Noah Berger/AP Photo
A young woman salvages items from her flooded Merced, California, home, January 10, 2023.
In the past decade, Texas has been hit hard by climate change. Residents have endured an almost apocalyptic succession of hurricanes and flooding, deep freezes and heat waves. In the aftermath, homeowners have been caught by surprise by disaster insurance products that failed to help them get out from under their personal crises. Housing advocates like Julia Orduña of Texas Housers say that they learn the hard way that their property policies do not cover flood damage. Sometimes a homeowner can spend years dealing with an unrepaired home and fighting Kafkaesque battles with insurance companies over payouts. Renters searching for new units learn that their policies covered their old belongings and little else. Many other people cannot afford coverage at all—or gamble that they won’t need it and lose the bet.
This state of affairs plagues those with the fewest resources: low- and middle-income homeowners, and particularly people of color, who can’t afford insurance coverage, or any insurance at all. Only the most persistent policyholders try to face down a disaster insurance system perpetuating societal harms comparable to redlining, the pattern of historical discrimination found in the housing sector.
One system designed to help underinsured and uninsured low- and middle-income whites and people of color as they battle accelerating climate woes is called “inclusive insurance.” This framework is the centerpiece of a new report, “Inclusive Insurance for Climate-Related Disasters: A Roadmap for the United States” by Carolyn Kousky and Karina French of the Environmental Defense Fund and released by Ceres, a sustainability nonprofit, and the ESG Initiative/Wharton Climate Center at the University of Pennsylvania’s Wharton School.
Co-author Carolyn Kousky and I discussed how new products and broader reforms could address long-running affordability, accessibility, and inequity problems in the disaster insurance sector. This interview has been condensed and edited for clarity.
Gabrielle Gurley: In this era of climate change disasters, underinsured and uninsured Americans end up in dire straits. What would an inclusive insurance model offer low- and middle-income consumers?
Carolyn Kousky: One product that the report explores is parametric insurance. The basic idea is that you get a payout based on some observable measure of the disaster. So, if wind speeds within so many miles of your house exceed a certain threshold, for example, you automatically get $10,000. Another challenging dimension today is how long it takes to get the payout. These products will give you money within 24 hours.
Getting money fast matters. We found that this was important for very low-income families because FEMA money or your insurance payout can take weeks or months to get to you. A more affluent family has some savings they can rely on during that time. They can use a credit card; when the money finally gets to them, they’re fine. But some of the lowest-income families don’t have any financial buffer at all. Not having the dollars to make their home safe and livable right after the disaster can create all sorts of negative short- and long-term impacts for the household. They can spend less on important medical care or fall behind on their bills.
The second thing about it is that it’s really flexible. Your homeowner’s insurance policy is based on the damage: A loss adjuster finds that the storm caused this amount of damage and it costs you this much to fix it—that’s how much money you get. That’s important especially for homeowners. But we saw that that is not as useful for some classes of people, particularly renters who don’t have property damage, but they still face economic costs. They might need temporary lodging because they’re not safe in their unit anymore. Now they have to pay for housing and it’s often more expensive, or the transportation infrastructure is down and they have to pay for costly ways to get to work. People have to buy generators and fuel because the grid is down. Nonsalaried workers see business interruptions and lose income.
There are all these other costs imposed on people that our current insurance system doesn’t cover at all. These types of parametric products can replace lost income and can pay for higher rents and all those types of things that your traditional insurance doesn’t. In France and Spain, the government mandates that all homeowner’s insurance policies have to include natural disasters. If a catastrophe happens that is so severe it would bankrupt an insurer, the government will step in and protect [an insurer] from bankruptcy to make sure you stay in business.
It’s so confusing in the U.S. You buy homeowner’s insurance and it doesn’t include flood protection. If there’s a hurricane, we have a huge deductible. If it’s burst pipes, [insurers] are only going to pay so much. It is just crazy for consumers to have to navigate that and then buy these extra policies to fill in all the holes. It would be easier on the consumer to have comprehensive coverage, which would really help with recovery.
What are some drawbacks of the current federal disaster assistance programs?
FEMA grants are typically only a few thousand dollars and they don’t come close to covering property damage for people. They were intentionally designed that way to only make homes safe again, not bring them back to pre-disaster conditions, because at the time the program was created there was an expectation that private insurance should play that role.
The challenge is that none of those FEMA programs are means-tested. Not only are they not means-tested, but recent research has suggested that they can be regressive. A lot of red tape and difficulty in accessing those dollars means that some of the communities that arguably need them more and are disproportionately impacted are actually getting less.
