Insurance and climate risks: Policy lessons from three bounding scenarios
Edited by Kathleen Segerson, University of Connecticut, Storrs, CT; received January 26, 2024; accepted September 27, 2024
Abstract
Climate change poses complex risks without precedent that challenge established planning and risk management tools, including property insurance. The nature and timing of transitions in markets and institutions in response to growing climate risks will shape prospects for future socioeconomic well-being. As property insurance markets in the United States face higher levels of turmoil, policymakers are weighing various interventions to stabilize not only insurance but also housing and mortgage markets. We identify policy lessons based on the investigation of three bounding scenarios designed to address the question of how near-term (1 to 3 y) policy and regulatory choices surrounding insurance markets in Florida could influence medium-term (3 to 15 y) risk levels, disaster recovery, housing markets, and local economic outcomes. Since our policy choices today have a profound impact on future outcomes, careful consideration of the longer-term impacts of today’s policy choices is required to secure more effective and equitable adaptation decisions and pathways.
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As climate-related hazards intensify, insurance markets in highly exposed regions are entering into crisis. In many areas of the United States, private insurers are finding they can no longer profitably offer coverage, leading to price increases and high-profile insurer exits from major markets (1). This has led to risk increasingly being shifted to public-sector insurance programs. While the federal government has long been the provider of flood insurance, many state government programs provide wind or wildfire insurance to those unable to find coverage in the private market (2, 3). Such dynamics are most pronounced in Florida, but other states, including California, Louisiana, Colorado, and Texas, also show signs of stress. What does this mean for the future?
In recent years, Florida’s market, like others, has entered a period of increased volatility (e.g., ref. 4). Florida insurance premiums, already highest in the country, have increased further. National insurers, many of which left the state years ago, have now almost entirely abandoned the state. Following Hurricane Ian in 2022, six insurers in Florida became insolvent. When this happens, their claims are paid by the state guaranty fund. The public insurance program, Citizens Insurance Property Corporation, has assumed a growing number of policyholders, making it the largest insurer in Florida. That program as well as the guaranty fund and a state reinsurance program are all ultimately backed by assessments on all policyholders in the state (of any property or casualty policy with limited exceptions); much of storm-related property risk is thus born widely across the state by all residents (5). While each state has a unique risk profile, political dynamics, and regulatory context, in many ways, stress in the Florida market is a warning for other regions of the country. In addition, as stress occurs in multiple states, the possibility of nationwide fiscal risk increases from the growing possibility that multiple states face severe stress in their private markets or insolvencies in their public programs simultaneously, necessitating federal assistance.
Insurance market turmoil directly cascades into housing markets and the health of local economies. Lenders require insurance coverage for mortgages and a growing body of research demonstrates how critical insurance is to postdisaster financial recovery for households and communities. Those with insurance have fewer financial burdens and unmet needs, widespread insurance leads to greater community economic recovery, and lack of insurance can drive widening income inequality (e.g., refs. 6 and 7). Near-term policy and regulatory responses to current insurance market volatility will have immediate impacts in these linked markets, as well as local economies, both through increased housing costs should insurance prices rise and more capital for rebuilding postdisaster if a large share of residents are insured. However, many potential future dynamics and outcomes are beyond the scope of historical experience, limiting informed management of insurance-linked risks and social tipping points.
In this uncertain context, and many others imbalanced by climate change, there is a crucial need to evaluate how ongoing policy decisions may lead to, open up, or foreclose different possible futures. These possible futures involve differing levels of climate-driven property risk and investments in risk reduction, and thus variations in future damages, as well as differences in income inequality and economic well-being. Future outcomes are driven not just by unprecedented warming but also by the public–private interactions taken in response and will be profoundly shaped by institutional, socioeconomic, and financial tipping points outside documented experience (8). As such, research methods that rely solely on historical experience, or use past data to identify relationships that are simply projected forward in time, are likely to miss possibly critical socioeconomic impacts and leave policymakers with a mistaken sense of the likelihood of future outcomes that depart substantially from present conditions.
