CLIMATE & PROPERTY INSURANCEClimate Change and U.S. Property Insurance: A Stormy Mix

By Alice C. Hill

Published 24 August 2023

Accelerating risks and damage from climate change are spurring private insurers in the United States to limit coverage in a growing number of areas, thus imposing mounting stress on local communities and straining the country’s overall economic health.

American homeowners already coping with extreme weather now face a new risk: disappearing property insurance. Private companies have increasingly reduced coverage, concluding that the risks—and potential losses—threatened by climate change outweigh probable profits. As of now, this primarily affects a handful of coastal U.S. states, including California. In other states, insurers have substantially increased the price of property insurance.

Investing in housing is how many Americans build wealth, with owner-occupied homes accounting for around a quarter of households’ net worth. But homes that carry high insurance costs can sell for lower prices, and when insurance costs become too high, homeowners may decide not to spend on insurance, making them vulnerable to major economic loss in the wake of a disaster.

Homeowners insurance does not reduce the physical losses caused by catastrophic events. Insurance does, however, better manage financial and economic losses, allowing large, one-off costs from disaster to be spread across smaller, annual premium payments. It helps reduce the broader economic fallout from disasters by helping people, businesses, and communities recover faster. The current trend of shrinking property insurance availability and affordability has profound implications for the economy at large, as spending on housing—including construction and services—accounts for about 17 percent of U.S. gross domestic product (GDP).

Does Climate Change Increase the Risk of Property Damage?
More than 65 percent of Americans own their own home. For many, their home is the most valuable asset they own. Property insurance protects the home against catastrophic damage, including from natural disasters. Insurance also protects mortgage lenders, ensuring they get repaid if the residence is harmed. According to a recent Insurance Information Institute survey [PDF], 88 percent of U.S. homeowners buy property insurance.

Private insurance companies charge premiums that put a price on risk: the higher the risk to a property, the higher the premium. If the risk grows too large, insurance companies can decline to write a policy altogether. Or, they can seek to raise the premium. Historically, insurers looked to past events to determine the risk of future damage occurring. Climate change, however, has brought new, unfamiliar extremes—longer heat waves that kink metal, sea-level rise that overtops seawalls to flood homes, higher winds that shred rooftops, deeper drought that buckles asphalt driveways, and wildfires that obliterate whole communities in mere hours.