Collapse of the U.S. Home Insurance System

One of the early warning signs of economic collapse caused by climate change is the retreat of the insurance industry.

Collapse of the U.S. Home Insurance System
Photo by Kelly Sikkema / Unsplash

One of the early warning signs of economic collapse caused by climate change is the retreat of the insurance industry.

As mundane as it sounds, the ability to insure housing helps to facilitate mortgage lending and the middle class lifestyle. Without insurance, home ownership would be a gamble for both mortgage lenders and borrowers and the real estate market would seize.

Moreover, existing individual homeowners with canceled insurance would be at risk of financial devastation, in the event of a fire or flood.

Unfortunately, this is becoming a reality today.

With increasing natural disasters, insuring property in some areas has become unfeasible. Once a property becomes uninsurable, it's value effectively plummets to zero, as it cannot be sold to anyone requiring a mortgage.

@CollapseSN sums it up nicely:

No insurance = no mortgage. No mortgage = few people can buy a house. Nobody buying houses = housing market collapse.

But the effects aren't limited to disaster-prone areas. To offset losses and in anticipation of spreading disasters, house insurers are jacking up prices for all home owners.

In a recent episode of "The Daily," Sabrina Tavernise, a journalist from "The New York Times," interviewed Christopher Flavelle, an investigative reporter researching how climate change risks collapsing the home insurance market.

Key Excerpts from the Interview

Government Role in Insurance:

"The government already provides flood insurance because for decades, most private insurers have not wanted to cover flood. But that change, with governments taking over that role, creates a new problem of its own because the government providing flood insurance that you otherwise couldn’t get means people have been building and building in flood-prone areas because they know they can get that guaranteed flood insurance."

Anecdotal Evidence of Housing Market Impact:

"Anecdotally, we’ve got reports that in places like Florida and Louisiana and maybe in parts of California, the difficulty of getting insurance, the crazy high cost of insurance is starting to depress demand because not everyone can afford to pay these really high costs, even if they have insurance."

Economic Ripple Effects:

"Getting insurance for a home is crucial if you want to sell or buy a home. Most people can’t buy a home without a mortgage. And banks won’t issue a mortgage without home insurance. So if you’ve got a home that insurance company doesn’t want to cover, you got a real problem."

Impact of Minor Weather Events:

"Formally unimportant weather events, like hailstorms or windstorms, didn’t used to be the kind of thing that would scare insurance companies. But those are becoming so frequent and so much more intense that they can cause existential threats for insurance companies."

Potential Solutions and Challenges:

"The fix that people seem most hopeful about is this idea that, what if you could reduce the risk and cause there to be less damage in the first place? The problem is, number one, hardening a home costs a fantastic amount of money. Number two, it takes a long time to actually get enough homes hardened in this way that you can make a real dent for insurance companies."

Insurance Premium Hikes and Coverage Issues:

"Some people had faced big premium hikes... Some people had gotten dropped... Some people couldn’t get the coverage they needed. But it was versions of the same tale, which is all of a sudden, having homeowner’s insurance in Marshalltown was really difficult."

Insurance Challenges in Iowa:

"When I drove through, I couldn’t help noticing all the roofs looked new. Turns out Marshalltown, despite being a pastoral image of Midwestern easy living, was hit by two really bad disasters in recent years — first, a devastating tornado in 2018 and then, in 2020, what’s called a derecho, a straight-line wind event that’s also just enormously damaging."

On Unexpected Areas Facing Climate Shocks:

"One of the really striking things about this data was it showed the contagion had spread to places that I wouldn’t have thought of as especially prone to climate shocks — for example, a lot of the Midwest, a lot of the Southeast. In fact, if you think of a map of the country, there was no state between Pennsylvania and the Dakotas that didn’t lose money on homeowner’s insurance last year."

Christopher Flavelle on the Spread of Insurance Market Turmoil:

"This market turmoil that we were seeing in Florida and California has indeed been spreading across the country. In 18 states, last year, the homeowner’s insurance market lost money. And that’s a big jump from 5 or 10 years ago and spells real trouble for insurance and for homeowners and for almost every part of the economy."

Is This the End of Insurance?

"I think it’s fair to say that we’re looking at the end of insurance as we know it, the end of insurance that means most Americans can rest assured that if they get hit by a disaster, their insurance company will provide enough money they can rebuild. That idea might be going away. And what it shows is maybe the threat of climate change isn’t quite what we thought.
Maybe instead of climate change wrecking communities in the form of a big storm or a wildfire or a flood, maybe even before those things happen, climate change can wreck communities by something as seemingly mundane and even boring as insurance. Maybe the harbinger of doom is not a giant storm but an anodyne letter from your insurance company, saying, we’re sorry to inform you we can no longer cover your home."

Listen to the full interview: