The Uninsurable Future: The Climate Threat to Property Insurance, and How to Stop It

abstract. Insurance is the climate crisis’s canary in the coal mine. Climate change, due to increasing greenhouse-gas emissions, is causing more extreme and severe natural catastrophes. Insurers respond to the substantial increase in property-insurance losses caused by these disasters by increasing prices and not writing or renewing insurance. State efforts to address the problem through deregulation of the insurance market, like Florida, or by allowing substantial rate increases, like California, do not address the underlying driver of the insurance crisis. There are several measures that can help keep insurance available and affordable in the short to medium term. Insurer-focused policies include ending insurers’ financial support for the fossil-fuel industry, encouraging subrogation lawsuits against fossil-fuel companies, and requiring insurers to account for mitigation measures in pricing and underwriting. Land-use policy measures, like curbing development in high-risk areas while promoting building and development practices that reduce the risk of loss, will also help. Other state-level measures include strengthening the financial stability of residual markets through bond financing. There is also a need for federal involvement. Congress should enact a federal reinsurance program for state residual markets and a subsidy program for low-income households to afford residual-market premiums. But the risk of loss from climate-driven events keeps climbing and will eventually overwhelm the benefits of these additional policies. The only long-term solution to preserve an insurable future is to transition from fossil fuels and other greenhouse-gas-emitting industries.

Introduction

The Los Angeles wildfires of January 2025 killed at least thirty-one people1 and destroyed over 16,000 structures.2 Estimates put the economic losses from this horrific event as high as $250 billion.3 Insurance companies are expected to pay $40 billion in claims—the largest insured loss from a wildfire anywhere, ever.4 Facing over $4 billion in claims, California’s insurer of last resort—the California Fair Access to Insurance Requirements (FAIR) Plan—needed a $1 billion bailout, more than half of which will land on all California insurance policyholders as a result of a recent state policy change.5 Research indicates that climate change made this disaster 35% more likely to occur—two years of above-average precipitation caused rapid brush growth, followed by an abnormally dry year that converted the brush into kindling awaiting ignition.6

Climate change is increasing the frequency and severity of natural-catastrophe events,7 which, in turn, damage and destroy homes and businesses at an unprecedented scale. In the last ten years, climate change accounted for over 30% of insured natural-catastrophe losses incurred across the globe.8 Global insurance losses from natural catastrophes keep climbing. In response to rising losses, property-insurance companies have significantly raised their rates and are increasingly refusing to write or renew insurance for homes and businesses, creating an insurance crisis.

Insurance is the climate crisis’s “canary in the coal mine.” And the canary is dying. In an effort to keep insurance available and affordable for a while longer, this Essay will analyze recent policy and regulatory responses to the property-insurance crisis and propose additional solutions to address their inadequacies. This Essay relies not only on research and engagement with insurance-sector participants, regulators, policymakers, and other stakeholders related to the insurance crisis, but on my own experience as the former Insurance Commissioner for the State of California, where I worked to get insurers to evaluate, consider, and address the growing risks and losses associated with the global climate crisis.

Part I provides background on the property-insurance industry and describes the nature and scope of the growing insurance crisis, including its implications for homeownership and the U.S. economy going forward. It will then delve into the examples of California and Florida, which have responded differently to the insurance crisis. California has maintained its regulation of rates and insurers but has recently embraced some deregulatory measures.9 Under these measures, insurers can use probabilistic models to justify rate increases and incorporate reinsurance costs into rates, so long as they promise to write more insurance in high-risk areas.10 Florida, by contrast, has long declined to regulate rates and has recently embraced even more deregulation of its insurance market.11

While both approaches might enjoy moderate short- and mid-run success, they will prove inadequate in addressing the insurance crisis in the long run. Florida’s blanket deregulatory approach may provide an opportunity for keeping some property insurance available (albeit, not affordable). But Florida homeowners and businesses pay four times the national average in rates.12 Moreover, because Florida does not require insurers to demonstrate sufficient financial strength, Floridians face the likelihood that future damage claims from a major hurricane will be unpaid.13

California’s current regulatory approach will be insufficient as well. The state continues to regulate insurers’ rates and reserves, though recent regulatory changes allow substantial rate increases linked to promises to write more insurance in high-risk areas. But this approach, too, will likely be overwhelmed by the insurance losses from the growing frequency and severity of climate-driven events. Fundamentally, both approaches fail to address the greenhouse-gas emissions driving the crisis. And both states fail to require insurers to account for risk-reduction measures in their decisions to write and renew insurance.

Part II lays out state-level solutions to help keep some home and small-business property insurance available. One set of solutions focuses on state-level regulation of insurers. It includes proposals that would require insurers to recover some portion of their climate-driven natural-catastrophe losses from fossil-fuel companies and account for risk reduction associated with proven climate-adaptation and resilience measures in their decisions to write and renew insurance. Another set of state-level solutions expands the focus beyond insurers, exploring ways to discourage development in areas at high risk of climate-driven disasters through land-use policy. Part II also discusses measures that would help stabilize state-created residual markets, like requiring real-estate developers to post bonds to cover expected losses and issuing catastrophe bonds to provide an alternative means of risk transfer. Throughout the discussion of these various proposals, I will identify and respond to legal and policy-based objections.

In Part III, I discuss the need for federal intervention, in the form of both a reinsurance program for state-run residual markets and subsidies enabling low-income homeowners forced to buy insurance in residual markets to afford insurance. Part III also discusses the advantages and disadvantages of a proposal to establish a federal all-risk, all-disaster property insurance scheme and concludes that the benefits of this proposal are outweighed by the harms.

To be clear, these insurance-policy solutions, while important, are only stopgaps. Unless we transition away from fossil fuels and from other greenhouse-gas-emitting industries that continue to drive up global temperatures, we will continue to march—at an increasing pace—toward an uninsurable future.

I. marching toward an uninsurable future

Three factors contribute to the growing insurance crisis globally and in the United States. First, climate change results in more severe and more frequent weather-related disasters, which damage and destroy home and business property and contribute to record insurance-company losses. Second, these losses are compounded by the rising costs of replacing or repairing homes and businesses. Finally, the increasing construction of homes and business properties in areas prone to climate-driven natural catastrophes expands insurance losses when disaster strikes. The last two factors, however, would not matter as much if the first were not true.

In response to increased losses from these three factors, insurance companies raise rates for policyholders and refuse to renew existing insurance policies or write new ones. This generates a crisis in which insurance is more expensive and less available. States like California and Florida have taken different approaches toward addressing this climate-driven insurance crisis. These recent state measures, while likely to keep some insurance available in the short run, do not address the root cause of the insurance crisis. Insurers in these states—indeed, in all states—will be overrun by the increased risk and losses resulting from rising global temperatures.

A. A Primer on the Property-Insurance Industry

With roots going back as far as ancient Babylon, property insurance as we know it developed in the seventeenth century at Lloyd’s coffeehouse in London, as a way for owners and investors in ships and their cargo to spread shipping risks and losses.14 Insurance continues to serve this function today: a financial instrument that protects against risk and loss.15 Insurance allows an individual or business to transfer the risk of a loss to someone else—an insurance company—who agrees to shoulder the burden in exchange for a payment called a premium.16 An insurance company remains profitable—collecting more in premiums and returns on investments than it pays out in claims—by pricing and spreading risk and excluding or limiting coverage for losses and risks that are so high that the insurer is likely to lose money covering them.17 Property insurance is no exception to these fundamental principles. This Section will describe several applications of these core principles of insurance that are crucial to understanding the nature of the insurance crisis and potential solutions.

