This post is part of a symposium on the law and political economy of insurance. Read the rest of the posts here.
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The United States has a home insurance crisis: people are losing their policies, many homes aren’t covered to begin with, and the price of insurance is skyrocketing. And it’s happening not just in California and Florida, but in Iowa and Colorado and Minnesota, too.
The media and policy conversation about this crisis tends to blame the climate, while portraying insurers as victims in need of rescuing. And it’s certainly true that climate change is increasing the frequency and scale of catastrophes, requiring bigger payouts by insurance companies. But that is not the whole story.
The original purpose of home catastrophe insurance was to share the risk of damage to homes so that people could still have safe and dignified homes after disaster strikes. Insurance provides a structure for that risk sharing, in part by determining who’s responsible for harm to homes in disasters, who is accountable, and who is compensated. It is, as Rebecca Elliott explains, a social compact “in which [w]e agree to share our risk: to contribute something so that if calamity strikes any one of us, there are enough resources to make us whole.”
However, the insurance industry has a history of picking and choosing whom to protect. Though mortgage lenders are often thought of as the main culprit in redlining, the insurance industry has also been a key player in using racial profiling to charge prohibitively high rates or even deny coverage to people of color, especially Black people. In recent years, insurance companies have also increasingly sought to transfer away their share of the responsibility for keeping homes across the country safe. For instance, companies increasingly use securitized financial products and withdraw support from certain areas – all while continuing to invest in drivers of climate change like fossil fuels. This is all happening upon a backdrop of skyrocketing housing prices and a cost of living crisis in the country, putting communities in a precarious position to address risks to their homes.
And it’s not just a crisis for homeowners. Insurance costs are becoming such a large part of the budgets of affordable housing developers and managers that it’s forcing them to reconsider building new projects. That means fewer affordable housing units available, even as the affordable housing crisis grows. Market-rate rentals, meanwhile, are likely to become more expensive as landlords pass on rising insurance costs to tenants (something affordable housing providers cannot do).
Thus, this crisis in home insurance sits squarely at the nexus of housing and climate justice in the United States. If we only focus on the industry as a victim of the climate crisis, we will end up with inadequate and short-sighted policy responses that center insurance companies instead of people.
Sarah Knuth and Zac Taylor have recently pointed to some of these flawed policy solutions that center insurance companies, like insurance-linked securities and catastrophe bonds, which seek to provide companies with more capital to cover payouts, or “rationalizing” premiums by using forward-looking catastrophe models in rate setting that, the argument goes, will “signal” to people in “risky” areas that they should move.
But limiting our analysis to insurer’s revenue and payouts misses crucial insights into how the industry constructs its own crisis. Take for instance, insurers’ earnings on investment income, or the hedging insurers do using tools like reinsurance (insurance for insurers) and financialized products like catastrophe bonds. Omitting these factors sidesteps how insurers are enjoying record share prices and big profits, even while they hiked premiums and left certain regions entirely.
And assuming that premium prices, or even the lack of insurance availability, are sufficient signals to people about where they should or should not live, and to incentivize them to make home hardening repairs, doesn’t bear out in reality, as Paula Jarzabkowski demonstrates. It’s intuitive, if you stop to think about it: people make decisions about where to live for all kinds of reasons, from where their jobs or schools are located to if they can afford to move.
The centering of the insurance industry as the victim also erases many classed and racialized inequities, from the industry’s role in redlining to to fact that richer – and typically whiter – homeowners can often absorb costs that others can’t. In Florida, as MacKenzie Marcelin describes, sea level rise is leading rich, often white, people from coastal Miami – where in past decades Black and brown Floridians weren’t allowed to live – to move into the inland areas where Black and brown Floridians now live.
And so, the overarching policy question should not be, “how do we save the home insurance industry from collapsing?” but rather, “what role should insurance markets play in the broader suite of policies to keep people safely housed?” Put another way: many places are already unlivable, and only becoming more so because of accelerating climate change; how do we de-risk for households, rather than for insurance companies?
The answer to these questions requires, then, a holistic, integrated policy response that reduces, prevents, and mitigates the harm of weather-related catastrophes before they strike, provides for an insurance system that equitably spreads the risk of non-preventable disasters, and ensures access to equitable post-disaster recovery that increases resilience–all without prioritizing rent-seeking.
In our current system, the insurance industry is largely relied upon to take care of all of this, even though it hasn’t done most of it well, especially for low income communities and communities of color. As insurance markets collapse, we now have an opportunity to consider whether other models could do those things better.
We could imagine, for example, a reimagining of state insurance programs. As the insurance industry began its collapse, many states set up insurer-of-last-resort programs to provide an option for people who can’t find insurance in private markets. But these programs are designed to provide bare-bones coverage, and in some states are required to be more expensive than private coverage. Plus, most kick policyholders out of the program if private coverage becomes available again. In other words, these state programs are specifically designed not to compete with private insurers. But if private insurers are doing such a bad job, why shouldn’t state programs compete with them?
These are the kinds of questions we should be asking if we want to de-risk for households, not for insurance companies.