Here, we explore three qualitative scenarios representing plausible future dynamics in the Florida property insurance market and follow-on impacts for the housing market, resident recovery, and community economies. In the face of complexity and uncertainty, inaction, or attempts to maintain the status quo are often the default, seemingly an easier choice, even as risks, damages, and inequities intensify and accumulate (e.g., refs. 9–11). Consideration of possible futures can shed light on path dependencies inherent in different actions and thus better inform the current interventions that policymakers are considering to address ongoing insurance challenges in Florida.
To identify these policy lessons, we draw on a systematic, but largely qualitative, approach to scenario analysis that has long been used by the private sector, not to make predictions, but to explore possible futures in order to improve strategic thinking concerning today’s decisions (12–14). We construct three possible futures for insurance market dynamics, including worst- and best-case bounding scenarios. These alternative futures are not predictions and are not chosen to be the most plausible outcome but instead to represent a range of plausible scenarios that can be used to guide policy and investment decisions. Useful scenarios are internally consistent, drive learning, map to mental models, and are relevant to near-term choices (14). The scenarios are narrative in structure, based on the analysis of today’s market and political dynamics.
In the sections that follow, we first provide background on the risks associated with climate-related transitions in the Florida insurance market. We then present our three scenarios designed to inform near-term state policy and regulatory decisions. We conclude with an analysis of the implications for policy actions and pathways through time in order to achieve social goals associated with stabilizing markets, increasing investments in risk reduction, and ensuring equitable recoveries from the increasing impact of climate extremes.
Background on Florida Risks and Property Insurance in the State
The physical hazards of climate change have been well identified in the highly exposed Florida region (15–20). These hazards include flooding driven by rainfall, streambed overflow, coastal storm surge, and rising groundwater; increased flooding and eventual inundation from sea-level rise; tropical storms and cyclones; and chronic humid heat. Continued warming will intensify many dimensions of these hazards, amplifying extremes and presenting “new normal” conditions such as increasing and permanent inundation of low-lying properties. Similar changes are underway in other regions of the southeast and Gulf coast.
We focus on wind risk from storms and hurricanes since it is a primary driver of property insurance market stress in the state [this is because flood risk has been covered for over five decades through the federal National Flood Insurance Program, NFIP (21)]. Since 1980, the National Oceanic and Atmospheric Administration (NOAA) estimates that Florida has had 33 tropical storms each causing more than $1 billion in damages, leading to total costs of between $300 and $360 billion (22). A third of those storms have occurred in the last 5 y, including Ian in 2022 costing over $52 billion. This risk is projected to increase as the planet warms leading to a greater likelihood of rapid intensification of storms (23), storms stalling over land (24), and storms occurring in quick succession (25). Catastrophe models predict a 1% annual chance (i.e., from a 1-in-100 y event) of hurricane losses for Florida ranging between $32 billion and $94 billion (26), while a repeat of the Great Miami Hurricane of 1926 today would cause over $260 billion in damages (27).
Against the backdrop of intensifying storm hazards, exposure to possible harms has increased throughout Florida. Census data indicate a long-term trend of increasing population in the state (28). The state also has high levels of income and wealth inequality. Greater Miami, for instance, has the second-highest level of income inequality in the United States; it has a relatively small middle class, and the metro area is ranked in the top 10 in the United States for the percent of residents living in poverty (29). Building permits for new private single housing units have been on an increasing trend since the spring of 2009, although they stabilized or even started declining in 2021 (30). Further, much of the development is concentrated near the coast (15, 19).
Development and migration dynamics and incentives have been strongly shaped by the fiscal structure of the state, including its absence of income tax, reliance on property taxes, and prioritization of economic growth over regulation (28). This budget structure can make the state resilient to other economic downturns that do not impact property values but also make the state susceptible to climate impacts such as sea-level rise that put property tax revenues at risk (31).
Property insurance markets within the state have been through periods of stress since the current regulatory framework was set up following Hurricane Andrew in 1992, but the past few years have seen a heightened period of market destabilization (5). This is driven by growing climate risk, continued development in high-risk areas, higher costs of rebuilding, and legal challenges in the Florida market (addressed with recent legislative changes). The reinsurance market has also hardened, impacted by the same forces. In response, insurers have been withdrawing coverage and increasing premiums. The costs of homeowners insurance in Florida are the highest in the country, three times higher than the national average (32).