Property-insurance companies use several methods to price and underwrite risk for properties, including catastrophe models. Insurers “underwrite” the risk of loss or damage to a property by writing or renewing a property-insurance policy, usually for a year’s duration, in which the insurer agrees to cover and make payments for certain losses or damage to the property up to a coverage limit and subject to exclusions and terms set forth in the insurance policy.18 Catastrophe models determine the probability and potential magnitude of losses in future years by accounting for the nature, severity, and frequency of disasters, as well as their impact on, and the vulnerability of, insured property.19 As climate change has exacerbated natural disasters, insurers have increasingly relied not just on their recent history of losses but on future projections of losses using catastrophe models.20

Insurance companies not only price risk and spread it across the pool of insureds but also transfer risk to insurers of their own.21 This insurance for insurance companies is called reinsurance.22 Direct writers of insurance purchase reinsurance from reinsurance companies, which usually operate globally, in order to transfer some of the risk they face to global capital markets.23 Reinsurance contracts often have attachment points that dictate the threshold of losses above which the reinsurer assumes responsibility to pay the direct writer of insurance to cover those losses.24 Reinsurance contracts also typically have coverage limits that cap the amount of payment from the reinsurer.25

Insurers and reinsurers also transfer risk of loss to capital markets through the issuance of “insurance linked securities” like catastrophe bonds.26 Catastrophe bonds are a type of high-risk, high-yield investment that transfers the risk of natural disasters from insurers to capital-market investors.27 If a predefined catastrophic event, like a major hurricane or earthquake, does not occur during the bond’s term, investors receive their principal back plus interest payments.28 However, if the event occurs, the investors can lose all or part of their principal, which is then used by the insurer or reinsurer who issued the catastrophe bond to help cover claims.29

When insurers pay claims, they have the right of subrogation, which exists in almost all insurance contracts and under state law.30 Insurers can sue third parties whose actions or inactions cause damage or injury to insurance policyholders, which in turn requires the insurance company to pay the policyholder’s claim.31 Subrogation enables insurers to stand in the shoes of their policyholder and bring suit against third parties to recover the insurance proceeds paid to the policyholder.32

But, as risks become certainties and losses increase substantially, the business of risk transfer (that is, insurance) can become unprofitable even with higher prices. Private-property insurers begin to stop underwriting, that is, they stop renewing existing policies and issuing new insurance policies. As homeowners and small-business property owners are unable to find insurance from traditional “admitted” private insurance companies,33 they are forced to buy insurance from the less regulated and more expensive nonadmitted “surplus lines insurers”34 or from insurance “residual markets” established by state law as insurers of last resort.35 While admitted insurers are fully licensed and regulated by the state, surplus-lines insurers are not licensed, less regulated, and will write insurance for risks or exposures that admitted carriers decline to cover, albeit with higher premiums.36

Thirty-four states and the District of Columbia have established “residual markets” to write insurance for properties that private admitted carriers refuse to write policies for.37 In most of these states, legislation establishes a Fair Access to Insurance Requirements Plan, or FAIR Plan. A FAIR plan is an involuntary association of admitted property and casualty insurers, who must participate in order to obtain and maintain a license to sell insurance in the state.38 FAIR Plans and other residual markets are usually structured so that if there is a shortfall in reserves to pay claims, the insurance-company members of the association share in making up the shortfall through an assessment collected by the FAIR Plan or residual market from insurance companies, based on their relative market share in the state.39

The implicit rationale for requiring private insurance companies to make up such shortfalls is that they are the ones determining the number of policyholders who will be forced to buy insurance through the residual market or FAIR Plan in the first place. By virtue of deciding not to renew or write insurance for certain properties, private insurers send policyholders to the residual market or FAIR Plan. States decided insurers should not be able to “cherry pick” the best risks and throw everyone else onto the FAIR Plan or other residual market, without bearing some responsibility if the FAIR Plan or other residual market runs out of money.

Florida and Louisiana are notable exceptions to the usual state-law approach requiring private insurers in the state to make up for shortfalls in FAIR Plan or residual-market reserves based on their relative market share. In these two hurricane-prone states, property-insurance policyholders in the state, including those not on the FAIR Plans, are assessed by Louisiana’s or Florida’s version of a FAIR Plan in the event their reserves are insufficient to pay claims.40 In other words, private insurers in those two states are not on the hook if the residual market—necessitated by private insurers’ refusal to write insurance—runs out of money. Insurance policyholders are.

B. The Crisis Facing the Insurance Industry

Climate change is not just tomorrow’s scourge; it is today’s reality. Climate change makes existing natural disasters more frequent and severe, and transforms previously mundane occurrences, like rainstorms, into destructive events. While climate-driven catastrophes vary in severity and frequency across the United States—with states like California, Florida, and Louisiana most at risk—there is virtually no place in the United States that is not experiencing worsening weather-related events. The resulting increase in losses has caused insurers to raise rates and stop renewing and writing insurance. Higher rates and less underwriting, in turn, make mortgages and other forms of credit less affordable or available because lenders require the borrower to have and maintain insurance. Obstacles to homeownership and higher rents as landlords pass insurance costs onto renters only exacerbate the nation’s housing crisis. Together, these trends set up the central challenge for policymakers: keep insurance available in the short term while facilitating the energy and economic transition to net-zero emissions necessary to preserve the long-term viability of insurance and housing markets.

There is strong expert consensus that global temperatures are on track to rise over two degrees Celsius above preindustrial levels, potentially by as early as 2029.41 Climate scientists warn about approaching “tipping points” that will accelerate changes in climate and related catastrophic events.42 And even if all greenhouse-gas emissions ceased today, substantial climate change has been baked into our climatic system.43 Already we are experiencing the impacts: more frequent and intense weather-related events, such as wildfires, hurricanes, tornadoes, droughts, extreme heat, river and coastal floods, and severe convective storms. These climate-driven catastrophes will kill and injure more people, damage and destroy more property, render entire geographies unlivable, undermine agricultural production, and potentially result in mass migration, to name but a few impacts.44

Climate change is also expanding losses from perils that were not historically major sources of losses. Severe convective storms accounted for at least forty-one percent of insured natural-catastrophe losses in 2025.45 Rising global temperatures result in larger amounts of water vapor in the atmosphere, which, coupled with changing weather patterns, enable “atmospheric rivers” of water vapor to stay over a particular geography for longer periods of time.46 Severe convective storms characterized by heavy rain, and sometimes with hail and wind, are landing across the United States in historically unprecedented ways.47

The effects of climate change are not limited to states like California, Louisiana, and Florida. Climate change has increased the frequency and severity of weather-related events throughout the United States. For example, wildfires are not limited to the West, but are also occurring in New England and the Southeast.48 The Gulf and Atlantic states are being hit with more intense hurricanes and wind.49 Severe convective storms are landing throughout the United States, including the Midwest, New England, the South, and the West, causing major losses.50

Another factor that exacerbates losses is the development of new homes and businesses in areas at the highest risk of climate-driven weather-related events.51 For example, between 1990 and 2010, forty-three percent of all new homes were built in wildfire-prone areas, accounting for twenty-five million residents.52 Moreover, the increased cost of replacing homes and business property only adds to the burden on insurers.53 However, the presence of more homes and businesses in areas at risk and the increased costs of replacing homes and business property would not drive insurance losses as significantly without more severe and frequent climate-driven events.

The upshot of climate change coupled with unwise development choices and rising replacement costs is increased losses for insurers. Globally, insurers had over $137 billion in weather-related natural-catastrophe losses (payments to policyholders) in 2024—significantly exceeding the ten-year average of $98 billion.54 Losses are on track to increase to $145 billion in 2025.55 Swiss Re, one of the world’s largest, oldest, and most respected reinsurers, estimates a one-in-ten probability that global insured natural-catastrophe losses could reach as high as $300 billion in 2025.56

The situation in the United States is consistent with these global trends. In the United States, insured natural-catastrophe losses are also at record levels, reaching $117 billion in 2024, which exceeds the rolling ten-year average by 52%.57 In 2024, there were twenty-seven events that resulted in over $1 billion in losses in the United States.58

Insurers respond to increased losses in two principal ways. First, they increase the price of insurance. Second, they reduce their exposure to losses by not renewing insurance policies and not writing new insurance policies. U.S. insurers do both. In the last three years alone, home-insurance premiums on average rose by twenty-four percent.59 Across the United States, insurers are not renewing home and small-business owners’ property insurance,60 and they are reducing the issuance of new insurance policies.61

The increased prices and decreased availability of property insurance place a heavy burden on homeowners and the economy at large. The Federal Reserve Bank of Dallas found that in areas where insurance prices are rising due to losses from climate-driven events, there is a corresponding increase in mortgage-payment delinquencies and defaults.62 Mortgage lenders require the borrower to maintain insurance.63 As insurance costs go up, the borrower’s ability to maintain mortgage and insurance payments decreases.64 If insurance is unaffordable or unavailable to the borrower, the lender can “force place” insurance (obtain insurance for the property and force the borrower to pay for it), which usually costs even more than traditional home insurance, leading to more defaults.65

A Federal Reserve Bank of Minneapolis survey found that owners and operators of permanently affordable multifamily housing for very low-, low-, and moderate-income households are getting squeezed by insurance price increases.66 Affordable-housing owners and operators cannot increase rents to cover higher insurance costs, increasing the potential for defaults on loans and discouraging the development of new, permanently affordable housing.67 Owners and operators of market-rate rental housing are also feeling the squeeze. As they raise rents to cover increased insurance costs, rental housing becomes even more unaffordable, exacerbating the nation’s housing crisis.68 Increased pricing of property insurance falls hardest on low-income households, who have limited or no ability to cover increased home-insurance or rent costs.69

The long-term outlook is grim. During his semiannual testimony before Congress, Federal Reserve Chairperson Jerome Powell addressed the growing issue of insurers withdrawing from regions at high risk of natural disasters. “If you fast-forward 10 or 15 years, there are going to be regions of the country where you can’t get a mortgage,” Powell said.70 He explained that “financial institutions and insurance providers are increasingly avoiding areas prone to wildfires, hurricanes,” and other climate-driven risks.71

A recent analysis of the impact of climate change on U.S. housing markets over the next twenty-five years found that homes may decrease in value by over one trillion dollars across the country.72 Increased insurance costs and decreased availability of insurance will reduce the ability to obtain a mortgage and reduce demand for housing.73 Economic losses and physical impacts from weather-related events will negatively impact local economies, which will affect employment opportunities and people’s ability to continue living in areas hit by disasters.74 Climate-related migration will reduce housing demand in these geographies, which, in turn, will further drive down housing values.75 There is potential for a runaway effect—lower property values also squeeze local-government budgets, which rely on property taxes as their primary revenue source,76 thus degrading the quality of local services and reducing the ability to service or issue debt necessary to finance local public-infrastructure projects.

