DISASTER INSURANCEFor Beleaguered Homeowners and Their Insurers, the Fire Next Time Could Be a Flood

By Felicity Barringer

Published 6 June 2023

The data-driven insurance business is in trouble as climate-change-driven disasters arrive with greater fury and frequency. Catastrophic losses are something that insurance companies have long planned and budgeted for. But not this many.

The West’s fires and floods of recent years share two common features beyond their immediate harms: they are disasters exacerbated by climate change, and they have wrought havoc with the insurance industry’s barriers against homeowner losses — barriers that in some cases weren’t so strong to begin with.

Industry research papers and officials’ testimony before Congress make it clear that the data-driven insurance business is in trouble. Its actuarial models are based on the disasters of the past, which may not be dependable models when budgeting for those of the future, nor for keeping the companies solvent. 

Financial and Property Losses Will Grow, Perhaps More for Some Than Others
It’s not just that the insurers and the insured are looking at bigger losses. It’s also that in the new disaster regime the losses aren’t shared equally. For example, higher-income people typically own homes in areas most likely to burn – usually at the intersection of wildland areas and growing towns. But according to a study published earlier this year in PLOS Climate, researchers at Stanford University and the University of North Carolina found that homes most likely to burn belong to lower-income families.

The study did not conclude that the reason was better fire defenses in high-income areas, but it didn’t rule that out, either. “The connections between experience with fires, especially multiple fires, and income and real estate point to a troubling pattern,” said Chris Field, the director of Stanford’s Woods Institute for the Environment and one of the study’s authors, “We need to take a hard look at fire management policy, to make sure it is not biased against lower income folks.”

A related question is whether insurance underwriting is biased against lower income and minority communities. When it comes to home insurance appraisals, there is clear evidence of discrimination. Less obvious is whether discrimination has played a role in rebuilding priorities. Still, one study that focused on this question, a 2019 report from the National Academies of Sciences, Engineering and Medicine, concluded that, “Poorer areas also have less political clout to remedy the many gaps in the way cities, states and the federal government deal with rising seas and more record rainfall caused by climate change.”