Insuring the Future of Our Communities
By Matt Horton and Anne Bovaird Nevins
At the national level, the total cost of natural disasters across the United States is staggering – and it is increasing rapidly with the impacts of climate change. Addressing the far-reaching local impacts of this global crisis will require new municipal and state approaches to insuring the future of our communities.
Rising Cost and Increasing Frequency of Disasters Across the U.S.
The National Centers for Environmental Information (NCEI) reports that from 2014 to 2023, disasters causing at least $1 billion in damage had a total cost of over $1.2 trillion. During the last five years, the average annual cost was more than $120 billion, more than double the average annual cost over the previous 44 years. Even these figures underestimate the total cost of weather- and climate-related disasters in the U.S. because they include only those billion-dollar damage events, which are occurring more frequently.
In 2023, the NCEI reported that the U.S. experienced 28 confirmed weather/climate disaster events with losses of more than $1 billion, with the majority of those being severe storm events. The NCEI further notes that the average number of events from the period from 1980 to 2023 was 8.5 per year whereas the average for the most recent five years was 20.4. The direct and indirect impacts of these disaster events are felt in local communities all across the country.
The federal Office of Management and Budget (OMB) undertook a comprehensive analysis of the federal government’s climate-risk exposure, which concluded that the “Federal Government’s budget is directly and substantially at risk from expected lost revenues and increasing expenditures due to climate change damages in coming decades, such as increasing costs from physical damages to our nation’s infrastructure and healthcare expenditures, the instability of certain subsidized insurance programs, and accelerating instability that threatens global security.” The report also noted that the full risk to American taxpayers has not yet been quantified, and that socially vulnerable populations and minority communities experience the greatest harm from the impacts of climate-induced disasters. While the report focuses on important national and federal implications, it is also clear that U.S. cities, their local leaders, and their most vulnerable citizens are on the front-lines of this global crisis.'
The federal government has begun to implement a number of measures to address the climate crisis, including investing in clean energy and infrastructure designed to reduce greenhouse gas emissions. These measures are expected to help reduce the number and severity of climate-induced disasters, thus mitigating risk and saving money, in the long run. Yet in the short term, moving toward implementation of these measures often requires more up-front investment in project readiness than many communities actually have in place. Securing the available funding can involve navigating myriad complex grant applications or tax credit incentives. Additionally, some of the emerging technological solutions required to meaningfully address climate mitigation are still years out of reach for local communities based on factors such as availability at scale and cost.
Local Impacts on Housing Markets and Municipal Budgets
Local leaders are already feeling the impact of climate change on local real estate markets, including challenges for municipal budgets as well as individual homeowners and renters. As the authors of a new study on the municipal fiscal impact of sea-level rise in Florida point out, “Communities can adapt to some of these effects, or at least buy time, by taking steps such as upgrading stormwater systems and raising roads and sidewalks. But climate disasters and sea-level rise also harm local governments financially by increasing costs and undercutting their property tax bases. Local reliance on property taxes also can discourage cities from steering development out of flood zones, which is essential for reducing long-term risks.”
The study, Can Florida’s Coast Survive Its Reliance on Development?, highlights the reliance of local governments on property taxes to fund general operations, as well as critical services like public education, and the threat to those local revenues posed by climate change. In addition to the revenue-side impacts, the report also noted the increase in costs to provide municipal services such as water and sewer or road maintenance, due to the impacts of climate-induced disasters and sea-level rise. The analysis determined that five million Florida residents live in municipalities where at least 10% of local revenues are generated by properties that are “at risk of chronic and permanent flooding,” and there are 64 municipalities across the state that rely on at least half of their revenues from those properties.
Given the importance of functioning housing markets and the heavy reliance of many local communities and school districts on property taxes to fund critical services, another major consideration is the rapidly rising uncertainty in the availability and cost of insurance due to the unmitigated risk of catastrophic loss. Already, homeowners in cities from Florida to California are experiencing massive insurance price increases or policies not being renewed at all. A new report by First Street Foundation, a non-profit research and technology group dedicated to defining, quantifying, and communicating climate risk in the U.S., clearly shows the scale of the problem and its potential impacts in communities across the country. Their Insurance Issue report concludes that there is a “growing issue concerning the cost, affordability, and general insurability of many locations across the country due to the increasing risk of exposure to climate hazards.”
First Street Foundation’s modeling showed that the growing risk of wildfires, wind, and flood are putting millions of properties at risk of rising rates and/or non-renewal of insurance, and that these climate-induced risks have not yet been fully priced into the real estate market. For example, one zip code in Santa Clara, CA had 2,877 properties where the insurer initiated a non-renewal from 2015 through 2021, representing 87% of the total number of properties in that zip code. Local housing markets that are already unattainable for many residents based on purchase price will be pushed further out of reach for both new and existing homeowners due to the rising cost of insurance - assuming these properties are insurable at all. The correction of this new type of housing “bubble” and the potential for substantial loss of value for millions of homes could have drastic consequences for both individual homeowners and local governments that rely on property taxes to fund critical services.