The dwindling availability of mortgages and affordable housing is just one example of the systemic risk that climate change poses for the financial system, through the impact of climate-driven losses on insurers. Without insurance, households and businesses cannot recover or rebuild in the wake of more climate-driven disasters.77 But the impact is not limited to high-risk areas. As losses mount, we can expect to see more insurance-company insolvencies, more unaffordable insurance price increases, and more insurers declining to write or renew insurance, all of which will negatively impact credit availability and asset values, which, in turn, will harm the real economy.78 A recent report from the U.S. Senate Budget Committee described the economic consequences of the insurance crisis as “2008 all over again,” except with more permanent results.79

C. California’s Response to the Insurance Crisis

Insurers in California, as elsewhere in the United States, have responded to increased losses from climate-driven perils in typical fashion. California insurers incurred substantial wildfire-related losses in 2017 and 2018, nearly $12 billion in 2017 and over $13 billion in 2018.80 In response, insurers increased home-insurance prices by an average of 43.7% from 2018 through 2023.81 In the substantial areas of the state facing high wildfire risk,82 prices on average have increased far more.83

Likewise, increased losses and increased risk of losses from wildfires have resulted in increased nonrenewals of home and small-business property insurance in California.84 In 2023, major national insurance companies announced that they would stop writing insurance policies for new customers in California. They also announced that they would increase their selective nonrenewal of homes and businesses they perceived as too risky.85

One indicator of the acuity of the insurance crisis is the increase in FAIR Plan or other residual-market policyholders. Because the California FAIR Plan is an insurer of last resort, an increase in its membership indicates a lack of options in the private market.86 The California FAIR Plan had 140,000 policyholders in 2018.87 Since then, the Plan has more than tripled in size, with over 610,000 policies in force as of June 2025, 97% of which were home-insurance policies.88

But higher premiums and refusals to renew and write new insurance policies should not be automatically equated with the financial collapse of the insurance industry. For one, insurers have been able to absorb part of the impact of increased losses through subrogation claims. For example, $11 billion of the over $12 billion California insurers paid due to the 2018 Camp Fire was recovered through subrogation claims against Pacific Gas & Electric (PG&E).89 PG&E equipment started the fire, which wiped out the town of Paradise, took at least eighty-five lives, and destroyed over 18,000 structures.90 More generally, insurance rates in California were sufficient to enable the companies to make underwriting profits on home insurance annually from 2019 through 2023, as well as profits on the investment of their reserves.91

Both things are true—California property insurers made profits from underwriting and investing between 2019 and 2023, and concluded that the rising risk of severe wildfire meant that they needed to reduce their exposure to loss going forward. They thus decided to write less insurance and demanded even higher prices for the insurance they continued to renew.

California’s recent policy response to the insurance crisis includes a number of regulatory changes that will allow insurers to justify and obtain higher rates and reduce their exposure to an assessment from the California FAIR Plan when it runs out of money to pay claims.92 While these changes might lead insurers to start writing insurance again in the short run, they will be overrun in the long term by the increased risk and magnitude of loss due to climate change.

California is one of only sixteen states that require property- and casualty-insurance companies to obtain approval from the state insurance commissioner before rates can be increased.93 Insurers in those states bear the burden of justifying why the rate increase is not “excessive, inadequate or unfairly discriminatory.”94Insurers’ rates can cover their projected losses, administrative costs, profit, and reserving requirements.95 The thirty-four other states, the District of Columbia, and Puerto Rico do not regulate rates—insurers are free to set rates as they see fit, and while the rates are filed with the state department of insurance, they are not reviewed or approved before going into effect.96

Insurers asked California to amend its rate regulations to allow them to use probabilistic catastrophe models in setting the catastrophe portion of rates.97 For context, insurers in California had historically been allowed to include an additional “catastrophe” factor or “load” in their rates to reflect rare but severe catastrophe-induced losses that exceed historically typical losses.98 Insurers could also use probabilistic models to determine rate relativities, that is, adjust base premium rates in light of individual risk characteristics.99 However, insurers were not permitted to use forward-looking probabilistic models to determine the catastrophe factor in their rates and were instead required to formulate the catastrophe factor based only on historical data.100 Insurers argued that the growing risks of wildfire due to climate change warranted the use of probabilistic modeling for the catastrophe load or portion of the rate as opposed to relying on past experience.101 California’s Insurance Commissioner agreed, issuing a regulation effective in January 2025 that allows insurers to use catastrophe models to justify rate increases, with the proviso that they have to increase their insurance writing in areas of high risk.102

The next item the insurers requested was the ability to include reinsurance costs, that is, the premiums they pay for reinsurance, in their rates. Unsurprisingly, the price of reinsurance has been climbing—in fact doubling between 2018 and 2023—as reinsurers witness an increase in losses (payouts to insurance companies) for the same reason that insurers are bearing higher losses—more frequent and severe weather-related events.103 Historically, California was the only state not to allow insurers to include reinsurance premiums in their rates.104 The Department of Insurance staff reasoned that allowing insurers to increase rates based on reinsurance payouts as well as reinsurance costs would be “double dipping,” because rate increases covered not only insurers’ direct losses but also the portion of their losses covered by reinsurance.105 Moreover, reinsurance prices are not regulated,106 and Department staff were concerned that passing on unregulated reinsurance costs to consumers was contrary to the objectives of the state’s rate-regulation law.107

However, last year, in the face of insurers declining to write insurance for new customers, the California Insurance Commissioner agreed to the insurers’ request and issued a regulation allowing them to include their reinsurance costs in their rates.108

Finally, insurers asked that their exposure to an assessment from the California FAIR Plan be limited.109 Instead of shouldering the responsibility to cover FAIR Plan shortfalls, insurers wanted to shift that financial liability to all California insurance policyholders, as was done in Florida and Louisiana.110 Consistent with this request, the California Insurance Commissioner issued an order in 2024 limiting private insurers’ collective exposure to a FAIR Plan shortfall to $500 million.111 Any additional California FAIR Plan shortfall will be covered through a surcharge on all insurance policyholders—much as in Florida and Louisiana.112

With these changes going into effect at the start of 2025, insurers in California indicated they would resume writing new insurance again and write and renew some additional insurance in high-wildfire-risk areas.113

But all of these regulatory developments occurred before the wildfires that devastated portions of Los Angeles in early January 2025 and resulted in an estimated $40 billion in insured losses.114 Faced with over $4 billion in claims,115 which exceeded its reserves and reinsurance coverage,116 the California FAIR Plan asked for and received the Insurance Commissioner’s approval of a $1 billion bailout to make up the shortfall.117

Under the 2024 order, insurers will be assessed only $500 million collectively, and the remaining $500 million will be collected as a surcharge on top of their insurance premiums from all home-insurance policyholders in the state of California.118 There is a high potential for additional surcharges, since it is very likely that the California FAIR Plan will need more than $1 billion to pay claims. In June, a California state court determined that the FAIR Plan has been unlawfully limiting or denying payments for smoke damage, which will no doubt increase the payouts the FAIR Plan has to make beyond its projections when it asked for the $1 billion bailout.119Given the burdens they shift from insurance companies to California policyholders, will these recent regulatory changes ensure that insurers start writing new insurance in the wake of the Los Angeles wildfires?

State Farm—the largest insurer in California120—suggests that the answer is no. State Farm received approval for a 17% emergency rate increase in May 2025.121 The company agreed to refrain from wholesale “block” nonrenewals, but did not agree to refrain from selective nonrenewals of individual homes and small businesses.122 State Farm continues to request an additional 11% increase on top of the 17% granted in May and a 20% increase approved last year.123 Notwithstanding these rate increases, State Farm indicated that it will not be able to start writing insurance for new customers.124

On the other hand, Mercury and CSAA Insurance Group recently filed for rate increases under the new California rules and indicated that they would resume writing new policyholders, including in high-wildfire-risk areas, if granted the rate increases.125 Other insurers have said that they will wait to see if, under the new rules, they are able to get substantial rate increases sufficient to cover their projected losses, before deciding whether they will start writing new insurance again.126 Nevertheless, a recent New York Times investigation found that, despite the regulatory changes allowing for rate increases, insurance nonrenewals increased substantially and that the conditional requirement to write more insurance in high-risk areas has so many loopholes that little if any additional insurance will be written in those areas.127

D. Deregulatory Failures: Evidence from Florida and Other States

While California has modified but maintained its strong regulation of insurance rates and insurers generally, Florida has taken a very different approach to address the impact of climate change on insurance pricing and availability. Florida historically has not regulated rates and has taken a number of other recent actions to deregulate the insurance market and reduce insurance-company costs. In addition to Florida, there are thirty-three other states, one territory, and the District of Columbia that do not regulate rates.128 But their experience shows that in the long term, we are not going to deregulate our way out of the climate-change-driven insurance crisis.

