The United States is in the throes of another devastating housing crisis. Financial institutions are accumulating risk at an alarming pace, and regulators and policymakers are not doing enough to help the very people they are charged with protecting. Whether through the steady withdrawal of big insurers from states experiencing unprecedented weather disasters, the unloading of risky mortgages onto the public in areas hard hit by fires, storms, and floods, or the loosening of state insurance regulations, the political response to current housing market challenges is frighteningly similar to the period that preceded the 2008 crash.

 

As the availability and affordability of insurance becomes more limited, housing is also becoming less available. Homeownership, arguably the most important tool in the U.S. for middle-class families to build wealth, is becoming ever more inaccessible to a growing segment of the population. The Consumer Federation of America (CFA) recently estimated that 6.1 million homeowners lack insurance, a figure that is poised to grow sharply as the climate crisis unfolds, as insurers spike rates, withdraw from markets, and refuse to renew policies in a wide range of climate vulnerable communities, from Florida and California to Iowa and Minnesota. Already, the 6.1 million households cited by CFA represent $1.6 trillion in property value. Since insurance is required by nearly all mortgage issuers, its diminished availability will escalate the housing affordability crisis. 

 

How uninsurance and underinsurance threatens financial stability

 

As this crisis grows, we are seeing these costly insurance disruptions endanger financial stability. In a story last year about the shrinking availability of insurance, the New York Times began with a starkly straightforward lede: “The climate crisis is becoming a financial crisis.” The Financial Stability Oversight Council (FSOC) of the Federal government has identified climate change as an “emerging and increasing threat to financial stability,” and has warned that insurance can be a major channel for spreading risk through the financial system – much like the mortgage-backed securities that created financial ‘contagion’ that sparked the financial crisis of 2007-2009. 

 

One potential channel for the spread of climate-related financial risk is the growing incidence of uninsurance (not having sufficient insurance to cover costs when disaster strikes), which is complicating the basic functioning of our housing finance system. Treasury Secretary Janet Yellen and the FSOC have flagged concerns about a ‘protection gap’ stemming from this lack of insurance. As an increasing number of people go without insurance, or without enough insurance, major climate disasters will cause homeowners, businesses, and renters to incur enormous costs. Faced with rebuilding expenses that they can’t possibly afford to pay, households and businesses may have no choice but to walk away from mortgages or other loans held by banks.  This raises the likelihood that costs from climate disasters will spill over into the banking sector and spread throughout the economy.

 

Meanwhile, some of the nation’s largest mortgage lenders are not subject to the same regulatory requirements as large commercial banks, and have been unscrupulously originating mortgages for properties facing soaring risk. The likelihood that these properties will retain affordable insurance through the duration of the mortgage is very low. This creates enormous risks and pressures for the mortgaged-backed securities market generally, notably including the $5 trillion in mortgage debt backed by the government-sponsored enterprises Fannie Mae and Freddie Mac. As the FSOC notes, “...the federal banking agencies recognize that several factors, such as the growing threat of floods or fires in various parts of the country, changing weather patterns affecting heavily populated geographic areas, and insurers’ decisions not to renew policies in these regions, may increase the GSEs [government-sponsored enterprises] and other financial institutions’ exposure to disaster risk.”

 

Protecting the public requires stronger regulation. But some states are moving in the opposite direction, endangering our economic well-being.

 

To address this looming crisis, federal policymakers have taken steps toward strengthening their regulatory oversight over so-called “shadow banks” – insurers, mortgage lenders, and other financial institutions that sit outside the system for regulating banks. But insurance policy remains regulated largely at the state level, meaning state policymakers must also step up their regulation of climate-related financial risks. Last year, the Federal Insurance Office (FIO) issued 20 policy recommendations for state officials to incorporate climate risk into state insurance supervision. These recommendations included:

 

• Evaluating insurance companies’ exposure to climate risks as part of the periodic financial condition exams that regulators are supposed to conduct.

• Embedding climate perils like wildfires into the capital requirements that are in place to make sure that insurers have the resources to pay out damages when disasters strike.

• Requiring insurers to conduct scenario analysis to assess how their business would respond to various climate impacts.

