Disaster Insurance for All: Our Proposal for Reforming Property Insurance

This article is part of The Rooftop, a blog and multimedia series from New America’s Future of Land and Housing program. Featuring insights from experts across diverse fields, the series is a home for bold ideas to improve housing in the United States and globally.

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Insurance has long been a silent bedrock of housing in the US. It has protected many of us from financial ruin when disasters strike, but otherwise we have rarely thought about it. Today, however, insurance has become a front-of-mind expense and headache for many households and a deal-breaker cost for many multifamily building managers as premium prices skyrocket, coverage options shrink, and claims require months-long fights for payouts.

Insurance, in other words, is now one of the primary manifestations of the climate crisis in people’s daily lives, and the crisis in insurance markets is driving up the cost of living across the country. This reality is both a consequence of insufficient climate change mitigation policy (getting worse under the current president) and a consequence of the increasing—though not entirely new—financialization of the insurance industry.

"Insurance is now one of the primary manifestations of the climate crisis in people’s daily lives."

While property insurance emerged from mutual aid societies, the profit-seeking structure of the private insurance companies of today conflicts with our expectation that they will provide financial protection for policyholders. Instead of ensuring protection, insurers seek to decrease their liabilities while increasing the amount of money they have to invest in—and profit from—financial markets.

However, today’s well-documented refusal of insurance companies to provide coverage in high disaster-risk areas is not the first time in recent memory that insurers have sought to transfer away their share of the responsibility for keeping homes across the country safe: In the 1960s, insurers refused to cover flood en masse. The industry has also cherry-picked the identities of whom it would protect, like engaging in redlining by charging prohibitively high rates and denying coverage to people of color, especially Black people.

In such moments of insurance market failure, state and federal governments have stepped in to ensure that the essential tool of home insurance continues to exist for U.S. households. In response to insurers’ refusal to cover floods, in 1968 Congress established two insurer-of-last-resort models: the federal National Flood Insurance Program (NFIP), and the state-level Fair Access to Insurance Requirement (FAIR) Plan model addressing inner-city insurance gaps caused by disinvestment and racial discrimination. While the NFIP was set up as a permanent public insurance program, the FAIR Plan model was designed to be a temporary safety net for the private insurance sector, run by insurers themselves.

Unfortunately, today we’re still relying on these out-of-date models, even as the need for insurance safety nets keeps growing. Plus, these insurers of last resort, like the private property insurance model of today, still rely on the ineffective and inequitable theory of risk-based pricing, which suggests that setting premium prices based on supposed disaster risk level is a good way to get people or housing providers to reduce risks themselves. Extensive examples of how people actually make decisions—and insurer use of credit scores over environmental risk in premium-setting—demonstrate the many holes in this theory.

Transforming Our Disaster Risk Insurance System

If our current system to provide financial protection and housing resilience in the face of disasters doesn’t work, what would? At the Climate & Community Institute we propose policies that center housing safety and affordability in this context of growing disaster risks, employing insurance tools as part of a larger suite of policies necessary to achieve that goal.

CCI’s proposal for this transformation of home insurance to support housing safety and affordability rests on three pillars: public disaster insurance, comprehensive disaster risk reduction, and green social housing production in less-risky places. We envision new state entities, which we term Housing Resilience Agencies (HRAs) to manage this work—but the following pillars, rather than the name and structure, are the keys to this vision.

1: Single-payer disaster insurance

Insurance tools are uniquely positioned to support post-disaster recovery and increase resilience; insurance therefore must be available, affordable, and effective for all households and housing providers. Yet the profit-protection conflict in private insurance markets will perpetually produce insurance gaps, particularly as climate change worsens disasters. Instead, we need to remove the profit motive from the essential service of disaster preparedness. We need robust, democratic, public disaster insurance.

At CCI we think that a single-payer public disaster insurance program is the best way to ensure home insurance availability and affordability. In our model, this single-payer disaster insurance coverage would be built on top of, but integrated with, private policies covering the standard, individual incidents like kitchen fires and burglaries. Coverage would be capped (with those with bigger houses wanting more coverage able to purchase it from the private market). Premium rates would be standardized but progressive so that lower-income households can afford coverage that meets their needs, while the wealthy pay their fair share. Apartment buildings and other multifamily housing would also have access to this public insurance. This is akin how New Zealand’s home insurance system works.

2: Comprehensive disaster risk reduction

Comprehensive disaster risk mitigation is essential to transforming home insurance. That’s because proactive risk reduction limits damage when disasters strike, thereby make homes safer and limiting reliance on the insurance safety net.

The approach to risk mitigation cannot just be “everyone for themselves,” however. When it comes to disaster risk, our fates are shared: If the woodlands abutting my neighborhood aren’t properly maintained, my whole neighborhood might burn. Or if your sewer system isn’t upgraded, everyone on your block might flood. Housing resilience in the face of extreme weather requires taking collective action at the community and landscape level.

To make this work, risk reduction policy needs to be more proactive, coordinated, and directly connected to insurance provision, land use planning, and housing policy. Depending on the type of risk facing a community, this might look like home hardening across an entire neighborhood, regional fire breaks in wildfire-prone areas, sewer upgrades in flood zones, infrastructure relocation, and more. It also means identifying where it is too risky to build new housing, and helping communities relocate from where it’s too dangerous to stay. And, of course, if we want to reduce disaster risk across the board, we must also stop climate change from getting worse than it already is by ending the fossil fuel economy.

3: New housing in lower-risk places

Without the existence of sufficient affordable, dignified, and safe housing, necessary risk reduction measures like relocation programs and stricter zoning in the riskiest places will further exacerbate the country’s housing crisis. Therefore, solutions to the home insurance crisis must be actively connected to policies to build green, resilient, affordable housing in lower-risk areas, like CCI’s proposal for accelerating Green Social Housing development.

Paying For It

How would we pay for something like this, particularly at the state level? We propose that those entities most responsible for the current climate-driven insurance crisis, and those that would most benefit from stability in home insurance, put skin in the game. When it comes to assigning responsibility, top of mind are fossil fuel companies as the leading driver of climate change. Mortgage companies are an obvious example of who would benefit; without insurable properties, their business model disappears.

We can also imagine multiple states setting up cooperation agreements to pool resources, share risk, and provide mutual support during disasters. And the federal government could set up a reinsurance facility to support state HRAs.

Such an approach is not an easy lift, to be sure. But only a holistic response to this home insurance crisis, intended to ensure safe, affordable housing for all—rather than prioritizing insurance company profits—can fully address the interconnected risks communities face.

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Editor’s note: The views expressed in the articles on The Rooftop are those of the authors alone and do not necessarily reflect the opinions or policy positions of New America.