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A home ripped off its foundation is seen in Fort Myers Beach, Florida, a month after Hurricane Ian made landfall on September 28, 2022, as a Category 4 hurricane.
The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
Climate change doesn’t need to reach civilizational collapse levels before its economic and political ramifications are acutely felt. Even now, as more intense impacts begin to manifest, the public is feeling the pain in one key way: Catastrophic climate disasters have driven insurance markets into an active state of meltdown, making a core aspect of homeownership less attainable.
President Biden seemed to appreciate the economic dimensions of climate change when he directed Treasury Secretary Janet Yellen and the other members of the Financial Stability Oversight Council (FSOC) to begin studying climate-related risks to the financial system early in his term. As FSOC’s climate risk supervision framework has come into place, regulators have flagged insurance markets as a key driver. As climate change causes insurance to become less affordable and available, billions of dollars in damages is going unprotected, raising the likelihood that costs from climate disasters will trigger a series of delinquent payments or defaults, and spread losses from climate events into the banking sector and throughout the economy. In recent congressional testimony, Federal Reserve Chair Jay Powell cited higher insurance costs as a continued source of inflation.
Containing this growing risk to the financial system may prove a difficult task, though. Because federal regulation of insurance companies is largely preempted by the McCarran-Ferguson Act—a 1945 law that could well precipitate the next financial crisis—FSOC members depend on state regulators to help them monitor and regulate climate-related risks in this critical sector. When the Federal Insurance Office (FIO) issued a report last summer recommending how regulators should integrate climate into insurance regulation, all its recommendations were for state policymakers.
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In an effort to get a better understanding of what is happening in insurance markets, the FIO finalized data collection on climate risk earlier this year. But it was fought aggressively by insurance trades, with an assist from the National Association of Insurance Commissioners (NAIC)—a private organization that largely exists to perpetuate a low baseline of regulations and fend off action on insurance companies, as we detail in a new report published today.
The insurance industry is keen to conceal how much it knows about projected climate damages because such information asymmetry is essential to its goal of maximizing profits and socializing losses. Recall that the same insurance firms now abandoning vulnerable communities continue to underwrite fossil fuel expansion, guaranteeing more frequent and intense extreme weather disasters (and insurance payouts) in the years to come.
The NAIC, with its captured network of state regulators, is running interference for the industry, and red states are intervening in insurance markets in the most market-friendly manner imaginable. Democrats have not really formed a policy on the insurance crisis, even though their counterparts’ approach is unpopular and ripe for political pushback.
THE INSURANCE CRISIS IS NOT LIMITED to one state or the coasts. One consumer advocate informed the Senate Banking Committee that some of the most dramatic market disruptions have been observed in the Midwest. In February, testimony before the Minnesota House Commerce Committee indicated the state ranked second in extreme weather costs last year. An astounding 76 percent of Arizonans live in a county that ranks among the top 15 nationally in terms of expected annual loss from wildfire damage.
The Republican playbook for handling the insurance crisis has come into view. First, deny climate change and pin blame for insurance market chaos on lawsuit abuse or socially responsible investing, rather than fossil fuel pollution. Then, attempt to entice insurers to remain in markets through appallingly lax regulation, “tort reform,” and the evisceration of consumer protections.
Last year, Republicans in Texas and North Dakota applied their attacks on socially responsible investing (also known as ESG investing and risk analysis) to the insurance sector. Texas’s law has made an already fragile insurance market even more volatile. So far though, the GOP’s most notorious response was the industry-drafted overhaul pushed by Florida Gov. Ron DeSantis right after he was re-elected in 2022.
DeSantis’s reforms—which made it harder to sue insurers and forced participants in Citizens, the state insurer of last resort, to accept substantially more expensive private policies—have been a disaster. There is little evidence that the overhaul has succeeded in its objectives of depopulating Citizens and halting the exodus of insurers from Florida’s market, while the handful of new, smaller insurers appear to be undercapitalized. Reporting from the Tampa Bay Times and Washington Post has detailed how the captured architects of the 2022 overhaul have inflicted harm on Florida insurance markets through major regulatory lapses. Meanwhile, Floridians continue to pay the nation’s highest rates, while insurers bring in enormous profits.
The insurance industry is keen to conceal how much it knows about projected climate damages because such information asymmetry is essential to its goals.