Growing Uncertainty in the Insurance Market
It should come as no surprise that providers across the country and the insurance industry in general are questioning their ability to operate in certain markets. On March 20, 2024, State Farm Group, the largest property and casualty insurance companies in the United States, announced that it would not renew 72,000 residential and commercial apartment policies in the state of California. This followed earlier announcements by State Farm and Allstate that they would stop accepting new applications for homeowners insurance in that state. Does this crisis in the insurance industry, as further described by The Atlantic in What Your Insurer Is Trying to Tell You About Climate Change, represent our collective canary in the coal mine – emblematic of our systemic sluggishness to plan long term for catastrophic loss?
Fair Access to Insurance Requirement (FAIR) plans, mandated by many U.S. states, provide property insurance coverage to those who cannot obtain other private insurance, acting as an “insurer of last resort” and offering a basic level of coverage for higher-risk properties. These plans are growing in importance in states where private insurers have either stopped providing coverage entirely or only offer limited coverage. For example, Citizens Property Insurance Group currently holds 18% of Florida’s insurance market, growing rapidly from just over 440,000 policies in 2020 to more than 1.2 million policies at the end of 2023. In US Home Insurance ‘Bubble’ Closer to Popping as Climate Risks Mount, Bloomberg quoted Matthew Eby, Executive Director of First Street Foundation, stating “The over-reliance of property owners on the state-run insurers of last resort is a big flashing sign that standard practices in the insurance market cannot keep up with our current climate reality.” Another study, “Can Florida’’s Coast Survive its Reliance on Development?”, also noted this risk:“a growing number of insurance companies have decided to stop covering some regions and types of weather events, raise premiums and deductibles and drop existing policies as payouts rise in the wake of natural disasters.”
Pathways to Insuring the Future of Our Communities
While the climate crisis is global and national, its impacts are local, and one of its victims is the core tax bases of communities. The solutions to insuring our future will require state and local intervention and participation alongside federal partners.
Role of States in the Reinsurance Market
Reinsurance is commonly referred to as “insurance for insurance companies.” When property insurers buy reinsurance, either in the private market or through government-backed programs, they are offloading a portion of the risk of providing coverage to consumers. However, the cost of reinsurance is ultimately passed through to those customers in their premiums.
The right approach to reinsurance for a particular state will depend on its specific circumstances. States should consider the following factors when developing dedicated fund or reinsurance programs to address the insurance coverage gaps and needs of its residents.
The size and severity of the risks the state faces: States with higher exposure to climate-induced catastrophic loss will need to have a larger and more robust reinsurance program.
The availability of funding options: States with limited budget resources may need to consider alternative funding mechanisms, such as catastrophe bonds or insurance-linked securities.
The potential impact on consumers: States need to be mindful of the potential impact of a reinsurance program on consumers, including evaluating the needs of specific populations such as seniors living on a fixed income. For example, if the program leads to higher insurance premiums, states may need to take further steps to mitigate this impact by incentivizing more sustainable community design or designing insurability safeguards (tiers) into its building codes. The Insurance Institute for Business & Home Safety, an insurance industry-funded nonprofit research organization, has developed sets of building standards designed to withstand natural disasters from hurricanes to fire that some states and localities are beginning to adopt.
Reinsurance and Fund Models at the State Level
Some current and specific examples of how states are approaching reinsurance programs include:
New York: New York State has an emergency assistance fund for qualifying homeowners to mitigate recent historic flood damage. Assistance from the program grants up to $50,000 to homeowners below 80% AMI.
Florida: Florida has a reinsurance program called the Florida Hurricane Catastrophe Fund (FHCF). FHCF is a tax-exempt state trust fund that provides reimbursements to residential property insurance companies for a portion of their catastrophic hurricane losses in Florida. The FHCF is funded primarily through residential property insurance premiums and investment income, and participation is mandatory for all residential property insurers operating in the state. Additionally, the My Safe Florida Home Program provides free wind mitigation home inspections to owners of single family residential homes to identify improvements to mitigate against future wind damages, as well as wind mitigation grant awards to implement improvements. The program has been oversubscribed and was recently re-authorized by the Florida State Legislature for an additional $176 million to fund existing grant applicants by appropriating nonrecurring funds from General Revenue into the program.
California: California has a reinsurance program called the California Earthquake Authority (CEA). The CEA is funded through assessments on property owners and insurance premiums. The CEA is backed by 22 participating insurance companies and has about $19 billion in claim-paying capacity.
Local Strategies to Build Resilience and Community Insurability
By carefully considering the risks and potential for loss that certain communities must grapple with, local jurisdictions can couple risk containment initiatives with economic development strategies. The end goal will be to offer more affordable and resilient options for residents.