It is not possible to purchase comprehensive hurricane insurance in the United States. Homeowners’ policies cover the wind portion of storms and hurricanes, but flood coverage must be purchased separately. While there are some private providers of flood insurance, the federal government, through the NFIP, writes most of the residential flood coverage in the country. The NFIP has recently increased its rates to better reflect property-level risk, which Florida consumers have now been experiencing in addition to rising homeowners’ premiums (33).
While the NFIP has provided a stable source of flood coverage, the Florida property insurance market has been more volatile. Decades ago, the state of Florida created a not-for-profit government entity—Florida Citizens Property Insurance Corporation (Citizens)—to provide homeowners insurance or wind-only insurance to residents in the state unable to find or afford coverage from the private market (34). All other states exposed to hurricane risk similarly have a so-called residual market for those unable to find or afford coverage in the voluntary market.
As insurance market stress has deepened in recent years, it has pushed more risk into Citizens. Policies in Citizens have been increasing since 2019, and it is now the largest insurer in the state with over 1.3 million policies (35). Private insurers must collect sufficient premium revenue to cover losses. Citizens, however, is only partially funded through premium payments. For severe loss years, it funds claims payments through the issuance of postdisaster bonds, which are paid back through assessments, first on its own policyholders and then, if needed, on policyholders of almost any type of property or casualty insurance throughout the state. Recent legislation has required policyholders of Citizens to also purchase flood coverage to ensure that policyholders do not attempt to pass flood damage onto Citizens. This provides more comprehensive insurance coverage for residents but also increases their costs.
In addition, Florida has two other state insurance programs. It has the only state-level reinsurance facility, the Florida Hurricane Catastrophe Fund. Like other states, it also has a guarantee fund to cover the claims of insolvent insurers, the Florida Insurance Guarantee Association (FIGA). Both programs, like Citizens, assess property insurance policies throughout the state should they face deficits. FIGA has done this recently with several notable insurer insolvencies in the past couple of years; insurers representing about 16% of the market share went bankrupt after Hurricane Irma in 2017 (4), and another large insurer failed after Hurricane Ian in 2022, along with multiple smaller insurers. When these programs issue assessments, it further increases the cost of insurance for all residents.
Volatility in the insurance market could lead to potentially rapid shifts and heterogeneous outcomes for residents and communities throughout the region, either through direct impacts or as mediated through housing markets. Changes in the pricing and availability of insurance drive complex interactions that involve feedback across markets, making it harder to secure a mortgage, decreasing property values, and increasing household financial stress. How this occurs will be shaped by multiple factors, including public sector investments in climate adaptation, regulatory decisions regarding insurance pricing, the structure of the state’s public insurance provider, the availability and pricing of mortgage policies, and macroeconomic conditions. Potential rapid shifts in equilibrium could manifest through bond market freezes, losses in investor confidence, or failures of government services.
At a household level, psychological dimensions will also be important, such as place attachment, risk perceptions, and consumer confidence, although those are not a focus of our scenario analysis. Rapid market and social adjustments can be especially difficult to model or predict, and as a result, preparations to buffer them may be inadequate. In general, people tend to be poor at thinking about an uncertain future. Research has shown that we often anchor beliefs about the future in the past, focus too heavily on the near term, and fall prone to overconfidence, optimism, or groupthink, resulting in suboptimal decisions (e.g., ref. 36). Beyond our own perceptions, our research tools often fall short when considering possibilities outside historical experience, as is now occurring due to climate changes. Backward-looking empirical analyses cannot inform understanding of out-of-sample events, and forward-looking socioeconomic modeling is also challenging when parameters or trends from the historical analysis are not useful for future estimates (37–41).
Future Scenarios
Our exploratory scenarios are chosen to address the question of how near-term (1 to 3 y) policy and regulatory decisions about insurance and broader hurricane risk management could influence medium-term outcomes (i.e., over the next 3 to 15 y) for households, housing markets, and local economies. After determining this scope and timeline, we assessed current trends and related context (42). This involved review and examination of research findings around climate risks in Florida, demographic trends, the state’s fiscal structure, and insurance market dynamics back to Hurricane Andrew in 1992 (much of this is summarized in the background section above).
