As wildfires raze entire neighborhoods, currents pull coastal villages into the Atlantic, and hurricanes displace more and more people each year, homeowners face a grim reality: The costs of climate change are spiraling out of control. Homeownership lies at the heart of the American dream and the US economy. Just over 65 percent of American adults own homes, and the nation’s residential real estate is valued at almost $50 trillion. Homes represent the average American family’s largest asset. In short, the risk of losing American homes puts a lot at stake.
Earlier this year, fires in California sparked debate on the role of insurers in protecting families from disasters—and how that relationship should be revised in light of climate change. Over 15,000 structures were damaged or destroyed by the fires, which devastated mansions owned by the super-wealthy as well as the homes of thousands of middle- and low-income Californians. The total economic impact of the wildfires is expected to surpass $250 billion. To make matters worse, many of the homes lost in the fires were uninsured. An unusually high 10.5 percent of Californian homes are uninsured, compared to the 7.4 percent national average.
Insurers, tasked with managing risk, are caught in a difficult balancing act. They must price premiums to accurately reflect the risks of a property while balancing political pressures to keep costs down. This often leads to artificially suppressed premiums for high-risk properties, temporarily making homeownership more affordable in disaster-prone areas. However, these artificially low premiums distort the market by eliminating financial barriers to development in risky areas and unfairly raising premiums elsewhere, particularly for lower-risk communities. In 1988, California voters passed Proposition 103, which reduced home insurance premiums by 20 percent and subjected future increases to public oversight. Since then, suppressed rates have concealed the true risks of living in many disaster-prone Californian communities. Many insurers have pulled out of the state altogether, forcing a large portion of the state to rely on a public insurance option, the California Fair Access to Insurance Requirements (FAIR) Plan. Policies like Proposition 103, which were meant to protect Californians from exorbitant insurance premiums, may have cost them more than they could have imagined.
California is not the only government to become the people’s insurer—federal programs like the National Flood Insurance Program (NFIP) offer subsidized premiums to homeowners in flood-prone areas. While these subsidies make insurance more affordable in the short term, they also incentivize rebuilding in high-risk zones after disasters strike. One study estimates that the NFIP caused up to a 14 percent increase in Hurricane Harvey damages by incentivizing the rebuilding of homes in high-risk flood zones, highlighting the need for policy reform to promote climate adaptation.
Distortions created by subsidized insurance do not affect all communities equally. Wealthier homeowners who can afford waterfront properties or scenic hillside homes—high-risk areas that also have higher property values—are often the primary beneficiaries of these subsidies, rather than lower-income homeowners. A study by the Natural Resources Defense Council found that federally subsidized flood insurance disproportionately benefits high-income households. This misallocation of resources exacerbates existing inequalities. Lower-income residents in safer inland areas pay taxes that subsidize rebuilding homes in wealthy beachfront communities. The insurance payouts these wealthier homeowners receive from subsidized insurance are also greater than those given to lower-income residents—reflecting their higher property values but failing to consider their stronger ability to pay. These households are better financially equipped to absorb climate risks, and they receive more generous benefits relative to their need. Funding by looking only at property value, rather than income or vulnerability, compounds existing inequalities and diverts support away from those who need it most.
While politicians and their constituents point fingers, we must look toward the future. Natural disasters are not going anywhere—instead, their risks are being magnified by climate change. It is critical that insurance policies reflect the risk of living in disaster-prone areas. Risk-based insurance pricing offers a potential solution. By aligning premiums with homeownership risk levels, insurance markets can provide more accurate signals to homeowners and policymakers. Insurers can also play a unique role in supporting climate adaptation. With their extensive actuarial datasets, insurers can develop public risk analysis tools that provide homeowners with clear, actionable insights into their property’s risks. Homeowners who understand their specific vulnerabilities will be empowered to take informed action to reduce those risks. Insurers can guide them by promoting and incentivizing strategies such as flood protection, sustainable landscaping, or fire-resistant technologies. In the aftermath of these inevitable disasters, insurers can also play a vital role in supporting more resilient reconstruction.
Risk-based pricing is the most efficient insurance pricing method. Accurately priced insurance plans minimize losses and distribute risk costs most equitably. Risk-based pricing also promotes climate adaptation. By making high-risk living a higher cost, it encourages homeowners to invest in resilience measures, such as elevating homes, retrofitting for fire safety, or even relocating to safer areas. This shift will not be easy for many families, but being priced out is far preferable to being forced out by disaster—or worse, losing your life. Insurance should serve as a warning system, not a false sense of security. Governments can support this transition by providing targeted subsidies for adaptation projects rather than for insurance premiums. For example, grants for flood-proofing homes or for managed retreat programs, such as New York’s post-Hurricane Sandy buyout program, could help communities transition away from dangerous areas.
Only by aligning policy with reality can we build a housing market that is both just and sustainable.