Even in states where rates are unregulated and insurers are free to set rates as high as they want, losses driven by climate change are causing insurers to increase nonrenewals, stop writing new insurance, and depart markets entirely. For example, due to the increased incidence of severe convective storms, at least four insurers in Iowa stopped writing all insurance in the state in 2023.129

In 2023, insurers lost money on homeowners’ coverage in eighteen states, more than a third of the country, according to a New York Times analysis.130 That’s up from twelve states in 2019, and eight states in 2013.131 Most of those eighteen states are in the interior of the country, hit by tornadoes, derechos,132 severe storms and hail in the Midwest and Southeast,133 and wildfires in much of the West.134 And most of those states do not regulate rates.135 In response, insurers have not only raised premiums, but have also narrowed coverage, dropped customers, and withdrawn altogether. As these states show, price increases and deregulation are insufficient to prevent insurers’ nonrenewals and withdrawals.

Florida dispels any lingering notions that treating insurers’ every wish as the government’s command will ameliorate the insurance crisis in the long run. As climate change is increasing the intensity of hurricanes and other wind events in Florida over time,136 the Sunshine State has enacted everything insurers requested of California, and much more.

In Florida, home-insurance rates are deregulated and are four times the national average—and climbing.137 Florida has allowed catastrophe models to be used to set rates for decades and has developed its own state-run catastrophe model, too.138 Similarly, Florida has permitted insurers to include reinsurance costs in rates for some time.139 Florida created two taxpayer-funded reinsurance programs to offer lower-cost reinsurance to private insurers and the Florida Citizens Property Insurance Corporation (Florida Citizens), the state’s residual-market insurer of last resort.140 Still more, Florida decades ago became one of the first states, if not the first state, to eliminate private insurance companies’ responsibility to cover its residual market’s reserve shortfalls and shift that burden to all home and small-business insurance policyholders in Florida.141 Florida eliminated all of the insurers’ exposure to assessments as opposed to keeping them on the hook for $500 million, as is the case now in California.142 When Florida Citizens runs out of money to pay claims—and it has—a surcharge is placed on all Florida policyholders, on top of the premium they are paying, in the amount necessary to enable Florida Citizens to pay claims.143

Florida’s deregulatory zeal goes further than California’s in other ways, too. Florida recently enacted laws that make it substantially more difficult for aggrieved policyholders or third parties to bring lawsuits against insurance companies.144 The end result for Florida policyholders has been an increase in claim denials because insurers are emboldened by the diminished threat of lawsuits.145 Florida’s nonrenewal rate has also climbed rapidly, nearly tripling between 2018 and 2023 from 0.79% to 2.99%, the highest in the nation by over a full percentage point.146

To be fair, as of late, new Florida-based and regionally based insurers have entered Florida’s market, and existing insurers in the market are writing more insurance in Florida again.147 Likewise, the number of Florida Citizens policyholders has declined, although it is still substantially higher than California’s FAIR Plan.148 But these new companies tend to be poorly capitalized, often startup insurers that are extremely vulnerable to market shocks. For example, seven of twelve new insurers are not traditional property-insurance companies, but “reciprocal exchanges” who are only required to maintain at least $250,000 in surplus funds, as opposed to the minimum reserves of $2.5 million required of traditional insurers.149 Unsurprisingly, the number of insurers who failed the state financial-fitness test more than doubled over the past year.150

Florida’s historical approach to rating insurers’ financial condition is instructive of the long-term effects of relying on financially weak insurers. Since the 1990s, Florida has allowed insurers to use a less rigorous rating agency called Demotech to rate their financial conditions.151 While that has allowed more insurers to enter the Florida market, those insurance companies are less able to withstand major climate-driven losses.152 All seven of the Florida insurance-company insolvencies in 2021-2022 were insurers rated by Demotech.153 Indeed, nineteen percent of Demotech-rated insurers entered insolvency proceedings between 2009 and 2022.154

The upshot is that Florida is just one major hurricane away from another wave of insurance-company insolvencies, insurers pulling out of the state again, and a further rise in Florida Citizens policyholders.155 In the wake of the last major hurricane, at least nine insurance companies became insolvent and unable to pay claims.156 National insurance companies are not writing insurance in Florida, even with prices four times the national average and all of the deregulatory steps taken above: the risk of substantial losses even at the highest prices is too great.157

Florida’s experience demonstrates that price increases and deregulation are not long-term solutions to the climate-driven insurance crisis. The higher rates that will result from recent regulatory changes in California, then, may help in the short or medium term to get insurers to write more insurance in California (although, as discussed above, even that remains an open question). But rate increases and deregulation will eventually be overwhelmed by the rise in risk and increased losses driven by climate change. So, what can and should be done to help keep insurance available in the long run?

II. what can states do to keep insurance available?

There is no “magic wand” that we can wave or regulatory “dial” that we can turn to keep private insurance available in the long run in the face of increasing global temperatures. To slow or stabilize the increased losses experienced by insurers, we need to address climate change itself, which requires a major transition away from burning fossil fuels and from other greenhouse-gas-emitting sectors of the economy.158 In the meantime, however, states can take a number of steps to help keep insurance available. States should require insurers to end their financial support for the fossil-fuel industry, encourage insurers and residual markets to recover losses from major oil and gas companies through subrogation claims, and require that insurers account for property-, community-, and landscape-scale adaptation and resilience measures. States and local governments should improve building codes to require more resilient homes and businesses and limit development in high-risk areas. In particular, they should require developers of new housing subdivisions in these areas to post a bond with the residual market to cover losses in the event of a disaster. Finally, states should bolster the financial stability of residual markets by authorizing the issuance of bonds, including catastrophe bonds. This Part will discuss and defend each of these recommended steps in turn.

A. States Should Require Insurers to Transition from Insuring and Investing in the Fossil-Fuel Industry

As many scientists have noted, we need more, not less, investment in clean energy and more regulation to move us away from fossil fuels for energy production, transportation, and home and commercial heating.159 To start, insurers must stop propping up the industries that fuel their demise. Because insurers have thus far refused the call, states should require them to transition from insuring and investing in the fossil-fuel industry.

There is an important role for insurers to play in supporting the transition to a net-zero economy. Currently, insurers in the United States are investing over $500 billion in the fossil-fuel industry,160 whose emissions are creating an existential challenge for the home and business property-insurance market. Globally, twenty-eight major property and casualty insurers collect $11.3 billion annually in premiums from insuring the fossil-fuel industry.161 Insurers should end their support, through investments and insurance, for the very industry that poses a critical threat to their ability to write insurance.162 Such a move would be far from symbolic. A recent study found that insurers restricting coverage for coal enterprises contributed to a reduction in coal production and burning, with essentially no financial impact on insurers.163 Nevertheless, insurers have rejected calls to end their insurance of and investment in the fossil-fuel industry.164

It is time for the states to act. As a legal matter, states have broad authority to regulate the underwriting and investing activities of insurers, a power which has been conferred by Congress and repeatedly reaffirmed by the Supreme Court.165 States have previously enacted laws that limit which investments meet insurer capital-adequacy requirements and prohibit certain categories of investments.166 States have also prohibited certain kinds of insurance coverage.167

States should exercise this legal authority to require insurers to transition, over a reasonable period of time, away from investing in fossil fuels and writing insurance for the fossil-fuel industry.

While fossil-fuel investments often provide positive returns for investors, insurers can find other investments that also provide positive returns.168 Moreover, fossil-fuel investments do not always provide positive returns. Consider the bankruptcy of at least sixty-three U.S. coal companies169 and the decline in the Dow Jones Coal Index over time.170 The International Energy Agency projects that global demand for fossil fuels will peak in 2030 and then begin to decline.171 Wind and solar energy are now a lot cheaper than fossil fuels and are growing substantially as a source of energy globally.172

Premiums from selling insurance to fossil-fuel companies do provide revenue to some insurers, but the rise of litigation against fossil-fuel companies and the potential that courts will hold them liable for climate-related damage ought to give insurers pause.173 The premiums collected annually from fossil-fuel enterprises, while not insignificant, are not so large as to be necessary for the financial viability of insurers.174 If an oil and gas company can’t get insurance, it will have to self-insure. This means that it will have to bear the cost of the risks that insurance would typically cover, such as property damage or liability for third-party injuries. Thus, a successful lawsuit for major damages or losses contributed to by the oil and gas company could reduce its profits or even degrade its financial condition, which could reduce fossil-fuel production and emissions.