We chose three bounding scenarios to capture a diversity of plausible future impacts and widely varying outcomes rooted in different near-term decisions regarding the Florida insurance market and approaches to hurricane risk management. We developed our scenarios around four key dimensions:
1.
the extent of socialization of insurance-sector risks,
2.
the extent of investment in risk reduction,
3.
the degree to which public policy aims to improve income inequality and inequities in exposure to hurricane risk, and
4.
the amount of innovation/disruption in either the public or private insurance sector and the nature of that disruption.
Our focus is on public sector decisions along these dimensions and how those decisions ultimately influence outcomes for residents, communities, and local markets. The scenarios take as exogenous the state of certain federal programs, such as increasing costs for flood insurance from the National Flood Insurance Program. Other dynamics will certainly influence our outcomes of concern, such as changes in federal policy or large shifts in consumer sentiment. We do not explore these influences here, focusing attention on state level policy levers.
The variations in these dimensions, shown in Fig. 1, drive very different futures. The first scenario, inequality and spatial checkerboarding, explores very uneven outcomes, where, absent state investments in risk reduction and limited state assumption of risk, affluent communities can afford risk reduction and insurance and other communities have access to neither. The second scenario, growing public sector risk and then a crash, explores what happens when the public sector absorbs a large share of the growing risk. While this maintains property values in the near term, it ultimately is not sustainable and can trigger postdisaster declines in prices and out migration. The final scenario, adaptation and resilience, uses best-case outcomes to focus on the tight link between risk reduction and insurance market stability, as well as the role of public policy in ensuring greater equity in both climate adaptation and disaster recovery. Each scenario is discussed in narrative form below and summarized in Fig. 1.
Fig. 1.
Scenario 1: Inequality and Spatial Checkerboarding.
Socialization of insurance risks.
Growing storm risks cause insurers to continue to abandon the state and those remaining to request price increases. The state insurance regulator allows premiums to increase somewhat to reflect rising risks but not at the full level requested by insurers. Insurer exits cause a continued increase in the policyholder base in Citizens. The current rates in Citizens are insufficient for the growing risk (43), and the program is allowed to continue increasing rates on a glide path, as well. Since the state requires Citizens policyholders to also have a flood insurance dwelling policy (44), rising rates in the NFIP add extra financial burden on policyholders. Regulators also allow greater differentiation in pricing, with the highest risk areas now seeing insurance prices much higher than the lower-risk areas.
Investments in risk reduction.
Despite escalating risks, the state does not adopt comprehensive changes in land use or building practices. The federal government does offer grant funds for risk mitigation, and some communities apply for and receive these funds. But the grants typically require a local cost-share of up to 25% and local expertise, staff time, and technical capacity to navigate the process, leading underresourced and low-capacity communities to access them less often (45, 46). Lower-income areas in the state cannot stay ahead of the growing risk, while more affluent regions are able to invest both federal and local dollars in risk reduction to increase protection, at least against smaller-scale disasters in the medium-term (47). The high insurance penetration in these areas and ability to navigate the federal process also mean that smaller disaster events are used to rebuild and incorporate some hazard mitigation as part of the rebuilding process. This enables more affluent homeowners to also take advantage of required premium discounts for certain risk reduction measures for both homeowners and flood insurance policies (48, 49).
Equity policies.
Nothing additional beyond existing efforts.
Insurance innovations.
New types of insurance products are made available but targeted at the needs of more affluent residents. Parametric hurricane insurance products grow in availability, but they are cost prohibitive for low- or middle-income residents. High-income households use them to offset otherwise uninsured costs from hurricanes, such as below-deductible expenses or landscape repairs.
Resulting impacts.
Disaster insurance becomes a luxury of the affluent (50). In areas where the risk is correlated with coastal amenities, these locations become dominated by affluent and investor owners who can afford the insurance or self-insure. These households are also able to afford investments in property-level risk reduction. These investments tied to coastal amenities help prevent substantial declines in property values in the near-term. But low- and moderate-income (LMI) households become financially locked out of access to coastal amenities, and income diversity in south Florida and coastal communities, already low, worsens further. LMI households are pushed into risky locations away from the beach without financial safety nets as many have to go without insurance coverage.
Postdisaster, those without insurance do not have access to the financial resources needed to recover, and as a result, these households experience poverty trap dynamics and long-term, negative financial consequences (51, 52). This drives increasing income inequality postdisaster (6). As this inequality grows, the lower-income communities have a lower tax base to support investments in all social services, including risk reduction, further depressing property values and widening income inequality even further. The end result is a vicious cycle of ever-widening inequality and segregated land use. This creates a checkerboard effect, with some housing markets staying stable and others collapsing.