Unsurprisingly, this approach has proven politically toxic. One poll taken early during DeSantis’s 2024 presidential campaign found that his 2022 overhaul was his single biggest electoral liability. Although insurance can hardly be cited as the reason DeSantis lost, Donald Trump did seem to recognize DeSantis’s weakness around the issue. In January, Florida Democrats successfully used insurance policy to win a special election and flip a Central Florida legislative district that DeSantis had carried by 12 points.
Voters in the swing state of North Carolina will decide on competitive races for president and governor in a year when many residents are facing a proposed doubling of their insurance premiums. Democratic appointees have enacted flood disclosure protections, while state Republicans have blocked sea level rise projections, and GOP Insurance Commissioner Mike Causey has defended his support for a law that led to higher insurance rates.
Following a string of scandals, Causey is in a tough re-election campaign against a Democratic state senator who was prompted to run after an extreme Republican gerrymander of her seat. Causey is disliked by many members of his own party, in part because he provided evidence that led to the federal prosecution of former state GOP chair Robin Hayes, who pled guilty to charges related to accepting a bribe from an insurance executive seeking lenient regulation, though Trump pardoned him as one of his final acts in office.
CLEARLY, DEMOCRATS HAVE AN OPPORTUNITY to show daylight on an issue of emerging political salience. To exploit it, their agenda must contrast with the Republican approach of tort reform and deregulation, starting with regulatory reforms like those recommended by the FIO, consumer protections, and fiscal investments like those in Biden’s infrastructure packages to make climate-resilient property upgrades. Even just adequately funding state insurance offices would be a useful intervention for helping constituents deal with the onslaught of rate hikes, since “approximately forty states have no more than three actuaries on staff to review rate filings.”
Making this agenda resonate with voters will require Democrats to distance themselves from the NAIC’s philosophy, which holds that insurance regulation is a nonpartisan issue that a diffuse set of regulators can deliberate over and achieve gradual consensus. Whenever insurance regulators are called before Congress to testify, Democratic and Republican commissioners alike testify “on behalf of the NAIC.” Their testimony typically stresses the wisdom of McCarran-Ferguson, and sublimates meaningful partisan distinctions on insurance regulation to the importance of maintaining a state-based patchwork with a low regulatory baseline.
The sharp partisan contrast in approaches to climate policy is revealing the folly of the NAIC’s faith in the state-based system. Since its initiation in 2010, select states have participated in a disjointed and inadequate climate risk disclosure survey. Today, 27 states and territories participate, nearly all at the behest of Democratic appointees and elected officials. After the FIO announced its willingness to defer to the NAIC’s data collection on climate-related risks, reporting surfaced suggesting that Republican regulators may block this data collection in some of the most at-risk states, including Florida, Texas, and Louisiana.
To truly distinguish themselves on insurance policy, Democrats will also have to get serious about wielding their power, by prioritizing candidates and appointments for previously obscure regulatory positions. This starts at the very top, as President Biden must act quickly to fill the vacancy for the FSOC’s insurance expert left by the expired term of Trump appointee Thomas Workman.
At the state level, Democrats failed to contest the open seat for Louisiana insurance commissioner in 2023, allowing a moderate Republican to be replaced by extremist Tim Temple, who has set about repealing consumer protections and aggressively replicating DeSantis’s deregulatory agenda. Maine Gov. Janet Mills let nearly two years pass before filling a vacancy for the state’s top insurance regulator. Last fall, Virginia Democrats won back control of both chambers of the legislature, securing the power to appoint regulators to the State Corporation Commission (SCC) and ending an impasse with Republican Gov. Glenn Youngkin. Though Democrats filled those SCC posts early on in 2024, discussion of the SCC’s power to regulate insurers was apparently absent from the confirmation process.
When Democrats picked up the governorships of Maryland and Massachusetts in 2022, a trade publication speculated that incoming Govs. Wes Moore and Maura Healey would “have the opportunity to appoint new insurance commissioners.” Now 18 months into their terms, Moore and Healey have kept the appointees of their Republican predecessors in those positions. In the case of Maryland, it has been nearly a year since Republican appointee Kathleen Birrane’s term as state insurance commissioner expired, but Moore has allowed her to stay in the job.
Such inaction is not only a dereliction of duty on a matter of growing public interest; it’s also a strategic blunder politically. As the year goes on, an intense hurricane season will likely deepen the insurance crisis, just as the 2024 campaign is heating up. Now is the time for Democrats to begin actively communicating a strong contrast with Republicans’ failed approach to insurance policy. In so doing, they can help protect our financial system from the biggest looming threat that Biden regulators have identified.