It is unlikely that these firms will be able to pass some or all of these costs onto businesses and consumers either indirectly (for example, increased price of plastic containers for businesses that sell goods in plastic containers) or directly (for example, gas price increase). The global price of oil, which largely reflects OPEC production quotas, is the number one factor in the price of gas at the pump, not the costs faced by any one oil and gas company.175 There is also the question of timing, as companies may not immediately pass on a large loss to consumers.176 In fact, a recent paper indicates a direct relationship between the magnitude of the pass-through effect and consumer awareness of increased costs, which would presumably be low when the cause is inability to procure liability insurance.177 Moreover, the cost of insurance currently is a partial measure of the annual cost of risks faced by the fossil-fuel industry. The annual premiums paid by the fossil-fuel industry are a fraction of its overall annual revenues, so having to self-insure will help internalize the costs of its activities and impact its bottom line while resulting in little if any additional pass through of costs beyond that which is already occurring.178

One final counterargument that might be raised is that insurers might cease operations in states requiring them to divest from and stop writing insurance for the fossil-fuel industry, in favor of less regulated states where they can continue to insure and invest in fossil-fuel companies. But insurers still earn profits in more regulated states like California, which, by itself, accounts for over ten percent of homeowners-insurance premiums and over thirteen percent of commercial-insurance premiums nationwide.179 As discussed above, insurers can make investments other than in fossil fuels that provide positive returns. And requiring insurers to transition from writing insurance for fossil fuels should not reduce home-insurance revenues because home insurance is written as a separate line from the general commercial insurance that covers fossil-fuel enterprises.180 Insurers therefore retain ample incentive to continue operating in states that institute this proposal.

Right now, insurance companies can maximize their profits by providing financial support to the fossil-fuel industry while denying insurance coverage to homes and businesses and passing on costs to consumers through higher rates. Increasingly, insurers can even pass along to policyholders the costs of FAIR Plan/residual-market losses that exceed reserves—that is, costs brought about by the very fossil-fuel industry that insurance companies invest in and insure. It is only fair that the state step in to prevent its residents and businesses from (literally) paying the price for the decisions of insurance companies to invest in and write insurance for the fossil-fuel industry.

B. Sue Oil and Gas Majors

Another important policy solution to help keep insurance available is to hold the major oil and gas companies accountable for their emissions’ contribution to the increased frequency and severity of weather-related disasters. All affected parties, including states and local governments, individuals, private businesses, private insurance companies, and FAIR Plans/residual markets, should exercise legal tools already at their disposal—and be given new ones—to force the oil and gas industry to internalize the costs of its emissions.181 In the short to medium term, encouraging private insurers and FAIR Plans/residual markets to pursue subrogation claims against fossil-fuel companies could help stabilize insurance markets by reducing the need to increase rates, stop writing insurance, and surcharge policyholders.

States and local governments have begun to bring lawsuits against the oil and gas majors to recover for public expenditures associated with responding to and rebuilding public infrastructure after climate-driven natural catastrophes.182 States can and should make it easier for private individuals and businesses to recover against oil and gas majors for their emissions’ contribution to climate-driven physical injury or property losses. While public-nuisance doctrine allows for claims against the oil and gas majors for their harm to the general public, state laws do not explicitly address individual physical and property damages associated with oil-and-gas-company emissions.183 In California, Senate Bill 222, introduced by Senator Scott Wiener in 2025, would create a new cause of action for private individuals and businesses to bring lawsuits against oil and gas majors who misled and deceived the public about the impact of their emissions on climate change.184 The bill would impose strict liability for property damage caused by fossil-fuel emissions by way of temperature rise and resulting weather-related events.185 While the bill did not advance this session, it is an example of how states can make it easier for private individuals and businesses to hold the oil and gas majors accountable for their emissions.186

States should also enact legislation to encourage insurers to join governments, individuals, and businesses in accountability efforts. Insurers already have the potent tool of subrogation claims,187 which they should bring against the fossil-fuel companies to recover insurance payouts associated with climate-driven, weather-related disasters. But on their own, insurers are unlikely to bring these lawsuits, given their collective investment of over half a trillion dollars in the fossil-fuel industry.188 States can insist that increasing rates and not writing insurance are not the only ways that insurers can address rising losses from climate change. In Hawaii, legislation was introduced by Senator Chris Lee to require that the Insurance Commissioner’s approval to increase the catastrophe load—the portion of the rate covering catastrophes—be conditioned on insurers agreeing to bring subrogation claims against oil and gas majors to recover losses from climate-driven natural catastrophes.189 Likewise, California’s Senate Bill 222 would encourage insurers to bring subrogation claims against oil and gas companies by reducing their assessment in the event of a FAIR Plan reserve shortfall if they bring subrogation claims.190

States can also adopt statutes requiring residual markets or FAIR Plans to consider and bring subrogation claims against oil and gas majors to recover losses from climate-driven natural disasters.191 This will reduce the pressure to increase rates or the need to assess insurers or surcharge policyholders in the event the FAIR Plan/residual market runs out of money. Existing state laws place duties on receivers appointed to oversee the liquidation of insolvent insurance companies to bring claims against third parties to recover assets or monies owed in order to enhance the ability to pay outstanding insurance claims and satisfy other legal obligations.192 Similarly, states can enact laws placing a duty on residual markets or FAIR Plans to bring subrogation claims against oil and gas majors for climate-driven losses, to help pay for claims and reduce the likelihood and amount of assessments, surcharges, and rate increases. After all, FAIR Plans/residual markets and receivership of insolvent insurers both reflect failures of the private insurance market that force state policymakers to intervene.193

Successful subrogation claims will result in oil and gas companies paying out some amount of damages to insurers and residual markets to cover part of their losses. Paying these claims could increase the cost of doing business for oil and gas companies and reduce their profits, especially if the cost is not passed wholly onto consumers. As discussed above, consumers will likely see minimal price increases because, among other reasons, the global price of oil, driven by supply and demand, is the primary factor influencing the price of gas at the pump and is likely a larger determinant of the price than the addition of a marginal cost associated with subrogation-claim payouts.194 And even if there is an increase in the price of oil and gas products, that cost is outweighed by the loss reduction for insurers and residual markets, which in turn will prevent or slow down rate increases that also land on the backs of consumers and businesses.

C. Enact State Laws to Require Insurers to Account for the Risk-Reduction Benefits of Mitigation in Their Pricing and Underwriting

There is substantial empirical and scientific evidence and a broad-based consensus that adaptation and resilience measures taken at the property, community, and landscape scale can reduce the risk and magnitude of loss from climate-driven perils.195 States should pass legislation requiring insurers to account for the risk reductions in both their pricing and underwriting models, given that insurers have largely refused to incorporate this information into their models voluntarily. Accounting for risk-reduction measures in pricing and underwriting models will incentivize their adoption, which will, in turn, reduce risk of loss, helping stabilize prices and allow for the renewal and writing of more insurance.

The Insurance Institute for Business and Home Safety (IBHS), the empirical-research arm of the property and casualty insurers, has developed a list of home-hardening measures that reduce the risk of loss of homes due to wildfire.196 These include using less combustible roofing and siding materials; protecting vents in the eaves of a home with screens to reduce ember intrusion; using heat-resistant glass for windows and doors so that the heat of the fire does not shatter the glass or door allowing embers to flow into the building; eliminating any wooded structures attached to the home such as decks, sheds, or fences that can be a conduit for the fire; and more.197 Having “defensible space” around the home, which includes clearing the first five feet of vegetation, limiting vegetation within one hundred feet from the home, and eliminating overhanging tree canopy, also reduces the risk of loss due to wildfire.198 Community-level adaptation includes keeping a distance between newly constructed homes to reduce house-to-house spread, creating fire breaks around the community, and reducing brush and vegetation in the community.199 Landscape-scale mitigation of wildfire risk includes using prescribed fire and thinning of forests and chaparral lands to reduce the fuel load and, in the forest context, eliminating “ladder fuels” like small trees and bushes, which become conduits for fire to move into the tree canopy.200

With regard to hurricanes, other wind events, and severe convective storms, the IBHS has relied on empirical testing to develop a “fortified home” standard for roofing and other elements of the home, which reduces the risk of wind, hail, and heavy rain damage and loss.201

While these measures at the property, community, and landscape scale do not guarantee that individual homes will not be damaged or destroyed by a wildfire, hurricane, or other climate-driven peril, they significantly reduce the risk of loss. Increased federal, state, local, and private expenditures and investments in property-, community-, and landscape-scale mitigation are needed to help reduce the risk of loss and, correspondingly, make it possible for insurers to keep writing insurance for areas hit by climate-change-driven catastrophes. Insurers need to do their part by taking these risk-reduction measures into account.