Scenario 2: High Public Sector Risk and Crash.
Socialization of insurance risks.
As the cost of property insurance continues to grow, it generates increased political upset in the state (53). Stories grow of people choosing to leave Florida because of the financial stress caused by high insurance prices (54) and realtors begin to note declines in property values due to unavailability or unaffordability of insurance (55, 56). This increases concern about spillover impacts into local economies. In response to pressure from developers, local governments, and residents to maintain housing values, the state steps in to stabilize or lower insurance costs. The Florida Office of Insurance Regulation (FOIR) thus restricts rate increases for private insurers. Such rate suppression, however, causes an even faster retreat of private insurance from the state since firms cannot generate a return sufficient for the catastrophic risk. This creates growing pressure on Citizens, already the largest insurer (5). The state responds by changing the mission of Citizens from a residual market to the primary provider of coverage in coastal locations, following the model of the NFIP. The number of policyholders grows with no change in premiums or financing structure of the program.
Investments in risk reduction.
While some local governments continue to undertake modest efforts at improving flood risk management on their own, very few changes are made to exposure levels in the state since no restrictions on land use and no further requirements on building are adopted. Efforts at increasing resilience largely focus on undertaking studies and risk assessments, and there is very little actual implementation of risk reduction measures. As noted by Swiss Re, risk mitigation efforts adopted do not offset increases in expected losses from population growth and climate change (57).
Equity policies.
Nothing additional beyond existing policies.
Insurance innovations.
None.
Resulting impacts.
When the next “big one” hits Florida, or when multiple more modest storms appear in quick succession, impacts to the insurance market are severe. Citizens face catastrophic levels of loss without sufficient claims-paying ability and thus fall into deficit. As noted above, when in deficit, Citizens are designed to secure postevent bonds to cover claims. After catastrophic storm losses, however, Citizens find a wary bond market. This is partially driven by the fact that the two other Florida insurance programs—the Florida Hurricane Catastrophe Fund and the Florida Insurance Guaranty Association—both face costs from the exact same storms and also need to turn to the bond market at the same time; this bond market clash makes it difficult for any of the programs to secure needed capacity and also increases costs (5). Residents also get nervous about the potentially large, stacked assessments—essentially fees—on all insurance policies in the state that will be required for all three programs to repay any debt going forward.
To secure needed liquidity for the three public insurance programs, the state legislature approves an infusion of taxpayer funds into Citizens, as well as to the Florida Insurance Guaranty Association, as numerous small insurers in the state have again gone bankrupt (58). They also pass a bill to guarantee bonds issued by the state programs. These actions warm up the bond market slightly, but major rating agencies issue statements about ever-growing risk in Florida, dampening investor interest in debt from Florida public entities.
This postdisaster financial stress and uncertainty make many residents increasingly nervous. The damage to private property is difficult to rebuild due to the challenges with paying claims, which slows local recovery. Dealing with multiple crises, local and state governments are also slow to make repairs to infrastructure and public buildings. Property values begin to decline, and many market commentators warn there may not be a near-term rebound. As multiple policyholder assessments begin from the Florida insurance programs, it causes political outcry at the spike in insurance costs. These combined factors begin to fuel out-migration from Florida, especially South Florida. This begins a downward spiral, which further hurts property markets and local economies. The end result is “bust-like” dynamics in several high-risk housing markets.
Scenario 3: Adaptation and Resilience.
Socialization of insurance risks.
Insurers demand higher rate increases commensurate with the growing risk, and FOIR grants them, although at increases lower than many insurers ask for and with a required phase-in of rate increases over time. The increasing glidepath for Citizens premiums is retained (43) but slightly accelerated. These phase-ins prevent abrupt price swings in related markets.
Investments in risk reduction.
In the face of growing concern about high insurance prices, public policy discussion in Florida shifts to the need for greater investments in adaptation and risk reduction to maintain a stable insurance market (59). The state adopts many new policies and programs to lower risk. The state first provides technical support to all local jurisdictions to optimize applications for federal risk reduction grants. To supplement federal funds, the state assesses a small fee on property and casualty policies to create a risk reduction fund. The fund awards competitive grants to local jurisdictions, targeting the most cost-effective risk reduction measures, designed in consultation with insurers as to the actions that can help maintain insurability.
