An Insurance Crisis Compounded by Climate Change Threatens the Broader U.S. Economy

One expert speaking at a forum on insurance and housing says climate change could soon mark a “death spiral” for the financial industry in parts of the country.

A trifecta of crises—accelerating climate change, a scarcity of affordable housing and escalating insurance rates—are threatening the one place where people usually feel secure: their homes.

“The cost of property insurance was a topic most people ignored, but it’s now a kitchen table economic issue for many families, and a risk factor for the housing market,” said Sarah Edelman, former deputy assistant secretary for single family housing at the U.S. Department of Housing and Urban Development. 

Edelman was among five climate financial risk experts who spoke to reporters Thursday about the unsustainable pace of insurance costs—costs that will likely continue to increase as climate change-fueled disasters become more frequent and intense.

Last December, the U.S. Treasury’s Federal Insurance Office issued a report which found that from 2018 through 2022, the annual number of major disaster declarations for climate-related events was almost double the annual average in the 50 years from 1960 to 2010. 

Over the same time period, home insurance rates outpaced inflation by nearly 9 percent—even before Hurricanes Helene and Milton, Appalachian flooding in Kentucky and the most recent western wildfires.

In the first three quarters of 2024, natural catastrophes caused the United States to suffer an estimated $145 billion in economic losses, of which nearly $80 billion was insured, according to the report.

“The effects of these rising costs have cascading impacts across the housing ecosystem,” Edelman said.

Current homeowners are more likely to become delinquent on their mortgages after an insurance premium increase. Prospective buyers can’t find or afford homes. Developers can’t bring new units to market. And operating costs for landlords can reach an unsustainable level, Edelman said, with effects trickling down to real estate agents, the lenders, mortgage services—the entire housing ecosystem.

Insurers are not transparent about what data they use to justify raising rates. And when rates become unaffordable, people often turn to “insurers who are fly-by-night operators or are very small and will go bankrupt the next time there is a major event,” said Rachel Cleetus, senior policy director at the Union of Concerned Scientists. “And they just leave property owners high and dry.” 

Compounded by climate change, the insurance crisis could destabilize the entire financial system, said Anne Perrault, senior policy counsel for the Climate Program at Public Citizen. ”In some ways, it’s just the beginning of a death spiral for some regions of our country.”

Insurers take the first hit, but pass those costs to homeowners, who fall deeper into debt and become delinquent on their mortgage. In some disaster-prone areas, people won’t have access to mortgages and other credit, Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee in March.

“That’s stunning,” Perrault said.

The insurance industry, in particular, has been slow to respond to the climate crisis, Cleetus said, but quick to raise rates far beyond what many people can afford. 

“One of the ways this crisis points out is how myopic the market has been about the growing risks of climate change,” Cleetus said. “Scientists have been telling us for decades that as emissions rise, we will see these really sharp increases in extreme climate-fueled disasters. And unfortunately, the market is still operating with a very short time horizon. Even the rate increases we’re seeing now, the double digit rate increases that others on the call have mentioned, are still looking ahead in a very short period of time.” 

Some homeowners will simply forego insurance, especially if they are no longer required to have it as the result of having a mortgage. “People place a lot of value, besides economic value, on where they live, and a lot of people don’t have the resources to move anyway,” said Alex Martin, policy director at Climate and Finance at Americans for Financial Reform. “People aren’t able to afford the cost increases that are coming right now. And if they can’t do that, just raising rates continuously will not be a holistic solution.”

Insurance costs are only one part of the climate crisis. After disasters, the homes could be more expensive to repair or rebuild. Earlier this year, at a public meeting in Asheville, Stephanie McGarrah, North Carolina’s deputy secretary for the Division of Community Revitalization, estimated that 74,000 homes were damaged in Hurricane Helene and an additional 11,000 were destroyed. But federal disaster recovery funding is expected to cover the cost of rebuilding or repairing only 3,500 homes, McGarrah said. 

As part of North Carolina’s $1.4 billion federal disaster recovery package from the U.S. Department of Housing and Urban Development, $807 million is allocated to rebuilding and repairing owner-occupied houses, including those in precarious mountain terrain. Even if the houses can be built more cheaply—at $160,000 per house—the money would cover only 5,000 of them.

Other moves by the Trump administration will make it more difficult for local and state governments to mitigate against future disasters, which otherwise could lower insurance costs. 

The Trump administration recently slashed jobs at the U.S. Forest Service, which fights fires and manages debris, and eliminated the FEMA Building Resilient Infrastructure and Communities program. Also known as BRIC, it funds improvements for wastewater and water treatment plants, building elevations and backup power systems to help communities survive floods.

Without resiliency measures, local and state governments, as well as homeowners, will pay higher insurance rates to try to offset the risk.

“Raising insurance rates to deal with this isn’t going to fix this problem,” Perrault said. “Banks have limits. Municipalities have limits. Ultimately, this is about our Earth’s capacity, the limits in our capacity to assimilate greenhouse gas emissions. We must also make sure that fossil fuel companies, lenders and insurers financing them assume their share of the cost and risk created by greenhouse gas emissions. Ultimately, we need to reduce these emissions for our financial system and communities to survive and thrive.”

Cover photo:  A family salvages belongings in the aftermath of Hurricane Helene on Sept. 30, 2024, in Old Fort, N.C. Credit: Melissa Sue Gerrits/Getty Images