Good

• Insurance for Good focuses on helping communities, nonprofits, and the public sector in developing and identifying risk transfer solutions that can support their social and environmental goals.
• Households with insurance have fewer unmet needs and financial burdens. Lacking insurance often widens income inequality post disaster. Federal aid systems were not designed to replace insurance, so there is no other money source for covering the expenditure shock of a disaster.
• Pullback from the private insurance and mortgage sectors is creating a migration of risk to public sector programs. States with a high risk of disasters have a “market of last resort” for residents who cannot find or afford coverage in the voluntary private market.
• Destabilization in the insurance market in California began with the 2017 and 2018 wildfires. After these fires, insurers paid out two times as much in claims than their cumulative state-wide underwriting profits from the past 30 years.
• Insurability has technical and economic limits. Technically, climate change is changing loss distributions and making some risks too frequent and severe to cost-effectively insure property. The economic limit is reached when the cost of coverage exceeds what anyone is willing to pay. Economic limits are reached before technical limits.
• There are creative solutions to keep Americans safe and insured. For example, parametric microinsurance harnesses new data, technology, and mobile platforms to write smaller insurance contracts.
• Disaster-stricken communities can also focus on building back in a way that is adapted to the climate future.
• Work is ongoing to design an inclusive disaster insurance market to relieve the financial burden on low-income households with the strongest need for the financial protection of insurance yet with the least access.
• Federal weather and climate data are an essential underpinning of successful insurance markets. Data from the National Oceanic and Atmospheric Administration, the National Aeronautics and Space Administration, the U.S. Geological Survey are crucial.
• The federal government also has an essential role in providing funding to state and local entities to carry out pre-disaster risk reduction and climate adaptation projects.

 

Q&A

 

What are some federal agencies or programs that play a particularly important role in ensuring long term resilience, investability, and insurability in the United States?

Dusseau

• Insurance is only one part of risk management. Risk mitigation will decrease premiums and provide a return on investment. The FEMA Building Resilient Infrastructure and Communities (BRIC) program was recently canceled, despite its importance in building resilience throughout the country. FEMA has a role to play, along with every other agency in the federal government.

Keys

• Housing and mortgage markets are focused on long-term and durable assets, so they have aligned incentives to think about climate risks. Fannie Mae, Freddie Mac, and the Federal Housing Administration can play a bigger role by recognizing the importance of insurance to a well-functioning mortgage market. Housing markets are huge beneficiaries of insurance policies, but have largely allowed insurance markets to operate on their own. It would be interesting to see if mortgage entities could get involved in reconciling disconnects in terms of incentives for building codes, land use, and the volatility of annual policy writing.

Kousky

• It is underappreciated that many proprietary risk models used by the insurance industry use government data. Private insurance sector innovations also depend on federal data.
• It is important that they use government data because it is independent from any of the transactional participants. Government research and data is deeply embedded into the insurance market.

 

What are your thoughts about insurance companies purchasing catastrophic models and doing private data analysis?

Kousky

• Many insurers and reinsurers use independent models. Most large-scale insurers use models from multiple vendors to compare them. The question is, how do we make sure that under-resourced communities, the public sector, and households have access to that credible information?
• There is data in catastrophe models that consumer protection regulators cannot see, which causes concern. There have been regulatory approaches that are starting to fix the problem of models that artificially hurt consumers with higher prices.
• Florida has been using catastrophe models longer than anywhere else, and they have an independent commission that examines each model, compares it against a state public model, requires that some outputs be publicly available, and finally approves it for use in the state.

Dusseau

• Big insurance companies have their own models while smaller insurers rely on independent modeling firms to price their premiums. Models are calibrated using loss data (i.e., claims from the insurers themselves). There is constant movement of data between different firms to further improve their models.
• Many states are susceptible to wildfires, so the United States would benefit from a national public catastrophe model. This would be cost effective and could be used by all the states for greater hazard mitigation planning at various scales.

 

What is one talking point for the public and Congressional leaders on the importance of insurance?

Dusseau

• Climate change touches every part of society, no matter where you live, no matter what you do. Hopefully, that sense of solidarity that we are all impacted by climate change can help cut through the noise.

Keys

• The first place that climate change is hitting households is through their insurance premiums. The insurance industry is responsible for pricing risk accurately, and they are putting significant time and resources into understanding current risks. The insurance industry is responding quickly and that is directly affecting household finances.
• Too often, insurance is “set it and forget it,” but, in reality, insurance premiums are changing every year.

