What Your Insurer Is Trying to Tell You About Climate Change

Jul 10, 2023

Insurers are trying to send a message. The government is trying to suppress it.

Having worked for decades in conservation nonprofits, Beth Pratt, who lives high in the Sierra Foothills in Midpines, California, understands how climate change is putting her home at ever greater risk. Her community is experiencing what she calls “climate whiplash”: forest fires, record heat, massive snow dumps, mudslides, rockslides, and even a tornado.

When Pratt, now 54, bought her 1,400-square-foot house in 1999, she thought the setting was ideal: on a big lot near Yosemite National Park. As recently as a decade ago, she told me by Zoom one recent morning, she didn’t particularly worry about wildfires—a problem that now plagues her area with disturbing frequency. Pratt said she has been forced to evacuate three times.

Making her best effort at “coexisting with fire,” as she put it, Pratt had metal roofing installed atop her house. To clear combustible material from around its perimeter, she learned how to cut trees with a chainsaw and to carefully incinerate heaps of wood debris. “I finally got comfortable doing my own burn pile, which took me a while,” she said. “I mean, lighting a fire can be a little scary, right?” Pratt has gone to enormous lengths to protect her house. She has a 2,500-gallon well tank with a firehose hookup, and added new metal decks to replace her wood ones. Because of these efforts, she reports, she’s passed the “defensible space” inspections recommended by the state fire department. “This home, which is my home, I would work six jobs to keep,” she said.

Read: When your yard can kill you

To Allstate, Pratt’s longtime home insurer, her resolve appears to be irrelevant. The company dropped her as a customer in July, she says. Given her professional expertise in environmental matters—Pratt is the California regional executive director of the National Wildlife Federation—she figured that growing climate risks might mean higher bills for insurance, but she wasn’t prepared to lose her coverage entirely. “I have an MBA. I’m not anti-business,” she told me. “Just raise my rates.” (Citing privacy concerns, Allstate declined to comment on her case.)

As climate-related disasters grow in frequency and intensity, major home insurers in some locations are concluding that no premium—or at least no premium that customers are willing to pay and state regulators are likely to permit—will cover the potential losses. Earlier this year, Allstate and California’s largest insurer, State Farm, announced that they would hold off on writing new policies for homes in the state. From 2019 to 2022, payouts to homeowners there more than doubled, but premium revenue from customers increased by only a third, according to industry data reported by The Wall Street Journal.

Rising home-insurance rates reflect a lot of factors: real-estate costs, building-supply prices, the whims of global financial markets, and, yes, corporate bean counters’ desire to maximize profits. But more and more, homeowners are also paying for the damage that climate change will cause to their property—and they should be paying. If the continuing risk of fires, hurricanes, and other weather-related disasters isn’t enough to make Americans think carefully about how and where to build a home, perhaps the rising cost of insurance might concentrate their mind. Yet policies at all levels of government suppress the signal that insurers are sending. That’s certainly true in deep-blue California. Even as prominent politicians there take pride in acknowledging climate risks, the state’s insurance-regulation system is built to discourage premium hikes.

In many ways, that bias is justifiable, and not only in California. Many people live in vulnerable areas partly as a result of past racial or economic discrimination; they buy homes in flood-prone areas because more privileged people own all the higher ground. A lot of Americans are underinsured because of genuine hardship, and suffer more than their wealthier counterparts do from uncompensated losses. But lower-income people also suffer disproportionately if coverage isn’t available at all.

In California, insurance companies are prohibited from using statistical modeling to assess future fire risks when setting rates; premium increases must be based on insurers’ loss history, not on the growing likelihood of serious fires. The state’s pro-consumer rules can’t hold off reality forever. After Allstate dropped her, Pratt patched together coverage from other private insurers and from the FAIR Plan, California’s public insurer of last resort. But she said she’s now paying twice as much as in the past for coverage that’s less comprehensive.

Certain regions of the country have long been prone to tornadoes, hailstorms, hurricanes, or other weather-related disasters, but this summer the dire signs of a climate crisis seem to have multiplied. July was the hottest month on record. A rare hurricane swept into Southern California. Wildfires tore through a historic town on the Hawaiian island of Maui. Fires in Canada brought dangerous levels of smoke to much of the northeastern United States. “Mother Nature is busting through the front door of American families,” Roy Wright told me recently. Now the CEO of the Institute for Business and Home Safety, a research group funded by insurers, Wright previously served in senior roles at FEMA during the Obama and Trump administrations and at one point ran the federal government’s flood-insurance program. Every state has some sort of a public insurance system, like California’s FAIR Plan, for homeowners who can’t get coverage on the private market. These systems of last resort, however, are becoming insurers of first resort. After Hurricane Ian led to devastating losses in Florida last year, smaller insurance companies went bankrupt trying to satisfy claims. And over the past two years, the state’s insurance system, Citizens Property Insurance Corporation, has doubled its number of policyholders. It now covers about 13 percent of the homeowner’s-insurance market in the entire state. Is this sustainable?

