Climate shocks make parts of America uninsurable. It’s only gotten worse.

The climate crisis is becoming a financial crisis.

This month, California’s largest homeowners insurance company, State Farm, announced it would stop selling coverage to homeowners. That’s not just in wildfire zones, but all over the state.

Insurance companies, tired of losing money, are raising rates, limiting coverage or pulling out of some areas altogether, making it more expensive for people to continue living at home.

“Risk comes at a price,” says Roy Wright, the former official in charge of insurance at the Federal Emergency Management Agency, and now head of the Insurance Institute for Business and Home Safety, a research group. “We’re just seeing it now.”

In parts of eastern Kentucky that were hit by storms last summer, the price of flood insurance will quadruple. In Louisiana, the top insurance official says the market is in crisis and is offering millions of dollars in subsidies to try to attract insurers to the state.

And across much of Florida, homeowners are increasingly struggling to purchase storm coverage. Most major insurers have already pulled out of the state, sending homeowners to smaller private companies doing their best to stay in business — a possible glimpse into California’s future as more major insurers leave.

Increasing ‘exposure to catastrophes’

State Farm, which insures more California homeowners than any other company, said it plans to stop accepting job applications for most types of new insurance policies in the state because of “rapidly growing catastrophe exposure.”

The company said that while it recognized the work of California officials to reduce losses from wildfires, it had to stop writing new policies “to improve the company’s financial strength.” A State Farm spokesperson did not respond to a request for comment.

California insurance rates rose after wildfires became more devastating than anyone expected. A series of fires that broke out in 2017, many of which were ignited by sparks from faulty utilities, exploded in size with the effects of climate change. Some homeowners lost their insurance entirely because insurers refused to cover homes in vulnerable areas.

Michael Soller, a spokesman for the California Department of Insurance, said the agency was addressing the underlying factors that have disrupted the insurance industry across the country and around the world, including the biggest: climate change.

He highlighted the department’s Safer From Wildfires initiative, a fire-resistance program, noting that state legislators are also working to control development in the areas most at risk of burning.

But Tom Corringham, a research economist at the Scripps Institution of Oceanography at the University of California San Diego who has studied the cost of natural disasters, said it’s unsustainable to have people living in homes that become uninsurable or prohibitively expensive to insure. .

He said policymakers should seriously consider buying properties most at risk, or otherwise removing residents from the most dangerous communities.

“If we let the market sort it out, we’ll have insurers refusing to write new policies in certain areas,” said Dr. Corringham. “We’re not sure how that’s in anyone’s best interest, except for insurers.”

A broken model

California’s woes resemble a delayed version of what Florida experienced after Hurricane Andrew devastated Miami in 1992. The losses drove some insurers out of business and most of the national carriers pulled out of the state.

In response, Florida set up a complicated system: a market based on small insurance companies backed by Citizens Property Insurance Corporation, a state-authorized company that would provide storm coverage to homeowners who couldn’t find private insurance.

For a while it usually worked. Then came Hurricane Irma.

The 2017 hurricane, which made landfall in the Florida Keys as a Category 4 storm before moving along the coast, did not cause much damage. But it was the first in a series of storms, culminating in Hurricane Ian last October, which broke the model insurers had relied on: a bad year with claims, followed by a few quiet years to rebuild their reserves.

Almost every year since Irma has been bad.

Private insurers began to struggle to pay their claims; some went bankrupt. Those who survived increased their rates significantly.

According to a spokesman for Michael Peltier, more people have left the private market for Citizens, which recently became the state’s largest insurer. But Citizens don’t cover homes with a replacement value of more than $700,000, or $1 million in Miami-Dade County and the Florida Keys.

That leaves those homeowners no choice but private coverage — and in parts of the state, that coverage is becoming increasingly difficult to find, Mr. Peltier said.

‘Just not enough wealth’

Despite its challenges, Florida has an important advantage: a steady influx of residents who remain willing and able to afford the rising cost of living there for the time being. In Louisiana, rising insurance costs have become a threat to their survival for some communities.

Like Florida after Andrew, Louisiana’s insurance market began to slump after insurers began leaving after Hurricane Katrina in 2005. Then, starting with Hurricane Laura in 2020, the state was beset by a series of storms. Nine insurance companies went bankrupt; people started rushing to the state’s version of Florida’s Citizens plan.

The state’s insurance market “is in crisis,” Louisiana insurance commissioner James J. Donelon said in an interview.

In December, Louisiana had to raise Citizens plan coverage premiums by 63 percent to an average of $4,700 a year. In March, it borrowed $500 million from the bond market to pay the claims of homeowners who were abandoned when their private insurer failed, Mr Donelon said. The state recently agreed to new subsidies for private insurers, which are essentially paid to do business in the state.

Mr Donelon said he hoped the subsidies would stabilize the market. But Jesse Keenan, a professor at Tulane University in New Orleans and an expert on climate adaptation and finance, said the state’s insurance market would be hard to turn around. High insurance costs are starting to affect house prices, he said.

In the past, it would have been possible for some communities—those where homes are passed down through generations, with no need for mortgages and no banks requiring insurance—to remain without insurance at all. But as climate change intensifies storms, that is no longer an option.

“There just isn’t enough wealth in those low-income communities to continue rebuilding storm after storm,” said Dr. Keenan.

A shift to risk-based pricing

Even as homeowners in coastal states deal with rising wind cover costs, they’re being squeezed from yet another direction: flood insurance.

In 1968, Congress created the National Flood Insurance Program, which provided taxpayer-backed coverage for homeowners. As with wildfires in California and hurricanes in Florida, the flood program arose from what economists call a market failure: Private insurers wouldn’t cover floods, leaving homeowners with no choice.

The program achieved its main goal of making flood insurance widely available at a price homeowners could afford. But as the storms intensified, the program suffered mounting losses.

In 2021, FEMA, which administers the program, began setting rates equal to the actual flood risk faced by homeowners — an effort to better communicate the actual danger faced by various properties, as well as reduce losses to the government. to contain.

Those increases, introduced over the years, in some cases amount to huge price jumps. The current cost of flood insurance for single-family homes across the country is $888 per yearsaid FEMA. Under the new risk-based pricing, that average cost would be $1,808.

And by the time current policyholders actually have to pay premiums that reflect that full risk, the impacts of climate change could make them much higher.

“Properties in high-risk areas should plan for that risk and expect to pay for it,” David Maurstad, head of the flood insurance program, said in a statement.

The best way for policymakers to keep insurance affordable is to reduce the risks people face, says Carolyn Kousky, vice president of economics and policy at the Environmental Defense Fund. For example, officials could impose stricter building standards in sensitive areas.

Government-mandated programs, such as the flood insurance plan or Citizens in Florida and Louisiana, were designed as a backstop for the private market. But as climate shocks get worse, she said, “We’re at the point now where that’s starting to crack.”