Kousky

• We are not effectively communicating that risk levels are escalating year to year because we did not decarbonize fast enough. We should not be surprised that insurance premiums are rising with risk levels and will not stabilize. Until we understand this new reality of increasing risk, we will always be trying to play catch up, which will cause a lot of economic pain.
• If we shift our thinking and make decisions for our future climate by building safer houses and communities that can withstand climate events, we can spare ourselves a lot of economic pain. This requires putting work in ahead of time to reap insurance discount benefits, not once a disaster hits.

 

How will the loss of FEMA BRIC grants impact insurance? What changes could FEMA make to better protect households?

Kousky

• BRIC risk reduction dollars are incredibly important. Their disappearance is going to increase levels of inequality because higher-income communities and states can sort out financing on their own while others cannot. FEMA requires reform, not destruction.

Dusseau

• Risk is borne by communities. Reducing community level risk through pre-disaster projects that increase resilience is essential to relieve burdens on individuals.
• Specifically, FEMA BRIC grants reduce community risk levels. We need more of those dollars to reduce risk because that is the only long-term solution to this insurance crisis.

 

Should there be a specific federal wildfire insurance program just like there is the NFIP for flood insurance?

Keys

• NFIP exists because the private market decided that they were not going to provide flood insurance policies at a reasonable price anymore. It became a necessary response. We are seeing similar elements of that private market shift playing out now for wildfires.
• With flood insurance, the way risk has been communicated has given people a false binary sense of either being at risk in the “flood zone" or being safe out of the “flood zone.” NFIP insurance has also been massively underpriced for decades. There are lessons to learn from NFIP.
• It is easier to impose standards at the reinsurance level of the market. There is some temptation to push the risk away from those who bear it and underprice the risk. The key element is to ensure that risk is priced appropriately.
• I think we will see public players in the wildfire insurance space.

 

How do we deal with insurance for entities like utilities in California?

Kousky

• There are a lot more risk transfer options for large commercial entities and infrastructure.
• California has struggled with its utilities because the state has a unique liability regime that makes utilities act like insurers and pay the full cost of any losses for a fire that was started by utilities, even if they are not at fault. As a result, insurance companies refuse to cover California’s utilities, and a state fund was created to support them.
• Utilities in other states struggling with climate impacts have captive insurance companies, which specialize in insuring just a particular group.
• FM Global is one of the only insurance companies that hire engineers instead of actuaries. These engineers run detailed risk assessments on every site they insure, and the insured firms implement risk reduction measures identified by FM Global, giving them lower-cost insurance. They offer integrated insurance and risk reduction.

 

As private insurers leave areas of high risk, when should the federal government step in?

Kousky

• There already are many government-based insurance programs, including NFIP. Every state has a state-created insurer of last resort program for things like windstorms, earthquakes, and terrorism. The payee of these costs varies across programs.

Dusseau

• When insurers leave states like Florida and California, it is usually due to increasing climate costs and not being allowed by state regulations to raise premiums. This could be alleviated by government programs taking on some of that risk.
• It is a matter of having conversations on how a system takes on risk, where to place that risk, and how to pay for it. There is no easy answer.

 

How is today’s conversation relevant to crop insurance or fisheries disaster insurance?

Dusseau

• Parametric insurance is about protecting an entity's revenue. Parametric insurance kicks in when certain parameters are met. For example, for a fishery, if a particular ocean temperature is met, then the insurer would pay out to members of the fishery organization.

Kousky

• The U.S. Department of Agriculture’s crop insurance program is its own unique challenge. There is work in that market to create new insurance products that incentivize climate-smart agricultural practices.

 

To what extent are the concerns discussed today relevant for entities like hospitals and airports? Do insurance issues infringe on the ability to build and rebuild key parts of infrastructure?

Keys

• All of these entities need insurance and are looking for solutions as climate impacts grow.
• Many businesses in the commercial market are scrambling to find alternative solutions such as creating their own insurance entity.
• There is a lot of innovation in this space, with options like insurance-linked securities and catastrophe bonds where the market participants are bypassing the insurance market entirely and trying to place the risk directly in capital markets.
• Airports are some of the most vulnerable entities because they are usually located along the water. The aviation sector is facing significant flood risk over the next 50 years.

Dusseau

• Municipal bonds are another key part of this picture for infrastructure. To what extent municipalities will continue to be able to access municipal bonds amidst climate impacts is an open question.

 

Compiled by Whitney Orloff and Hadley Brown and edited for clarity and length. This is not a transcript.