Both the public and private sectors are already investing substantially in landscape-scale mitigation for severe wildfires, for example. At the federal level, the bipartisan infrastructure bill enacted in the first year of the Biden Administration contained $5.1 billion for forest management and other fuel-reduction measures on federal lands across the United States.202 California has appropriated $4 billion for landscape-scale forest-fuel reduction through prescribed fire and thinning in the last few years.203 In 2024, California voters passed Proposition 4, which authorizes the sale of Climate Bonds that will raise an additional $1.5 billion for landscape-scale forest management to reduce wildfire risk.204 On the local level, cities and counties in California are taxing their residents and spending money on community- and landscape-scale fuel reduction and forest-treatment projects.205 Mitigation efforts extend to the neighborhood level, where private homeowners associations are collecting fees from their members to pay for landscape-scale forest and chaparral management projects.206

State-sponsored risk-reduction efforts are not limited to California. To assist homeowners in fortifying their homes against wind and hurricanes, a number of states on the Gulf and Atlantic coasts have enacted limited grant programs and other financial incentives to help homeowners with the cost of retrofitting their home to meet the IBHS fortified-home standard.207 In the Midwest, nature-based solutions to reduce river flood risk are also being implemented.208

While more federal, state, local, and private investments are needed for property-, community-, and landscape-scale mitigation, homeowners and businessowners who spend thousands of dollars on home hardening, HOA fees, and local, state and federal taxes for mitigation measures are justifiably frustrated when their insurer fails to account for these mitigation measures in deciding whether to write or renew them insurance.209

Insurance models used for pricing and underwriting have the technical capacity to account for property-, community-, and landscape-scale mitigation in setting a risk score for particular properties.210 However, when deciding whether to write or renew insurance, only two insurers out of hundreds in California account for mitigation in the risk-score models they use to decide whether to write or renew insurance.211

As insurers were not voluntarily accounting for risk-reduction measures in pricing, some states, like California and Alabama, adopted requirements that insurers provide homeowners with a premium discount for home hardening against wildfire (California) or wind (Alabama).212 But in these states, insurers issue discounts to homeowners for home-hardening measures yet still refuse to renew or write them insurance.213 This means that you can be eligible for a home-hardening discount, but the insurer will still not renew your policy or write you insurance, which makes the discount for mitigation effectively worthless. Thus, to properly incentivize risk-reduction measures, states will need to require that insurers incorporate property-, community-, and landscape-scale mitigation into their models when deciding to write or renew insurance.

Insurers may complain that there is not one database to which they can look to obtain information as to whether homeowners or businesses have undertaken mitigation measures. But insurance companies routinely ask current and prospective customers for information about their homes and businesses to decide whether to write insurance. Recall the list of questions you were asked the last time you shopped for new property insurance. Customers are asked the age of the home, what materials were used in construction, the age of the roof, the materials used for the roof, the number and type of rooms, whether there is a basement, crawl space or the house is on a concrete slab, how the home is heated and cooled, and more.214 Insurers can simply ask the customer if they have undertaken home hardening and, for wildfire risk, defensible space, just as they ask all sorts of other questions to collect data to input into their models or underwriting guidelines to decide whether to write insurance for the home.

Data on community- or landscape-level mitigation is also available. For example, the State of California maintains a database of the locations of forest-treatment projects to reduce the risk of wildfire,215 which insurers can access to obtain data to account for community- and landscape-scale mitigation in their modeling.

The insurance industry clearly has the technical capacity to use this readily available data to account for property-, community-, and landscape-scale mitigation in setting a risk score for particular properties. As discussed previously, the insurance industry has established empirically based standards for home hardening against wind, wildfire, hail, and heavy rain.216 Thus, there is a list of items that the insurance industry’s own research arm has developed, about which the customer can be asked, to obtain data to account for property-level mitigation in their models. Further, the availability of data and the ease of incorporating it into models dispels worries that requiring insurers to take into account property-, community-, and landscape-scale mitigation would result in substantial additional costs.

Just this year, Colorado grew tired of waiting for insurers to account for risk-reduction measures in their pricing and underwriting models, and took action. With the support of Colorado Insurance Commissioner Mike Conway, the state enacted H.B. 25-1182, which requires insurers to account for property-, community-, and landscape-scale mitigation in the computer models they use to set prices and to decide whether to write or renew insurance.217 In my view, this is the most important property-insurance law to be enacted this year (if not in several years) anywhere in the United States and should serve as a model for other states to follow.

D. States and Local Governments Should Update Building and Zoning Codes

Just as states and local governments should incentivize the adoption of mitigation measures from the bottom up by requiring insurers to account for them in their pricing models, they should leverage their authority over building and zoning codes in a top-down manner to mandate safer building practices and development patterns.

Strong building codes help reduce the risk and magnitude of loss. For example, homes in Paradise, California, built after the latest major building-code upgrade were substantially more likely to survive the firestorm than those built before.218 Conversely, in North Carolina, the state legislature delayed updates to the building codes, which resulted in more homes suffering more damage and loss than if they were built under the updated codes.219

Zoning codes can also reduce the risk and magnitude of loss. Building houses too close together, for example, can accelerate the spread of fire from home to home.220 Local zoning codes should take into account the latest science with regard to mitigating the risk of climate-driven perils in that particular geography. State laws should limit the ability to approve more low-density homes in high-risk areas.

There is no inevitable tradeoff here that will result in increased housing costs. Even in high-risk areas, states and local governments should eliminate code provisions that don’t improve resilience but add substantial costs to housing development, like requiring parking or requiring two stairwells in multistory multiunit structures.221 At the same time, state laws should also require local zoning codes to facilitate more housing in lower-risk areas, such as by allowing higher-density housing structures (duplexes, triplexes, fourplexes, and mid- and high-density multifamily structures). This would address both the short-term and long-term causes of the insurance crisis. Land-use regulations account for up to 10% of the cost of wildfire risk by limiting development and raising rents in urban cores, which results in more development in urban peripheries subject to higher wildfire risk.222 Similarly, in coastal regions, single-family zoning can limit the ability to move to nearby areas with lower flood risks.223 Relaxing these regulations would therefore prevent further migration to higher-risk areas and help people move out of harm’s way.224 It would also allow for more people to live in more compact development patterns, which reduces vehicle miles traveled and overall emissions associated with housing.225

E. States Should Curb Development in High-Risk Areas

Over time, states and local governments have approved more development in areas at high risk of loss from river flooding, coastal flooding, wildfires, hurricanes, and other climate-driven perils.226 The presence of more homes and businesses in high-risk areas has contributed to insurance-company losses.227 Instead, states should limit and discourage development in high-risk areas. One insurance-related example discussed further below would require developers of new housing subdivisions in high-risk areas to post a bond with FAIR Plans/residual markets that will be used to cover losses in the event of a natural disaster.

The rising price and declining availability of insurance in higher-risk areas sends a strong market signal that these are, in fact, areas of high risk.228 But that signal alone has not been enough to overcome homeowners’ demand for housing in these areas, which creates profits for real-estate developers and revenue for local governments. Rather than addressing the underlying cause of the problem and reducing development in high-risk areas, states require their FAIR Plans or residual markets to keep insurance available for new and existing homes built in areas at high risk of loss.229 And in the case of flood risk, the federal government created a flood-insurance product for homes and small businesses at risk of flooding, which encouraged new development in areas at high risk of flooding.230

States and local governments should enact laws to reduce or limit new development in higher-risk areas. States can map areas of high risk and limit development in those areas accordingly. It bears emphasis that decades of exclusionary land-use policy demonstrate that states and localities are adept at limiting development when they want to.231

Like with the last proposal, one objection here might be that limiting development in high-risk areas will limit housing supply in the state. If the state has a housing shortage, limiting supply through restrictions or limitations on development in high-risk areas arguably would keep housing prices higher than they should be otherwise, increase the number of rent-burdened households, and contribute to homelessness.232

However, limiting or restricting development in high-risk areas does not entail a reduction in overall housing supply. First, allowing greater density of structures on infill parcels can provide more supply without developing outward into areas of high risk.233 Second, the state can and should require local governments to allow higher-density structures throughout the state in areas that are not high risk, to increase supply of housing as needed and to offset any loss associated with restricting or limiting development in high-risk areas.234 Indeed, recent studies demonstrate that housing demand can be met nationally with more compact development at higher densities, which also provides substantial benefits in terms of greenhouse-gas-emission reductions.235

One way that states could reduce development in high-risk areas would be to require developers of new housing in high-risk areas to internalize the risks and cost of having to rebuild that housing in the event of a climate-driven event. Specifically, in high-risk areas, developers of new subdivisions should be required to post a bond with the FAIR Plan or residual market, instead of shifting the risk and cost of rebuilding to private insurers, or more likely, to the FAIR Plan or residual market. In the event of losses due to a wildfire, hurricane, or other climate-driven event, the FAIR Plan would use the bond amount to cover the losses. The bond amount should match the expected losses for the subdivision, determined according to the same models used by private insurers. Also, the determination of expected FAIR Plan or residual-market insurance losses for the subdivision should account for home hardening and other risk-reduction measures in order to incentivize risk mitigation, as described above.236

By requiring the posting of a long-term bond, the developer would be held responsible for a cost that it otherwise externalizes to the FAIR Plan or residual market, and thus ultimately to all insurers and policyholders.237 Developers may pass the cost of the bond along to prospective homeowners, but in the case of developments in high-risk areas, increased costs and reduced demand are a virtue rather than a vice. In some cases, having to take the risk of wildfire into account will mean that the development will not be economically viable, which would be a successful policy outcome.

