A recent Guardian profile of the oil company chief who will lead this month’s United Nations climate meeting in Dubai nodded toward the stakes of those talks with a seemingly uncontroversial observation: “Global heating has been increasing in severity for years, but this summer there were impacts no one could ignore.” It was indisputably a “summer from hell”—a fire hose of extreme weather that exceeded anything in lived memory or modern temperature records. Wildfires began consuming Canadian forests in April and kept burning through October, sending air pollution levels to all-time highs in cities from Chicago to New York. A crushing heat dome descended upon the southern and central US, bringing Phoenix thirty-one straight days over 110 degrees. Punishing rains inundated communities from New England to South Korea to Slovenia to Hong Kong to Greece to Brazil to Libya. In August, the deadliest wildfire in more than a century consumed the historic town of Lahaina in Maui. Ninety-nine people died.
As shocking as these events were, here in the US, at least, their larger significance will almost certainly be ignored. For decades climate advocates have wondered whether a “Big One” would ever come along—a disaster so overwhelming that, like an invading army, it would galvanize America’s political class to take on the primary cause of the climate crisis: the rampant burning of fossil fuels. We have enough evidence by now to conclude that no single event—or even a sustained summer-long drumbeat of disasters—will serve as such an inflection point. Just look at climate shocks past: Katrina in 2005, Sandy in 2012, Harvey–Irma–Maria in 2017, and Florence–Michael–Camp Fire in 2018. The orange skies clear, the floodwaters recede, and the warning signal of collective danger invariably gets swamped by other exigencies. It’s already happening. This summer’s “mind-boggling” temperature extremes have faded into the background, amidst autumn’s escalating political crises at home and abroad.
But one development might prove truly impossible to ignore. On the Friday before Memorial Day, State Farm quietly announced it would cease selling new insurance policies for homes and businesses in California, where it accounts for 20 percent of the market in homeowners’ coverage. Roughly a quarter of all Californians live in areas of high fire risk, and one of the reasons the company gave was “rapidly growing catastrophe exposure.” And yet State Farm is shutting out new homeowners not just in those areas but throughout the entire state—a state that accounts for 20 percent of the total value of the nation’s housing stock. Other major insurers, such as Allstate and Farmers, have taken similar steps to limit their exposure in the Golden State. California is already one of the toughest housing markets for aspiring homeowners to break into. These moves make it tougher, tilting the field in favor of those who can make all-cash deals and therefore don’t need to secure a certain level of insurance coverage to qualify for a mortgage.
State Farm’s decision caught many homeowners and regulators by surprise. But it is part of a much wider migration across the industry, as insurance companies awaken to the fact that far more Americans live in harm’s way than anyone realized. In the US this year there have already been twenty-five “climate disasters” with tolls of more than $1 billion each, compared to an annual average of eight such events between 1980 and 2022. It is getting more expensive to insure American homes that are increasingly likely to be flooded, wind-damaged, or burned to the ground. Nationwide, there were $99 billion in insured losses from climate disasters in 2022 alone.
Firms are finally starting to price those climate risks into premiums, which are rising nationwide. But even with those hikes, premiums can’t cover the rising costs of paying out post-disaster claims and buying reinsurance (insurance for insurers). As the environmental news site Grist recently reported, some insurers are solving this brutal math by dropping existing customers, telling homeowners in parts of the Sierra Nevada foothills that they won’t renew their policies or pulling out of hurricane-battered states like Louisiana altogether. Like schools of fish striking out for friendlier waters, they are beginning to exit the more perilous markets. Nobody wants to go bankrupt.
These insurance companies are among the few major institutions clearly assessing the current climate precarity and acting accordingly. It is, to be sure, a ruthless, narrow-minded clarity: millions of homeowners will be left in the lurch, unable to rebuild or recover after the next disaster. (Meanwhile, as The Atlantic recently reported, even as some insurance companies withdraw homeowners’ coverage from swaths of the Gulf Coast, they seem to have little compunction about underwriting extremely expensive projects like liquefied natural gas terminals sprouting nearby, presumably because the associated profits are large enough—for now—to justify the risk.) The insurers’ retrenchment threatens not only individual homeowners but also broader economic stability. Like the shifting of tectonic plates, the ongoing alignment of insurers’ risk models with climate reality is starting to send seismic waves through the US financial system.