Building on the success of these efforts and the My Safe Florida Home grant program, the state further expands its focus on climate risk reduction. This involves a massive push to upgrade all coastal buildings to Fortified standards.* These upgrades result in lower insurance premiums (60) and are cost-effective, saving more on future damages that up-front costs (61). Fortified adds only 1 to 3% to the cost of new construction, and Habitat for Humanity expands their program to build Fortified homes inexpensively (62). Improvements are also made in local infrastructure to withstand higher flood and storm risk, accompanied by a renewed focus on restoring coastal ecosystems to absorb storm surge [such as the development approach taken in Pelican Bay, Florida (63)]. The focus on green infrastructure is accompanied by a change in land use, where new development is restricted in areas at increasing risk of sea-level rise and chronic inundation coupled with relocation of critical assets and buildings out of high-risk areas, much of which takes place through safer postdisaster rebuilding (64). Many of these investments take many years to be completed. As the process unfolds, developers and real estate agents notice that safer construction in safer areas sells at premium and add political and market support for greater investments in climate adaptation (65).
Equity policies.
State technical assistance helps LMI communities receive funds from the unprecedented amount of federal funds through the Federal Emergency Management Agency and the US Department of Housing and Urban Development now available for risk reduction. Many of these funding sources have mandates to prioritize overburdened communities, which drives more mitigation dollars to under-resourced areas in the state.
Insurance innovations.
The state insurance regulator encourages multiple types of innovation in insurance markets. A microinsurance market is launched, following Puerto Rico’s example, to provide some degree of financial protection to low-income households unable to afford broader coverage (66). Fortified endorsements, which pay policyholders the needed costs to upgrade to Fortified standards in rebuilding, are required on all property policies, and the state pays the extra premium for income-qualifying households. Citizens also direct poststorm dollars at mitigation investments for its policyholders. FOIR leads an effort to ensure that catastrophe models used in rate-making account for investments in green infrastructure and coastal ecosystem protection, so that those communities are rewarded with more stable insurance prices. This creates a positive cycle whereby insurers underwrite only safer homes and communities, consumers demand safety, public agencies create and support risk reduction programs, developers incorporate risk reduction since it makes the building more attractive, and agents educate consumers about risk—and all of these activities create a mutually reinforcing feedback loop.
Resulting impacts.
In response to these combined policies and investments, development in Florida becomes more concentrated in safer areas, built to withstand more severe storms, and the riskiest areas are turned back into open space. This is a lower-risk land use pattern that attracts more insurer and reinsurer capital to the state, stabilizing the insurance market and the housing markets for at least several decades. The development in these areas retains value in the medium term.
Policy Recommendations.
Who pays for the shifting risk of climate change is a key question for governments, civil society, and the private sector. Because existing mechanisms for spreading risk, including insurance, are likely to be stretched—and to sometimes fail—under intensifying climate change, policies that enable insurance to adapt need to be developed. Near-term policy decisions (or lack of changes to the status quo) will have consequences for household and community outcomes in the coming years. Here, we shed light on the policy changes that are needed in the near-term to secure a safer and less costly future. Across our insurance-driven scenarios, several key policy lessons emerge.
First, reduce risk. Sustainable strategies must not just mask or transfer rising risk. The only way to solve the challenges in insurance and linked markets is to address underlying risk, as seen in the adaptation and resilience scenario (scenario 3). Climate adaptation efforts must be undertaken by all sectors and actors in a mutually reinforcing dynamic. The insurance sector can be both incentivized and required to do more to help drive down risk including through improved transparency around the link between mitigation investments and the pricing and availability of coverage, as well as innovative mechanisms such as resilience endorsements that offer funding at the time of rebuilding to invest in greater risk reduction (e.g., Fortified).