The bond requirement should survive legal challenges arguing that it violates the Takings Clause of the U.S. Constitution.238 Under the Takings Clause, conditions on development like the bond requirement are subject to an “essential nexus” and “rough proportionality” analysis. As the U.S. Supreme Court, in Sheetz v. County of El Dorado, explained last year, the first prong requires an “essential nexus” between the permit conditions and the land-use interest, which “ensures that the government is acting to further its stated purpose, not leveraging its permitting monopoly to exact private property without paying for it.”239 The second prong demands a “rough proportionality” between the impact on the state interest and the permit conditions such that the landowner cedes only what “is necessary to mitigate harms resulting from new development.”240

Here, the “essential nexus” between the bond requirement and the state interest is clear.241 The bond accounts for “the social costs of the applicant’s proposal.”242 Development in a high-risk area will increase reliance on the state-created FAIR Plan, which will have to pay to cover damage to homes in the development. Likewise, the “rough proportionality” standard is met because the bond does not exceed the amount needed to cover future FAIR Plan insurance payouts for homes burned in the development.

F. States Should Support FAIR Plans and Residual Markets with Bond Financing

In addition to reducing high-risk development, another benefit of the previous proposal is the infusion of much-needed funds to cash-strapped FAIR plans and residual markets. To further bolster the financial stability of FAIR plans and residual markets, states should authorize them to sell bonds to cover financial shortfalls and to improve their negotiating positions with reinsurers through the issuance of catastrophe bonds.

For example, California recently enacted legislation to allow the state to sell bonds and raise funds to cover shortfalls in FAIR Plan reserves.243 While the FAIR Plan would need to repay the bonds over time, bond financing can help reduce the immediate need for the FAIR Plan to collect an assessment from insurers or a surcharge from policyholders. Although insurers and policyholders will likely need to be assessed or surcharged over time to repay the bondholders, bond financing would effectively allow for amortization of assessments and surcharges and thus reduce sudden price shocks.

States should also pass legislation to allow FAIR Plans and residual markets to issue catastrophe bonds and other insurance-linked securities as an alternative source of risk transfer. As discussed earlier, catastrophe bonds are financial instruments that allow insurers to transfer risks to capital markets through complex four-way transactions.244 In form, catastrophe bonds look like normal debt vehicles—investors purchase bonds and receive annual interest payments.245 However, if a predefined loss or risk-related trigger occurs within a certain period and losses exceed a specified attachment point, the investors forfeit their right to the principal used to purchase the bonds, which then goes to the insurer.246 If the loss or risk-related trigger does not occur within the specified period, the investors get their principal back (and keep the high interest payments).247 While catastrophe bonds require the FAIR Plan to pay interest to bondholders, they can provide competition to reinsurers and help obtain better-negotiated reinsurance pricing for the FAIR Plan.248 In fact, both California and Florida have previously issued catastrophe bonds in order to bolster residual markets for earthquake and hurricane insurance, respectively.249

III. congress should establish a federal reinsurance program and means-tested premium subsidy for fair plans and residual markets

Congress should enact a federal reinsurance program for state FAIR Plans and residual markets to help offset the cost of private reinsurance and enable access to more reinsurance. The federal government should also institute a subsidy program to enable low-income households to afford the high premiums charged by FAIR Plans/residual markets. These two measures would work in tandem to enhance the affordability of FAIR Plans/residual markets while sending accurate market signals about the risk of loss. While a federal all-risk, all-disaster insurance scheme is an alternative that would have some advantages, a narrower reinsurance and subsidy scheme for FAIR Plans/residual markets shares its advantages while avoiding some of its flaws.

Currently, FAIR Plans and residual markets turn to the private reinsurance market to cover some of their exposure to losses.250 Reinsurers have been raising rates in the face of climate change, which raises costs for FAIR Plans and residual markets and requires that they raise premium prices for their policyholders.251 As they cover homeowners and businesses with the highest risk, FAIR Plan and residual-market premiums are generally higher than the private market.252 More and more homeowners are going without home insurance as they cannot find private insurance and cannot afford FAIR Plan or residual-market insurance. Over thirteen percent of all homes in the United States are uninsured253—a substantial increase from five percent in 2019.254

A lower-cost federal reinsurance program would help FAIR Plans and residual markets offer lower prices.255 A federal reinsurance program that does not seek profits, that is exempt from state and federal taxation, and whose reserves are funded by U.S. taxpayers would be able to offer reinsurance at a lower price than private reinsurers, along with better terms such as lower attachment points and more coverage than private reinsurers are willing to take on. The lower costs and broader coverage of reinsurance would go hand-in-hand with higher availability. Namely, the federal program would help reduce the likelihood that state FAIR Plans and residual markets have to assess private insurers to make up for shortfalls, thus encouraging more private underwriting.

In addition to a federal reinsurance program, the federal government should establish a premium subsidy program for lower-income households on a sliding-scale basis to assist them in paying for FAIR Plan and residual-market insurance. FAIR Plan and residual-market rates should reflect the actual risk of loss, both to improve the likelihood that they will have sufficient funds to pay claims in the event of a disaster and to send an accurate market signal that climate change is increasing the risk of loss. Subsidizing the premium for low-income households does not artificially suppress the premium rate or the market signal associated with the rate. An income-based sliding-scale premium assistance program, much like the state and federal health-benefits exchanges under the Affordable Care Act (ACA),256 would enable lower-income households to afford FAIR Plan insurance.

A. A Federal All-Risk Disaster Insurance Scheme Would Send the Wrong Price Signal About Risk and Deepen Inequities

With the onset of the insurance crisis at the state level, there are calls for federal interventions in insurance markets that go well beyond a federal reinsurance and premium subsidy program for state FAIR Plans.257 This Section will focus on one such proposal—an all-risk, all-disaster national home and small-business property-insurance scheme. While a national all-risk, all-disaster insurance program would have some benefits, on balance, the disadvantages and poor historical performance of federal insurance programs make the reinsurance and premium-subsidy approach for FAIR Plans and residual markets a better alternative. A federal all-risk, all-disaster insurance scheme would cost much more, send the wrong price signal about climate-driven risk, supplant the private market, and be more regressive, unlike a narrower federal reinsurance and subsidy scheme.

1. Advantages

A national scheme would spread the risk of loss among all policyholders across the nation who purchase insurance from the scheme. Assuming the insurance program is risk-rated, those facing higher risks would pay more and those facing lower risks would pay less. Spreading the risk nationally, as opposed to at the state level, may help make insurance more available in smaller markets where there is less opportunity to spread risk.

The public scheme would be nonprofit, so its rates should be naturally lower than private insurers. However, underwriting profits for private property insurers can be relatively low and sometimes nonexistent, so there might not be a large comparative reduction in rate.258 On the other hand, the national-insurance scheme would not pay federal income tax or state premium taxes,259 which should further help reduce rates. And assuming that the national program is required to maintain adequate reserves to pay claims and that it can invest those reserves, the returns from the investments would not be paid as profits to shareholders or owners but rather could be added to reserves and/or used to reduce the premium price that the program needs to collect. Indeed, nonprofit-governance rules require that financial decisions further the mission of the nonprofit,260 which here would be to provide affordable property insurance to Americans in every corner of the country.

The national scheme could also include a premium subsidy for lower-income households like that provided for health insurance sold in state and federal health-benefit exchanges under the ACA.261 And, in line with the best practices described in Section II.C, a national scheme could account for property-, community-, and landscape-scale mitigation in pricing.262 This would create an incentive for homeowners, communities, and states to invest in mitigation, which would reduce the risk of loss across more properties, communities, and geographies.

