Insurance trends are deciding where Americans will live as planet heats

(The Hill) - Climate change and generations of US housing and development policy are making homes, neighborhoods, and entire municipalities riskier to insure, undermining the ability of Americans to live where they choose.

The current face of this crisis is a nationwide withdrawal by the insurance industry from regions threatened by wildfires and hurricanes, particularly along the Gulf Coast and California.

While there are other factors at play, this retreat is largely driven by the collision of climate change with long-term federal decisions to incentivize ever more expensive homes in riskier areas.

But insurance is just one manifestation of a larger problem, experts told The Hill, a canary dropping from its perch in the coal mine, warning of more significant dangers rising out of sight.

And in a country whose economy is among the most unequal in the rich West, the cost of that danger falls increasingly on those least able to bear it.

A record number of billion-plus dollar weather disasters hit the U.S. in 2023, with 28 such incidents costing nearly $100 billion collectively, according to the National Oceanic and Atmospheric Administration. The previous record was set in 2020 at 22 disasters with 10-digit tabs.

The scale of these disasters, however, is only partly a result of climate change. In a world where America's coastlines were dominated by wetlands and mangrove swamps, its conifer forests were burned regularly in low-intensity blazes and its housing stock was built with an eye toward resilience, these numbers would be far lower.

But in state, federal and local governments have for decades incentivized both large-scale suppression of low intensity fires and booming high-dollar coastal real estate, often on barrier islands. Those trends have left more people — and more insured home value — in the way of worsening fires, floods and storms.

The home insurance industry has lost money every year for the past five, according to a March report by the insurance rating site A.M. Best, part of a broader crisis in the industry.

In the broader category of personal insurance, the industry suffered three consecutive years of losses in excess of $20 billion.

"That's why you see companies pulling back and retrenching — because they're suffering enormous losses," Robert Gordon, a senior vice president at the American Property and Casualty Insurance Association, told The Hill.

When insurance companies face rising risk, they have a few options: they can raise deductibles, raise rates, cut the riskiest homeowners from their rolls or exit a state entirely.

Increasingly, they are doing all of the above — with the state exits being the most dramatic.

Last month, State Farm announced that it would not renew insurance policies for 72,000 California houses and apartments, about 2 percent of its total policies in California.

That announcement followed the company's May 2023 decision to stop writing new policies in the state, citing "rapidly growing catastrophe exposure," a move that was echoed by Allstate and American Insurance Group.

To the insurance industry, California is a particularly difficult market: a state where a wave of high-dollar development in increasingly fire-prone hinterlands has led to rapidly increasing risks, and therefore insurance costs. State policies intended to protect consumers mean that insurance companies often must wait up to a year to raise rates, and another year for them to take effect.

But the problem goes far beyond California. State Farm's March retreat followed the February withdrawal of Texas-based American National from nine extreme weather-prone states, including California, Colorado, Louisiana and the Dakotas.

In Louisiana, more than 20 insurance companies have gone insolvent or left the state since 2020. Florida has lost over 30, and there are signs that skyrocketing premiums are leading homeowners to depart the state. And while no insurers have yet left Texas, premiums are soaring in the wake of disasters.

In these cases, too, the industry points to other compounding factors — in particular, Florida and Louisiana's unusually high rate of litigation over insurance claims.

"We are marching steadily towards an uninsurable future in a number of places across the United States," former California insurance commission director Dave Jones said last year.

That's a worrying development because when an area is uninsurable, "it becomes uninhabitable," Anne Perrault, senior finance policy council at Public Citizen, told The Hill.

Taxpayers foot the bill for the increasingly common disaster supplementals, which are made more expensive by the continuing trend of higher-dollar houses in ever riskier areas.

In states like Texas, California, Louisiana and Florida, homeowners who can't find insurance elsewhere can turn to state-run 'insurers of last resort', which offer guaranteed — but more expensive — coverage.

But because those agencies can't say no to homeowners, the cost of insuring the riskiest properties is effectively socialized, with the cost of insuring a second home on the shifting sand of a barrier island borne by those inland.

For the banks and the federal agencies that regulate them, the downstream risk is that a crash in insurance value will lead to a wave of mortgage delinquencies and declines in home prices.

It also difficult for federal officials to gauge the collective risk the U.S. faces because insurances companies are regulated by the states. While the Treasury Department is beginning the process of putting together a nationwide picture, it has faced resistance from the states — despite its rising risk, Louisiana officials told The Hill they are sitting the call out — and from companies themselves.

Gordon of the insurer's trade group argued that such a call would be expensive, time consuming and ultimately just tell federal regulators what they already know: that risk is rising, thanks in large part to decades of poor planning around land-use and homebuilding standards.