Professionals in my field, disaster preparedness, have one thing in common with insurers’ risk-assessment experts: We both spend a lot of time telling people things they don’t want to hear. (I should note here that, in promoting my book The Devil Never Sleeps in recent months, I gave paid speeches at two small insurance-industry events.) The right’s preferred form of denial is to brush off the importance of climate change. When Donald Trump chided his Republican rival Ron DeSantis in July to “get home and take care of insurance,” the former president presumably wasn’t telling the Florida governor to rethink the low-lying state’s development rules and emergency-preparedness policies in light of global warming.

Read: How 12 readers prepare for natural disasters

In the past, insurers have generally been able to diversify their own portfolios to balance different risks; historically, insurers that do business across the country could afford a bad year in one or two states. But the math becomes more challenging as disasters proliferate. The cost of reinsurance—essentially, coverage that insurers take out to protect themselves against big losses—has shot upward, in large part because of growing climate risks.

Insurers are regulated by states—in many cases by elected officials whose job is to make sure the companies aren’t overcharging ratepayers, not to encourage long-term climate adaptation. Home insurance is expensive in Oklahoma, for example, in large part because of high winds and hail big enough to destroy roofs—and because of building rules that don’t adequately take that threat into account. In 1988, California voters passed Proposition 103, which subjected certain auto- and property-insurance rate hikes to state review. Consumer advocates argue that the insurance industry makes billions of dollars in profits in the state, and they have recently accused Allstate and State Farm of bullying California Insurance Commissioner Ricardo Lara into going along with excessive rate increases. (In a statement, Allstate told me that it has “paused” new homeowner-insurance policies because the “ability to adjust prices quickly in California is not an option due to Proposition 103.”) Another possibility, though, is that climate-related risks are becoming apparent faster than the state’s regulatory system can take them into account—lulling the public into complacency about the climate crisis. “Risk has a price, and by not acknowledging that price, homeowners can’t understand that risk,” Erwann Michel-Kerjan, a McKinsey partner who focuses on insurance matters and co-wrote the book At War With the Weather, told me.

The upshot of American disaster-relief policy as a whole has been to extend the status quo, no matter what. Jesse Keenan, a Tulane University urban-planning professor who studies climate change and the built environment, expresses some frustration with consumer advocates who view the rising cost of coverage as a “power play” by the industry. “It often is,” he told me. “But what [advocates] don’t acknowledge is the culpability of a lot of different actors—local governments that do not strengthen land and zoning use, state legislators who pass laws making it harder to place obligations on homeowners, and a federal government that writes big, unconditional checks. So there is a lot of blame to go around.”

Some of that blame includes the 1988 Stafford Act, the current mechanism by which a president can declare an emergency, whose incentive structures for disaster relief can work against the very climate resiliency needed to protect homeowners. It was adopted at a time when disasters that required federal assistance were considered random flukes—the kind of event that could stretch a state’s ability to respond but wasn’t likely to recur. The relief generally discourages using the money to fundamentally alter how individuals behave, let alone how local and state governments function. In addition, after the largest disasters, Congress will typically approve multibillion-dollar relief funds, as it recently did after Hurricane Ian in Florida. That money is helpful to people in need, but it does far too little to encourage communities to defend themselves against future losses. Some lawmakers criticize these aid packages—but promptly change their mind when disaster strikes their own constituents, as Senator Rand Paul, an opponent of hurricane-relief bills, did when tornadoes devastated parts of Kentucky.

Protecting people in harm’s way is, I would argue, an essential part of the government’s job. But public officials are also shirking their responsibility to not leave communities vulnerable again and again. Keenan recognizes that people are tied to their neighborhoods, but the present incentive structure puts its inhabitants at risk: “I understand people love their homes but we should be telling them to love their kids who are at risk of climate disasters.”

Insurers are probably not thinking about the safety of a homeowner’s children when they abandon coverage or increase rates because of climate catastrophes. Their risk calculation is purely transactional; issues around equity and fairness are not of primary import to them. But their recent assessments are the symptom of a problem, not the cause, and we should all heed their warning: Living in paradise, or most anywhere else, has a cost. Climate change is real, and we need to pay.