The availability of the national-insurance scheme in a state could be conditioned on the state taking action to improve building and zoning codes, limit new development in high-risk areas, and invest in adaptation and resilience programs, all of which would help to reduce risk of loss for the national-insurance scheme. On the other hand, states are often resistant when the federal government tells them what to do, which raises doubt as to whether an insurance scheme enacted with such conditions could be truly national. For example, ten states still refuse to adopt the Medicaid expansion under the ACA.263

A national-insurance program would allow states to eliminate their FAIR Plans or residual markets, which would become redundant. This in turn would reduce the potential for assessments on private insurers and surcharges on policyholders in states like California and Florida. If the national scheme enjoys the full financial backing of the federal government, then it may not need to purchase reinsurance, which could further help to reduce premiums. On the other hand, it is unlikely that Congress would put the federal treasury on the hook to cover the losses of the national scheme. More likely, the national-insurance scheme would be capitalized with an initial infusion of federal funds or federal loans but then be required to set rates sufficient to maintain reserves to pay claims.264 Under this setup, purchasing private reinsurance may be a useful addition to the claims-paying capacity of the national scheme.

2. Negative Consequences

Even taking these positive elements of a national-insurance program at face value, there are a number of negative consequences that also require consideration. The historical record of national-insurance schemes is spotty, to put it mildly.

For starters, national-insurance schemes have failed to set rates based on risk, which results in underpricing. This means that insufficient premiums are collected to cover losses, demanding major taxpayer subsidies to maintain claims-paying capacity. The Federal Crop Insurance Program (FCIP), for example, does not charge farmers premiums that actually reflect the risk of loss. As a result, the FCIP is heavily subsidized by federal taxpayers.265 Similarly, the rates of the National Flood Insurance Program (NFIP) did not reflect the actual risk of loss for decades.266 In fact, the Federal Emergency Management Agency, which manages NFIP, repeatedly reduced premiums for wealthy oceanfront dwellers by redrawing maps to place them in a less risky flood zone, even when their properties had previously suffered flood losses.267 As a result, taxpayers have had to bail out the NFIP.268

Because national-insurance schemes have not set rates based on risk, they send the wrong price signal about the risks associated with the activities or property they are insuring. For example, the FCIP does not provide lower rates for regenerative agriculture practices even though there is substantial evidence that these practices reduce the risk of loss.269 And the NFIP, whose rates did not accurately reflect the risk of loss until recently at best, has incentivized more development of homes and businesses in areas at high risk of flooding.270 To be fair, as discussed earlier, private-property insurers often do not adjust their rates or underwriting to reflect risk-reduction measures.271 However, it is an entirely different matter and a much bigger problem if the rates fail to account for the likely losses from the peril (flooding) itself, as has been the case with the NFIP.

National-insurance schemes likewise do not actually “underwrite”—determine the risk of loss and decide whether to assume it—because they write the insurance regardless of the risk of loss.272 For example, with limited exceptions, the NFIP will write flood insurance regardless of the risk of flooding where homes are located.273 This eliminates an important (albeit, so far substantially ignored) signal about the risk of loss associated with developing homes and businesses in a high-risk area. Unlike private home insurance, where insurers may send an important signal about the risk of new development in an area by declining to write or renew insurance, there is no such market signal sent by the NFIP, other than its price, which historically has not reflected risk. Although FAIR Plans also write insurance regardless of the risk of loss, they are not funded by taxpayer dollars.

National-insurance schemes have been very regressive. The FCIP requires that low-income households pay federal taxes to subsidize crop insurance for large corporate owners of agricultural lands.274 And the minority of Americans who are renters are subsidizing flood insurance for the 65% of Americans who are homeowners, even though renters typically earn lower incomes and have less overall wealth than homeowners.275

National-insurance schemes have also tended to supplant the private market. While Congress created NFIP in the 1960s in response to private home insurers excluding coverage for flood insurance, it now writes about 95% of home and small-business flood insurance in the United States.276 Efforts to get private insurers to cover flood risk have failed, as the NFIP premiums, even if increasingly risk-adjusted, are still lower than the rates at which private insurers can make a profit.277 Supplanting the private insurance market means that the benefits of a private market for insurance are potentially lost, including access to risk transfer to private capital markets, innovation in developing new insurance products, risk-rated pricing, and sending market signals about risk through pricing and reduced underwriting.

There is one example of a national-insurance scheme that did not supplant the private market, but that program was narrow and limited, unlike an all-risk, all-disaster national home and small-business property-insurance scheme. In the wake of 9/11, when insurance companies stopped insuring commercial buildings in urban centers due to the risk of terrorism, Congress enacted the national Terrorism Risk Insurance Act (TRIA) and program. TRIA is a federal-insurance backstop, which kicks in to reimburse insurers for commercial-property-related claims above a certain level in the event of major losses from a major terrorist event.278 Unlike FCIP and NFIP, TRIA has worked as intended. Private insurers started underwriting commercial buildings again, bolstered by TRIA’s ability to pick up major catastrophic losses.279 But TRIA is for a specific type of loss, much narrower than the broad, guaranteed, and growing losses that would be covered under a proposed all-risk, all-disaster insurance scheme. Further, TRIA is a backstop, not an insurance program per se. In sum, TRIA does not supply evidence to counter the likelihood that a national all-risk, all-disaster insurance scheme will supplant most if not all of the private-insurance market.

A narrower federal scheme of reinsurance for private home insurers would share many of these flaws. It is likely not to be risk-rated and thus will send the wrong price signal to insurers. It is also likely to require a regressive taxpayer subsidy and a large one at that, with renters, who tend to be lower-income, subsidizing reinsurance for private home insurance.280 Further, the nonprofit reinsurance program’s ability to offer lower rates may cause it to supplant the private reinsurance market and its ability to access private capital markets to spread risk. To make up the difference, even more federal reinsurance might be required. Finally, even if there are conditions placed on states to enable insurers to access federal reinsurance, their willingness to comply with those conditions may be low.

Given the relative costs and benefits of a national scheme, the better approach is still the more targeted federal program of reinsurance for FAIR Plans/residual markets and a premium-subsidy program for low-income households who depend on FAIR Plans/residual markets. A narrower federal reinsurance program for FAIR Plans and residual markets avoids supplanting the private-insurance markets and private-reinsurance markets for private insurers. It would not send an incorrect price signal to developers and homebuyers about the risk of loss in an area, since those prices would still be set by private insurers (and approved by regulators in rate-regulated states) and FAIR Plans/residual markets. The narrower FAIR Plan reinsurance program would be far less regressive because it will require less federal funding, and will help those who are in greatest need—households who cannot obtain insurance on the private market and are forced to purchase insurance through a FAIR Plan. The progressive premium subsidy targeted to lower income households would also lessen the regressive impact.

Conclusion

The insurance crisis is driven by the climate crisis. In response to rising losses due to climate-driven events, insurers are increasing prices and decreasing the availability of insurance. Policy responses to date have focused on deregulation (Florida) or modifying existing rate regulations (California) to allow for higher rates conditioned on writing more insurance. The deregulatory approach comes at a heavy expense to policyholders, in the form of higher rates and the inability of less regulated insurers to pay claims when the next disaster strikes. Both approaches fail to address underlying causes of the losses—emissions from the fossil-fuel industry and increased development in high-risk areas.

States, localities, and the federal government should implement a number of policy responses that can help make insurance more available. These include insurer-focused measures, like requiring insurers to transition from investing in and writing insurance for the fossil-fuel industry, to bring subrogation claims to recover from oil and gas companies for their share of losses associated with their emissions, and to account for risk-reduction measures in both pricing and underwriting—the decision whether to write or renew insurance. Land-use policy interventions are also warranted. States and local governments should update building and zoning codes to reduce the risk of loss and restrict new development in high-risk areas while meeting statewide housing demand by requiring higher-density development in low-risk areas. One specific measure to reduce high-risk development would require developers in high-risk areas to post a bond with the FAIR Plan or residual market to cover expected losses, which would have the added benefit of providing financial support to beleaguered FAIR Plans and residual markets. States should further shore up the finances of FAIR Plans and residual markets by allowing them to issue bonds, including catastrophe bonds.

The federal government must also take action to address the nationwide insurance crisis, while learning from the mistakes of its previous interventions in private insurance markets. Rather than establishing a federal all-risk all-disaster insurance or reinsurance program, Congress should enact a narrower federal reinsurance program for FAIR Plans and residual markets and a means-tested premium subsidy for low-income households forced to buy insurance through the FAIR Plan or residual market.

But in the long run, these stopgaps will be outrun by the growing risk and magnitude of losses from climate change. To preserve an insurable future, we need to transition from burning fossil fuels and from other greenhouse gas-emitting sectors. Otherwise, the insurance “canary in the coal mine” will sing no more.

Dave Jones is the Director, Climate Risk Initiative, Center for Law, Energy & the Environment (CLEE), UC Berkeley School of Law. The author wishes to acknowledge and thank Lead Editor Kishore Chundi, Executive Forum Editor Gabriel Klapholz, Managing Editors Matthew Beattie-Callahan and Ako Ndefo-Haven, and Editor-in-Chief Jeremy Thomas for their excellent editorial suggestions and contributions to the Essay.