Local communities may need to step into the insurance marketplace as a first-loss funder of reinsurance programs to mitigate risk and provide a backstop against potential climate-induced catastrophic loss, as well as taking proactive steps to build more resilient communities through physical development and redevelopment policies under the purview of local governments and land use authorities. Some approaches include:
Adopt a Resilient Asset Management Framework: Empower local leaders, like city/county CFOs, to integrate local capital improvement planning with a resilient risk assessment and hazard prevention approach to evaluate the likelihood and potential impact of potential hazards on critical infrastructure, public facilities, residential and commercial buildings, and other community assets. Localities should strategically prioritize assets based on their importance, vulnerability, and potential consequences of failure or damage. This framework is designed to allow cities to prioritize funding allocations to projects that address identified vulnerabilities, such as upgrading aging infrastructure, implementing flood control measures, or reinforcing critical facilities while facilitating resilient growth. This long-term and comprehensive approach would also incorporate ongoing maintenance, monitoring, emergency preparedness and response and continuous improvements, as well as extensive community and stakeholder outreach and education on risks and mitigation strategies. Accelerator for America recently published a case story on Hoboken, NJ’s ‘ResilientCity Park’ project that highlights the power of coordinated planning and project prioritization with funding partners.
Sustainable Building Codes and Standards: Resilient-designed communities and infrastructure can effectively mitigate disasters and contain risk. Local communities and developers can put in place building codes and design standards for new construction and renovations to address specific risks related to hurricanes, flooding, fires, and other hazards. Communities should also consider measures such as seismic retrofitting, flood mitigation, wildfire-resistant building materials, redundancy in critical systems, and the potential relocation or reinforcement of assets in higher-risk areas. One recent example is Babcock Ranch – an innovative community north of Fort Myers, Florida that demonstrated strong resilience during Hurricane Ian in 2022. Other coastal communities, such as Mobile, Alabama, have adopted requirements based on insurance industry-backed standards, with the state offering financial incentives and requiring insurers to offer discounts to customers that meet the standards. Capital planning for and investment in resilient infrastructure, particularly in high-growth communities, can ultimately improve community ratings from the insurance industry by mitigating the risks that insurers are grappling with, leading to lower costs for residents.
Industry Leadership and Fostering Innovation: Many of the communities most impacted by the effects of climate change are looking for ways to grow industries, jobs, and technological advances that can be at the forefront of resilience solutions. For example, Finance New Orleans has partnered with Elemental Excelerator to launch an innovation challenge around deploying climate technologies in single-family homes in one of the most climate-impacted communities in the country. A recent opinion piece for the Tampa Bay Times proposed for that region to take proactive steps to attract property insurance companies and related firms and technology providers to drive both innovative solutions to the insurance challenge and industry and job growth.
Pursue Options and Partnerships for Reinsurance and Dedicated Funds: Local governments could create a dedicated fund to finance a reinsurance program, which could be funded through a variety of sources, such as general tax revenue, insurance premiums, or assessments on property owners. Local leaders could also finance a reinsurance program through alternative risk transfer mechanisms, such as catastrophe bonds or insurance-linked securities; these mechanisms allow the transfer of some of the risk of catastrophic losses to investors. Partnerships with the private sector may also be necessary to finance these reinsurance programs, such as working with reinsurers to develop a program that reduces the exposure to catastrophic losses. Local jurisdictions can create special programs designed to mitigate and contain specific climate-related risks (e.g., for flood damage) by designing specific tax districts to address catastrophic loss.
Leverage Current Federal Funding for Implementation: All of the solutions outlined above require substantial resources. Localities should partner with their state governments to proactively pursue new federal funding programs to support the implementation of these and other measures to increase community resilience and address risks that impact a community’s insurability for homeowners, renters, and business owners. FEMA’s $500 million Safeguarding Tomorrow through Ongoing Risk Mitigation Revolving Loan Fund program provides funding to entities to establish a revolving loan fund for local governments to complete hazard mitigation projects and activities that will reduce risks from natural hazards for homeowners, businesses, nonprofit organizations, and communities. The Department of Energy’s $90 million Resilient and Efficient Codes Implementation program supports “building energy code adoption, training, and technical assistance” among state, Tribal, and local governments to improve energy efficiency and resilience and to meet climate objectives.
As federal spending and state and local budgets become increasingly constrained by the growing cost of disaster relief, the pressure on leaders at all levels to devise solutions to meet these global challenges will mount. As one AFA city leader put it, “This is too big to fail.”
This growing spotlight on the dynamics of the insurance market may be unfamiliar territory to many city leaders. However, local leaders who are closest to experiencing and understanding the impacts on the ground are also well situated to find and develop new solutions tailored to the local climate risks that impact insurability while protecting their tax base. The time is now for mayors and local leaders to embrace new models that pair risk containment strategies with local economic and community development priorities to create the resilient, sustainable future in which we all hope to live.