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The value of the domestic housing market reached an all-time high of $47 trillion this summer, exceeding the aggregate value of all US publicly traded companies. Most of that assessed value is tied up in detached, single-family homes, making the white-picket-fence American Dream one of the world’s largest investment asset classes. Home equity is the single largest source of wealth in the US. The fact that climate risks have not been priced into that real estate market means that there is an enormous bubble waiting to burst. One investor who saw the 2008 crash coming thinks a similar “correction” lies ahead: a widespread drop in property values. A study published in February found that the housing market might be overvalued by more than $200 billion due to exposure to flood risks—by more than $50 billion in Florida alone. Another assessment in 2022 by an actuarial firm offered a much higher estimate: $520 billion in overvaluation. Again, that’s just for flooding. The nonprofit First Street Foundation, assessing flood, wind-damage, and fire risk, recently concluded that a quarter of all homes are overvalued.
If you can’t get insurance, it is virtually impossible to get a mortgage. (Almost all lenders require home buyers to secure insurance for the full replacement cost of a home before approving a mortgage.) Without insurance, property values plummet. This insurance-driven crisis will effectively bring future climate impacts forward in time, collapsing the financial architecture of home ownership in many places long before they are actually made uninhabitable by water, wind, and fire. It will also literally “hit home.” The insurance exodus that is now underway will cause millions of Americans pain in the place they cannot ignore: their pocketbook.
“‘Work hard, save a little, send the kids to college so they can do better than you did, and retire happily to a warmer climate’ has been the script we have all been handed,” Lawrence Samuel wrote in The American Dream: A Cultural History (2012). For Americans, he observed, the home has served as shelter, status symbol, and source of wealth all rolled in one—a dream built on the premise that you can always turn your house back into money. What happens when that’s no longer guaranteed? Premiums will continue to rise everywhere, but more sharply for those in the parts of the country most prone to fire and flooding. Some homeowners will opt to forego coverage. All policyholders will increasingly be footing the bill for underwriting the riskiest properties, whose value will in turn decline. One of the authors of the First Street analysis, Jeremy Porter, has warned that this overvaluation reset could happen quite suddenly. “It is not that farfetched to say that you hit a tipping point,” he said. “It may be community by community. It may be a larger tipping point that you hit across the country in the real estate market.”
Whereas very few local governments were bankrupted during the Great Recession, this new bubble leaves them especially vulnerable. Most city and town budgets are funded mainly by property taxes. As municipalities’ tax bases shrink, their budgets for trash pickup, road repair, and public education will dry up. A vicious cycle will set in as the erosion of those services further depresses property values. The crisis is also coming for the $4 trillion municipal bond market, into which virtually no climate risk has yet been priced. Much like individual homeowners, some cities and counties will see their credit ratings go down and their cost of borrowing rise to finance infrastructure upgrades like road and sewer repairs, or sea walls.
Those feedback loops could trap millions of Americans in economically hamstrung zip codes. Some states’ entire economies are at risk: real estate accounts for 18 percent of Florida’s GDP. While Ron DeSantis wages his culture war on Disney and high school history teachers, his state is hemorrhaging insurers. Florida took a hit of almost ten percent of its GDP due to damage from the 2022 hurricane season.
Despite all of this, home values in regions most menaced by climate change have increased in recent years. According to Redfin, some of the counties that face the highest levels of flood, fire, and heat risk have added more new residents than almost anywhere else in the country, like Maricopa County in Arizona, where Phoenix is located, and Lee County in Florida, which is home to Cape Coral, battered by Hurricane Ian last year. Coastal Florida contains four of the nation’s six fastest-growing housing markets since the start of the pandemic: Miami, Jacksonville, Orlando, and Tampa. The chair of the Miami Association of Realtors told Axios that they aren’t seeing any effect of the rising insurance premiums from where they’re sitting: “On the contrary, we have seen home price appreciation for 140 consecutive months.”