 

These steps, which are all aimed at verifying that insurance companies are well-capitalized enough to withstand more intense climate disasters, are necessary to protect the public from the fallout from a climate-induced insurance market meltdown.

 

The only party not well capitalized enough to endure increasing climate-related losses is the American public. For example, there has been a growing reliance on state insurers of last resort, which reached over $1 trillion in exposure last year. In some states such as Florida, the process for ‘recouping’ costs in the increasingly likely event that damages exceed the premiums that state insurers of last resort are able to collect, is that all state residents are charged a surcharge. State guaranty funds, which are meant to make policyholders whole when insurers become insolvent, are not in a financial position to compensate people if insurer insolvencies continue to increase in pace and scale. Promoting solvency – a core responsibility of state insurance regulators – is the best way to prevent the costs from falling on the public.

 

But as state lawmakers have debated how to handle their fossil fuel pollution-driven insurance crises, they’ve mostly moved in the opposite direction. The insurance lobby has advocated deregulation, false solutions, and “shared financial burden,” and many state lawmakers have obliged. In Florida at the end of 2022, legislators passed an industry-drafted law to make it harder to sue insurers and force participants in the state insurer of last resort into more expensive policies. Modest consumer protections were considered as follow-ups during the 2024 session, but they were all rejected. One Orlando homeowner – forced by Florida’s 2022 law to accept a $1,000 premium increase – asked: “Where does it stop? People are going to be bankrupt out of their homes just because they can’t afford insurance.”

 

In recent weeks, Louisiana lawmakers have passed their own overhaul, which mostly emulates Florida’s law and weakens consumer protections. Meanwhile, they cut funding for a roof fortification program created last year. As one state representative pointed out in explaining his opposition, “People are losing generational homes — where they grew up in, their parents grew up, maybe even their grandparents grew up — because they can’t afford insurance.” 

 

In making state insurance markets less affordable, these overhauls are premised on an assumption that essays in this series have already shown to be faulty: pricing out entire communities will discourage people from living in the at risk communities, so the best solution is to give insurers the premium increases they are demanding. But pricing people out has been shown not to work, and since insurance policies are set annually, it empowers insurers to maximize profits and foist as many costs as possible onto consumers before things become even worse. 

 

Florida’s approach is a dangerous one, especially because it has been combined with weak regulation. The 2022 law has not depopulated the state insurer of last resort or halted the exodus of insurers from Florida. Instead, it has fueled a precarious situation that confirms the FSOC’s most dire warnings about the potential of the insurance sector to spill over into other segments of our economy. The small number of new entrants into Florida’s insurance market are reportedly very flimsy. Ratings agencies tasked with estimating insurers’ financial health have seemingly inflated new, small insurers’ grades in a practice that uncomfortably resembles the behavior of credit rating agencies in the run-up to the 2008 crash.

 

Disaster relief costs climb, making reform essential

 

So, as climate costs escalate, insurance is proving to be a major channel for making our entire financial system more precarious. It makes sense that insurance – a product designed to pool risk – has become increasingly complex along with the intensification of the climate crisis. But it can also be a vehicle for smoothing out these challenges. Because we are all in this together, it is vital that we are smart about how we use the tools at our disposal so that higher public costs are paid as equitably and efficiently as possible.

 

That notion that expanded coverage is required to lower overall costs for all was the basic principle behind the creation of the National Flood Insurance Program (NFIP). After Hurricane Betsy devastated the southeastern United States with over $1 billion in damages in 1965 (nearly $10 billion in 2024 dollars), Congress created the NFIP to fill the gap left by private insurers refusing to offer flood coverage, and more importantly, to lower the overall costs that the federal government pays for disaster recovery. If managed properly, the NFIP’s incentives and programs for hazard mitigation and community flood management can be powerful tools for bringing down disaster relief costs. Today, however, the NFIP is mired in congressional dysfunction, and is badly in need of investment and modernization through a long-term reauthorization. 

 

In spite of the challenges facing the NFIP, the need for a system that resolves private insurance market gaps while bringing down overall disaster relief costs has never been greater. The federal costs of disaster relief have increased in recent years, and Pew has observed that “[t]he increasing frequency and severity of natural disasters is already putting pressure on state budgets.” 

