Uninsurable Future: Managing the Climate-Change-Fueled Home Insurance Crisis
On January 7 2025, an ill wind began to blow down the mountain canyons north of Los Angeles. Upland forests and shrubs were already bone dry thanks to a delayed start to the winter rainy season, so the arrival of hurricane-force Santa Ana winds let loose a monstrous spate of wildfires across the city.
By the time the flames were finally extinguished, more than 18,000 homes and buildings were burned or destroyed and at least 31 people were killed — by any measure, one of the worst catastrophes in California’s history.
Insurance offers one way to support people who have suffered catastrophic losses. But insurance companies are more cautious than ever to provide aid for damages associated with wildfires and other weather-related risks. In 2024, insurers worldwide paid out more than $140 billion in claims relating to natural catastrophes, the fifth consecutive year with losses exceeding $100 billion.
Traditionally, insurers used past claims to predict future losses from the same perils. So long as there were no major unexpected disasters or significant shifts in risk or exposure, insurers could be confident the premiums of the many would be enough to pay the claims of the few.
Destruction caused by Hurricane Andrew in 1992 exposed the fragility of that backward-looking approach. Insured losses from that storm were three times higher than what were expected by industry insiders and led several insurance companies to become insolvent. That gross miscalculation hastened the industry’s adoption of catastrophe models — tools that combine the physics of specific natural hazards with details about building construction and insurance information to estimate possible financial losses. And as the imprint of global warming on natural hazards has become more obvious, the insurance industry has recruited climate and Earth scientists to reduce their risk of future surprises.
Equipped with these new tools and insights, today insurers have more realistic views on their exposure to weather- and climate-related risks and the scale of potential claims. Within the limits set by government regulators, insurers can better decide how much risk they can tolerate across their portfolio, raise premiums so more exposed homes pay more and purchase reinsurance to prepare for losses larger than they could normally afford.
These advances offer a mixed blessing. Bankrupt insurers pay no claims. So insurance companies and their policyholders have a mutual interest that risks are estimated correctly and actual losses can be paid by charged premiums. But insurers also use the latest catastrophe modeling and climate science to justify higher premiums, which are fast becoming unaffordable for many policyholders. Too many people are forced to choose between paying more for the same insurance, accepting lesser coverage to keep premiums manageable or letting their insurance lapse.
Continuing to ratchet up insurance premiums to keep up with mounting losses from hurricanes, wildfires and other perils may make financial sense, but is also indicative of a growing crisis facing the industry. In the United States, the real cost of homeowners insurance is more than twice what it was a generation ago. For consumers, paying more for home insurance doesn’t make you any more prepared for disaster. Despite charging higher prices, many insurers are still losing money on home insurance lines because they are paying out record-setting claims from natural catastrophes. And when companies withdraw coverage from high-risk properties or entire jurisdictions, what remains is a diminished market for insurance products and higher geographic concentrations of risk.
For the good of both homeowners and insurers, we need to stop this upward spiral. Insurance has traditionally served to transfer risk, not reduce it, so we need new approaches to push down risks and costs.
In April, Willis and the Nature Conservancy announced a first-of-its-kind wildfire policy that leveraged past fire management efforts to secure lower premiums and deductibles. In the same vein, industry-sponsored programs that pay people to stormproof their homes — such as Strengthen Alabama Homes — have been shown to lower insurance premiums for high-risk areas. Here in Minnesota and elsewhere, some insurers now offer discounts on insurance premiums for homes with impact-resistant roofs. Other states are considering legislation that would require insurers to tell their customers how they can reduce weather-related risks to their properties and offer discounts for individual-, community- or state-level mitigation efforts.
But all of these actions treat the symptom, not the disease. Apart from earthquakes, all major perils that cause substantial insurance claims — tropical storms, wildfire, windstorms, tornadoes and hailstorms, river and coastal flooding — are expected to be made worse by climate change. Even for those perils where the recent and rapid increase in insured losses has been mainly due to exposure growth and economic inflation — severe convective storms, most notably — climate change has still provided an unwelcome boost to the overall risk.
The ongoing storm in insurance markets shows adaptation without mitigation is not enough to offset harm from climate change. The path forward given these trends isn’t to walk away from risk, but instead to invest in resilience. Ultimately, we need to zero out greenhouse gas emissions, prevent any additional increases in global temperature and avoid the expected climate-driven uptrend of catastrophe risk. If we fail, homeowners’ insurance may be priced out of reach for many people in the United States.
Photo: AP Photo/Jeff Chiu