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Perhaps those new arrivals are counting on government to be the backstop, much in the way the Federal Deposit Insurance Corporation steps in to rescue deposit holders when a bank fails. Florida, Louisiana, California, and many other states indeed have their own programs that act as insurers of last resort, offering coverage for homeowners when private companies won’t. But the financial laws of gravity apply to them, too, and like the beleaguered federal National Flood Insurance Program (NFIP) they are woefully under-resourced. (Since some states support their nonprofit safety-net programs with levies on private insurers, those programs also seem poised to lose funding as the companies depart—even as they face the prospect of increasing payouts on claims from the customers those firms have abandoned.) Their premiums don’t reflect the actual climate risk, either. These countervailing migratory trends—homeowners flocking into harm’s way and insurers streaming out of it—threaten to widen the range of uninsured economic losses, a “protection gap” that is making regulators nervous.
The dream of homeownership is already under strain for plenty of other reasons, being pushed further out of reach for millennials due to rising prices and interest rates, stagnating wages, inflation, and most crucially a lack of housing supply, which the insurance crisis will exacerbate. In Lahaina, which already lacked sufficient affordable housing, economists have warned that locals who survived the fire will likely be priced out of the rebuilt town unless zoning laws are changed—and that they are likely to face higher home insurance costs now, too, after years of paying the lowest rates in the country.
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It’s safe to predict that this economic crisis will turn into a political one. Up to a point, the subprime mortgage implosion and housing market crash of 2008 offers a guide. It consumed the attention of lawmakers for much of Obama’s first year in office, rippled across the global economy, and unleashed dark political forces (for example the Tea Party, which took shape in opposition to Obama’s plan to protect millions of homeowners from foreclosure using taxpayer dollars). But whereas the housing market soon bounced back, doubling its value in the decade following the Great Recession, the insurance crisis will only intensify until millions of Americans relocate to safer places.
Of course, there are no truly “safe places,” as this summer made painfully clear. Because air holds more water vapor as it warms, supercharged thunderstorms can and will visit nearly every corner of the country as time goes on, to mention just one danger. Still, some places face more risk than others. In a decade or two, coastal and mountain towns that are now booming may be all but impossible to fully insure, thanks to surging seas and expanding wildfire seasons. There will be no reset, only rising costs and—if our leaders rise to the occasion—a managed retreat from danger instead of a chaotic scramble. (For now, the smart money is on the latter scenario. It’s worth noting that if the government shuts down next week, then the National Flood Insurance Program will expire, too. Homeowners will not be able to purchase or renew federal flood insurance policies until Congress reauthorizes the program. Home sales could more or less grind to a halt in areas designated as having high flood risks.)
The genius of insurance is that it weaves individuals guided by self-interest into a web of shared protection. By pooling risk, it reduces exposure for everyone. But it also makes for pooled discomfort. Taxpayers already subsidize risky housing markets through programs like NFIP, FEMA disaster relief and loans, and government-sponsored mortgage guarantors like Freddie Mac and Fannie Mae. Policyholders everywhere will see their premiums rise as insurers seek to make up for losses covering homes battered by rising seas in the Outer Banks or deluges in Kentucky’s hills.
Folding the full cost of coping with climate change into insurance premiums and property values will never be politically palatable. (Lawmakers frequently push back on FEMA when it updates its flood risk maps, as the real estate lobby cries foul.) But as the map contracts there will be no place left to hide. “An era of complacency is ending,” Benjamin Keys, a professor of real estate and finance at Penn’s Wharton School, wrote presciently in the New York Times just a few weeks before State Farm’s announcement.
Still, the policy solutions being floated to keep this bubble from growing and bursting—bolstering funds to backstop insolvent insurers, requiring insurers to keep more cash on hand so they can withstand disasters to come, upgrading building codes, making climate risk data available to prospective homebuyers—are band-aids. None are likely to alter the fundamental, irreversible dynamic that has been set in motion. The only policies likely to preserve the long-term insurability of some parts of the US are ones that actually reduce climate-warming pollution. In the meantime everyone is going to feel some pain. We will soon see how much the body politic can tolerate.