 

The pressing need to reform our disaster relief system is abundantly clear. Deficiencies with the disaster relief process have caused unconscionable delays in Puerto Rico and other jurisdictions ravaged by climate disasters. In 2019, the House advanced bipartisan legislation to streamline disaster relief spending, but it has stalled in the Senate. One year after intense wildfires swept through New Mexico in 2022, the federal government had only distributed 1% of the aid that Congress approved. It seems that states can no longer afford to wait for Congress to get its act together. After FEMA denied assistance to a Massachusetts town that incurred major costs from severe flooding last fall, Governor Maura Healey proposed creating a state-level disaster relief and recovery fund. 

 

Coordinating public spending toward climate resilience

 

Since policymakers have insufficiently mitigated climate pollution, disaster relief costs will likely increase and the public will continue to bear many of these costs. This spending will involve major government expenditures and investments toward climate resilience, including upgrades to public infrastructure and assistance to homeowners and businesses when they pursue hazard mitigation measures. In some cases, relocation may be necessary.

 

Substantial public investment, relocation, and difficult decisions about where and how to rebuild are all vital parts of the insurance crisis conversation. But all of this public spending must be carried out with a conscious eye toward making insurance more accessible, equitable, and affordable on the whole. We must continue to modernize and invest in the features of NFIP that are meant to encourage climate resilience, and replicate them at the state and local level. Not only should state and local governments develop programs of their own that support roof hardening and other hazard mitigation investments, but insurers should be required to provide discounts to individuals and businesses that take advantage of those programs. Lawmakers should also adopt legislation like Rep. Sean Casten’s Protecting Families and the Solvency of the National Flood Insurance Program Act, which streamlines the process for FEMA to buy out severe repetitive loss properties covered by the NFIP, and provides greater assistance to NFIP participants who need to relocate. 

 

An approach to climate resilience that centers environmental justice

 

Insurance companies have been warned for decades that climate change threatens their business and may result in higher costs for all, yet they have strongly resisted the efforts to prepare for our new reality by integrating climate risk into insurance supervision or collecting and making publicly available data about the affordability and availability of insurance. 

 

By contrast, many low-income residents and communities of color in vulnerable cities like Miami, Florida or Lake Charles, Louisiana have not had access to sophisticated data or enormous resources to prepare for a warming world. Instead, they have borne the brunt of climate pollution. As CFA notes in outlining existing racial disparities surrounding uninsurance, “unequal vulnerability to being uninsured is particularly concerning as communities of color are disproportionately exposed and susceptible to natural disasters.” If the government is going to increase its investment in climate resilience, the communities whose main source of wealth is being systematically destroyed by climate pollution should be prioritized for assistance over the insurance industry. 

 

To address these myriad concerns, we must invest in updated flood and maps, and we need much better and more accurate data about the exposure of insurers to climate risk. State policymakers should also heed the FIO’s recommendation to coordinate improvements to catastrophe modeling. Improved data will undoubtedly show an alarming picture, and the need for building code reforms and relocation resources must be embedded into our response. But expecting that higher insurance prices and deregulation will do the job of determining where people can and should live in the future is a deeply unjust approach. As noted elsewhere in this blog series, the apparent calculus that vacation properties near Lake Tahoe are worth rebuilding but manufactured homes in Paradise, California are not, reveals a serious class and race bias. 

 

Policy solutions must achieve affordable, equitable, and accessible insurance markets

 

Real climate justice looks like an accounting of racial and economic disparities within climate risks. There must also be understanding of the importance of community history and connection to place. Many impacted households have been part of their communities for generations, and their homes serve as their primary store of wealth–often against the backdrop of acute and long standing environmental injustices. 

 

Policy proposals that ignore environmental and economic justice considerations should be rejected because they threaten the possibility of limiting harms and creating resilient communities. Additionally, short-term policy interventions that entice insurance companies back into the market through deregulation are also dangerous, since they ignore how insurance is at the center of a growing financial stability threat. Truly shielding the public from the substantial costs that insurance market disruptions are causing will require a holistic approach that integrates stronger regulations, consumer protections, and climate resilience. Public spending – including toward relocation and rebuilding – must be coordinated and undertaken in a thoughtful and just manner.