Second, as the costs of climate change escalate, policy decisions must allow insurance prices to reflect risk and yet ensure that insurance remains available to low-income households. When insurance prices reflect risk, that sends an information signal to markets about unsafe levels or types of development. Insurance signals about climate risk, however, are muted since insurance only prices for this year’s risk—not future risk. In addition, the political attention to high insurance prices typically obscures any concerns about market efficiency. As discussed in Scenario 2, the desire to not disrupt household finances or housing and mortgage markets can lead to a suppression of insurance rates, essentially transferring that risk to the state. That, however, simply sets markets up for a future crash. Absent public-sector intervention, however, high insurance prices hit low-income families the hardest. They may not be able to afford insurance and thus go without coverage. This can leave them struggling to recover after a disaster. A policy of letting prices reflect risk, but also putting in place means-tested assistance for lower-income households, can help secure greater efficiency in markets and protect our most vulnerable.
Third, policymakers need to avoid systemic risks caused by interconnections between linked markets, programs, and risk management approaches. For example, Florida has multiple insurance programs—Citizens, the Florida Hurricane Catastrophe Fund, and the Florida Insurance Guaranty Association—and all could be negatively impacted by a severe hurricane season. The correlation in the fiscal health of these programs creates systemic risks for the state. In addition, the scenarios highlight the ties between insurance markets and real estate, rental, bond, and mortgage markets. These interconnections mean that the full scope of risk in these linked markets can be missed leading to a market crash (scenario 2). Managing this systemic risk must go beyond siloed efforts in each individual program or market (scenario 3). Beyond the scope of this paper, there is also a concern that multiple coastal regions across the United States are experiencing similar dynamics simultaneously, raising concerns about broader regional systemic risks that should be investigated in future work.
Fourth, policies with short-term benefits can have large long-term costs. With rising climate-related disaster risk, suppressing insurance rates now, even with the good intention of supporting insurance affordability, property markets, and profits, masks risk and pushes the day of reckoning into the future, perversely increasing the risk of market crashes that can erase any short-term gains (scenario 2).
Fifth, deliberate attention is needed to maintain equal access to insurance, otherwise climate impacts and responses are likely to increase income inequality. More affluent jurisdictions can afford proactive investments (scenario 1), and more affluent families can afford insurance (scenarios 1 and 2). Post disaster, these jurisdictions and families more readily rebuild, while those with lower wealth often fall into worse financial positions postdisaster (6, 7, 67). The status quo insurance-only policy adjustments, without support for lower-income households to afford insurance or lower-income communities to reduce risks, may risk privatizing benefits and socializing costs, increasing inequality.
Finally, learning by doing, supporting flexibility and institutional transformation, is necessary. Many of the climate-related risks insurance and interlinked markets face are outside of historical experience, i.e., climate hazards that rapidly cascade into institutional and market failures. A proactive stance enabling experimentation and learning is therefore crucial. Carving out communities or markets in which to experiment should be a part of any policy response. For example, state insurance regulators can invite new products into the market, such as parametric insurance for a subset of the market using new property level climate data and monitoring. Or local governments can work with insurers to designate neighborhoods for proactive investment in risk mitigation in order to support insurance premium reductions from the private sector, much like the Community Rating System. In addition, governments and the private sector can monitor for potential points of failure, such as a 20% relative drop in housing values in neighboring communities as a potential trigger to check for a developing checkerboard scenario (scenario 1) and then respond before negative impacts cascade.
The future of property insurance in Florida is uncertain and tied to policy decisions. Using scenarios to deliberately explore outcomes outside our historical climate experiences can increase the odds that today’s policy and regulatory choices support effective, equitable adaptation to rising climate risk.
Data, Materials, and Software Availability
There are no data underlying this work.
Acknowledgments
K.J.M. acknowledges support from the NSF (SCC‐2305476).
Author contributions
C.K., G.T., and K.J.M. designed research; performed research; and wrote the paper.
Competing interests
The authors declare no competing interest.
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Copyright © 2024 the Author(s). Published by PNAS. This open access article is distributed under Creative Commons Attribution-NonCommercial-NoDerivatives License 4.0 (CC BY-NC-ND).
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Published online: November 18, 2024
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K.J.M. acknowledges support from the NSF (SCC‐2305476).
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C.K., G.T., and K.J.M. designed research; performed research; and wrote the paper.
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The authors declare no competing interest.
Notes
This article is a PNAS Direct Submission.
*
Fortified building is the highest standard of construction to withstand hurricane winds. It was developed by the Institute for Building and Home Safety. More information is online here: https://fortifiedhome.org/.
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