What the National Flood Insurance Program does is, unlike the private sector, it doesn’t kick you out if you have repeated losses. So there are definitely properties in the program that have flooded over and over again and get rebuilt over and over again and by any cost-benefit standard shouldn’t be built where they and we are supporting them where they are. That wouldn’t happen in the private sector. People should purchase insurance if they are living in risky areas. That should be the mechanism, not government bailing everybody out all the time.
With the climate crisis accelerating, should federal and state governments take on an even greater responsibility for providing disaster insurance?
When you look historically at disasters, you see a very large public-sector presence in disaster insurance markets. This is even before we started thinking about what a climate signal is doing to disaster losses. Disasters can be really difficult for the private sector to insure because so many people get impacted at once and the impacts can be so severe and so they have to be able to have enough capital to cover all those claims without going bankrupt—and that’s difficult and not cheap.
It’s always been a challenge to make disaster insurance affordable and widely available. When you look around the world, basically every single country has some type of public intervention to provide disaster insurance; they just take different forms. What we’re seeing as climate is driving up losses from those events, there’s a shift from the private sector to the public sector. There are still a few places where certain types of climate-related disasters are largely provided for by the private sector.
In the U.S., that’s hurricane wind and wildfires, and that’s where you’re starting to see stress in those private markets—it’s definitely happening. With wildfires, when homeowner’s insurance becomes too expensive in California, we see increases in the state FAIR Plan providing that coverage. When you look at Florida, over a million policies are in the public-sector wind pool, not in the private market.
The kind of tension that you’ve got there is between wanting to maintain pricing that can support and incentivize smarter land use and development. The question now is who’s going to pay for disaster losses. There’s a concern that if we make insurance super-cheap, we’ll see too much development. In our thinking, that’s much less of a concern when you’re talking about lower-income households. There is a real argument that we should be targeting where we’re subsidizing the cost of insurance and focus the subsidies on the households that really need them.
What are the signals that government should be sending to insurers about the products they offer and the consumers they cover?
Clearly, the big challenge is just affordability. But we also saw broader types of inequities and those can play out at multiple points in the insurance chain. Most states do outlaw pricing discrimination based on protected classes. But we don’t have enough data to know whether there are underwriting decisions, which is not the pricing but just whether a company is going to make insurance available at all, which might be related to things like race or income. So, one of our first recommendations is as the federal government has required all mortgage data to be made publicly available to researchers to be able to look at differential impacts, the insurance data needs to be transparent, too. There’s no way to look at what’s happening in the market because the data is not available.
The other thing we heard a lot about anecdotally was actually on the claims processing side. You bought your insurance and there’s a lot of concern that it’s too hard to get the money. The process of getting the money can disadvantage certain groups, particularly those without expertise in these markets; without the time and the resources to navigate how to do it; and people who don’t have English as their first language.
We also saw that communities of color and low-income communities have really lost trust in the market. Maybe a better path forward is some sort of public-private partnership, NGOs or philanthropy. The private sector is not going to solve this on their own. We’ve seen some innovation. There are microinsurance products now in Puerto Rico [Ed: After Hurricane Maria, the commonwealth introduced affordable, easy-to-understand, quick-turnaround insurance products for catastrophic risks.] and there’s an earthquake-specific one in California. The founder of that program thought that people would really like this product because it’s cheaper and faster and they could trust that it was transparent. They knew that it was just the magnitude of the earthquake that was going to get them their dollars and there wasn’t going to be a power differential.
Another possible reform is a version of the Community Reinvestment Act (CRA) for the insurance industry. Given that insurance regulation is largely a state-level function, would the federal government have to assert new regulatory authority over the insurance industry to move in that direction?
The state regulatory framework is really entrenched. For that model to work, it would have to be a state-level program.
The prospects for a federal CRA for the insurance industry would seem very slim.
Politically, they’re slim.
How does managed retreat figure into the disaster insurance dynamic?
That is an excellent question. The way insurance could fit in there is by allowing a policyholder to take their insurance payout and use it to move somewhere else. Part of the reason it’s hard to do is if you have a mortgage, your lender has to sign off on your insurance. It involves some sort of collaboration to formalize that this is something that is not only going to be allowed if you fight for it, but encouraged because you have to deal with the mortgage that’s on the property that no longer exists. You essentially have to pay off the mortgage and then still have enough funding to purchase a new home somewhere else or at least the down payment.
Would that mean that it’s too expensive to use insurance for that or is there some way to have some public-sector financial support? I don’t know yet. It’s so hard to motivate people and institutions to be preventative. If we could get some models that would help prevent costly and upsetting shifts post-disaster that would be good. But, in reality, we’ll see a lot of the changes happen as a result of big disasters, sadly.
