Elias van Emmerick, JD ’25, University of Chicago Law School

Global warming has increased the frequency of extreme weather events significantly in recent history. The number of major climate disasters roughly doubled globally from 1980-1999 to 2000-2019.[1] In the United States, this has caused significant property damage. In 2021, one in ten homes suffered some climate-related damage.[2] These costs are not evenly distributed across geographies. California, Texas, Louisiana, and Florida incur significantly more environmental damage than do other states,[3] because their location makes them particularly vulnerable to a changing climate.

Home insurance companies have taken notice. In 2023, State Farm and Allstate, two of the largest home insurance companies in California, announced they would end operations in the state due to the increased risks of natural disasters. Later in the year, a number of smaller insurers followed suit.[4] In Florida, some companies have left the market, and others have significantly raised premiums. Average home insurance premiums in the state have tripled in the past five years.[5] As a result, some areas have become wholly unaffordable to insure. If we are to take climate change seriously, we must see this progression as inevitable. Development in some areas—be it the Florida coast, or the Santa Clarita Hills, is both harmful to the environment and simply no longer realistic under today’s climate conditions.

Alas, intense pressure from constituents has pushed governments to become insurers of last resort. The Federal Government has run its National Flood Insurance Program for more than fifty years. California has its FAIR plan, meant to “provide basic fire insurance coverage for high-rish properties when traditional insurance companies will not.”[6] Florida’s state-backed Citizens Property Insurance (meant to be an insurance of last resort) is now the state’s largest home insurer.[7] There is no issue with state-provided insurance generally. In this context, however, these publicly funded plans create perverse incentives for homeowners to settle in zones that we know will become increasingly uninhabitable.

State-subsidized insurance plans distort the actual cost of living in areas affected by climate change. They artificially lower the cost of climate risk, and thereby impair individuals’ ability to accurately choose where they want to live. For current residents, state-sponsored plans reduce the incentive to move to safer, more sustainable areas.[8] Where new residents enter endangered housing markets, they “lock in” a need for continued provision of home insurance. Since we can expect climate events to become more impactful over time, that lock-in effect basically guarantees that governments will be on the hook for ballooning costs in the future.

The fact that private insurers pulled out of these markets signals that it is no longer profitable to provide insurance there, at least not at any reasonable premium. That in turn means that state insurance plans are losing money on providing insurance—losses that have to be made up for with public funds. The National Flood Insurance Plan, for example, loses between $400 million and $10 billion annually.[9] In all likelihood, these losses will trend upward over the coming years.[10] Taxpayers everywhere will need to subsidize inefficient housing choices in a select few areas for ever larger amounts. This is a classic example of moral hazard: Residents on the Gulf Coast or near wildfire hotspots in California remain there for longer because they know they won’t need to bear the full costs of the environmental risks they are incurring.

There is no sense in a state policy of promoting unwise and unsustainable housing choices. The billions spent on insuring homes that will only be damaged again and again could instead go to relocation assistance, affordable housing development, and climate mitigation measures. Such policies would reduce future cost obligations on the part of the state—our current policy all but guarantees that such insurance plans will eat up an increasingly large portion of public budgets.

I do not believe we need the state to be an insurer of last resort. The sooner we extricate ourselves from that responsibility, the better. At the same time, millions of people today depend on state-sponsored home insurance of some sort.[11] Ending insurance programs would leave them with no alternative options. As such, I believe a gradual phase-out, rather than a full stop, is advisable. If we can end the underwriting of new policies, at least, we could realign incentives to promote more sustainable living environments.

[1] Mami Mizutori & Debarati Guha-Sapir, Human cost of disasters 6, UNDRR (2019), https://www.preventionweb.net/files/74124_humancostofdisasters20002019reportu.pdf.

[2] U.S. Dept. of the Treasury, The Impact of Climate Change on American Household Finances 6, https://home.treasury.gov/system/files/136/Climate_Change_Household_Finances.pdf.

[3] Nat’l Centers for Environmental Information, Disaster Cost and Frequency, https://www.ncei.noaa.gov/access/billions/mapping.

[4] Clare Fonstein, Home insurance exodus: Another key insurer leaves California, S.F. Chronicle (Nov. 7, 2023), https://www.sfchronicle.com/california/article/insurance-farmers-18472404.php.

[5] Deborah Acosta, Home Insurance Is So High in This Florida Town, Residents Are Leaving, Wall St. J. (Oct. 17, 2023), https://www.wsj.com/real-estate/home-insurance-is-so-high-in-this-florida-town-residents-are-leaving-bb00c96f.

[6] California Fair Plan Property Insurance, https://www.cfpnet.com/ (last accessed Nov. 18, 2023).

[7] Saijel Kishan, Florida’s ‘Last Resort’ Property Insurer Is Now State’s Biggest, Bloomberg (Aug. 10, 2023), https://www.bloomberg.com/news/articles/2023-08-10/hurricane-season-2023-florida-s-biggest-property-insurer-is-nonprofit-citizens?sref=iRPGYJiK#xj4y7vzkg.

[8] Ishita Shen, “How distorted insurance pricing obscures customers’ climate risks,” Fin. Times (Jul. 5, 2023), https://perma.cc/N3VG-9USK.

[9] Federal Emergency Management Agency, NFIP Debt (Nov. 4, 2022), https://perma.cc/5TA9-LP6B.

[10] Michael K. McShane & Juita-Elena Yusuf, “Toward Better Management of Flood Losses: Flood Insurance in a Wetter World,” 24 Pub. Works Mgmt. & Pol’y 88, 92 (2019).

[11] See Camille Von Kaenel, Last-ditch wildfire insurer in California sees 21% enrollment hike, Politico (Nov. 2, 2023), https://perma.cc/AQ4D-RFSG (“Enrollment in the FAIR Plan has grown 21 percent since the beginning of the year to 330,100 policies.”); Congressional Research Service, A Brief Introduction to the National Flood Insurance Program: Homeland Security Issues in the 116th Congress (Oct. 8, 2019), https://crsreports.congress.gov/product/pdf/IN/IN11049/6#:~:text=Over%2022%2C000%20communities%20participate%20in,over%20%241.3%20trillion%20in%20coverage (showing more than 5 million NFIP policies).