For the mortgage lenders, a disquieting question looms around the question of insurance company withdrawals. "What we don't know is: is the cycle going to normalize and level out — or will it continue? So there's a lot of unknowns around that," Pete Mills, vice president of residential policy at the Mortgage Bankers Association, told The Hill.

Looking at the broader picture, Mills saw an oversupply of anecdotes, but added that "I don't know that everybody's data collection is to the place, we need it to be to understand the problem," something he called on both the industry and government to fix.

In disaster-prone areas like the California Sierra — where state and federal policy created the wildfire problem that climate change now exacerbates — the disjointed response of financial institutions and local governments has led to heartbreaking choices and the dramatic reshaping of communities.

In the fire-ravaged town of Paradise, Calif., for example, homes could once be found for $60,000, making it a refuge for seniors and young families leaving the increasingly unaffordable California coast. Since the devastating 2018 Camp Fire, however, home prices have soared, and investors largely don't pay to rebuild affordable housing stock.

That helped tip the community "into the abyss of unaffordability," Seana O'Shaughenessy, of the Community Housing Improvement Program, which builds affordable housing in the region, told The Hill. Rising insurance rates and home prices mean many residents who survived the fires find "they can't stay in their home," O'Shaughnessy said, "but they can't leave either, because they can't sell their home. And anyway, their community is here."

Similar dynamics have followed other disasters. Federal Reserve study found that post-disaster federal grants offered by the Federal Emergency Management Agency tended to be "regressive" — meaning they were more likely to benefit homeowners who had more money, and left those with less more likely to go bankrupt.

A February report by real estate site Redfin found that areas with worsening air quality -- mostly as a result of wildfires — lost about 1 million people between 2021 and 2022, largely because rising home prices had pushed them out.

And as The Hill has reported, Americans are increasingly abandoning flood-prone neighborhoods for ones less likely to flood.

Policy makers sometimes discuss the big-picture solution to this problem as "managed retreat" — the often-controversial idea of a planned withdrawal from zones like barrier islands that are too vulnerable to consistently defend.

But housing advocates say that in the absence of a coherent federal housing policy — or even a clear understanding of where insurers are pulling out — what the U.S. is getting instead is unmanaged retreat: a piecemeal and chaotic realignment of insurance and lending decisions that is quietly reshaping the country's human geography as the planet warms.

In many areas, those choices amplify older prejudices, because today's risky areas are often yesterday's zones of historic disinvestment.

Harvard University real estate professor Jesse Keenan told The Hill about a conversation with a loan officer at a major bank who took out a blue marker and outlined all of Florida.

"He said, we're just not loaning here anymore," Keenan recalled.

To Keenan, that blue marker recalled the older idea of "redlining," the process by which mortgage lenders and real estate agents refused to serve to families from majority-minority neighborhoods. The federal government banned redlining in the 1970s.

In the 2020s, the most climate-vulnerable municipalities are often those which received low levels of historic investment, Michela Zonta, a housing policy analyst for the Center for American Progress (CAP), a left-leaning research nonprofit, told The Hill.

"We see that those formerly redlined neighborhoods are the ones exposed to polluting facilities or elevated heat — which is one of most common causes of health related issues," she said.

Those communities are less likely to have access to measures that reduce heat, like modern materials that protect residents, or greenspaces that cool entire neighborhoods.

A CAP report found that Black communities concentrated in areas with higher exposure to heat or flooding, chiefly coastal areas in South and East.

"A lot of insurance companies are abandoning areas with flooding risks," which are disproportionately home to black communities, Zonta said.

Those regions serve as a "wicked problem" to federal policymakers, Keenan said: places where federal goals around rectifying historic injustice run right into a worsening climate reality.

In those zones, "you want people to adapt, but you don't want to throw them to the wolves. You don't want the redlined communities screwed by history to get screwed again."

To make things yet more complicated, another big problem is that many zoning decisions are made locally.

Solving this problem, Keenan said, would draw together everyone in government, including the Departments of Commerce and Housing and Urban Development.

Government-backed lenders like Fannie Mae and Freddie Mac, Zonta added, have an important role to play here. She argued they must avoid making loans to people of color for purchases of homes in underserved areas.

The CAP study found that in 2022, 30 percent of the loans made to black borrowers were in areas at high risk of either heat or flooding.

"You can't promote access to ownership in those areas — people keep buying there but unless the homes are climate resilient, they're not going to be a solution in the long run," Zonta said.

Without such planning, families who settle there, often with federal aid, will simply "see their financial losses accumulate," she said.

Ultimately, Keenan said, markets and municipalities alike will need to adapt. "If you have a redlined area, that's really marginalized — you can try to protect them to some measure."

"But if you're at the end of a river delta, like New Orleans, the question becomes: 'Do you want to take your medicine now or delay the inevitable?'"