Climate Change and U.S. Property Insurance Crisis: Regulatory Responses and Solutions

The escalating climate crisis is exerting profound effects on the U.S. property insurance industry, serving as an early indicator of broader economic and environmental risks. Accelerated by increasing greenhouse gas emissions, climate change fuels the frequency and severity of natural catastrophes such as wildfires, hurricanes, floods, and severe convective storms. These phenomena have driven record insurance losses, prompting insurers to raise premiums and withdraw coverage, resulting in a growing insurance availability and affordability crisis. Recent catastrophic events, like the January 2025 Los Angeles wildfires causing an estimated $250 billion in damages and $40 billion in insured losses, exemplify this intensifying trend. Insurers, including state residual market entities such as California’s FAIR Plan, face mounting claims exceeding reserves, necessitating bailouts funded through assessments and surcharges on policyholders. States have responded divergently. California maintains rate regulation with adjustments enabling use of catastrophe modeling and inclusion of reinsurance costs in premiums, conditioned on insurers agreeing to serve high-risk areas. Florida, with deregulated rates and weakened insurer obligations for residual market shortfalls, faces fourfold higher premiums than the national average and a risk of insurer insolvencies after major hurricanes. Both approaches provide limited temporary relief but do not address the underlying climatic and developmental drivers of the crisis. The insurance industry's traditional risk assessment involves catastrophe models and reinsurance strategies to price and manage risk. However, climate change advancements have surpassed historical data, challenging these models' effectiveness. Insurers also leverage subrogation rights to recover losses from third parties, particularly fossil-fuel companies implicated in climate-related damages. Development patterns exacerbate losses, with substantial growth in construction within high-risk wildfire and flood zones, adding to insurer exposure. Rising replacement costs further compound loss burdens. Consequently, insurance premiums escalate, nonrenewals increase, and insurance availability contracts, which in turn impact mortgage lending, housing affordability, rental markets, and local economies. Insurers continue profitable underwriting in some high-risk states but increasingly seek to offload risk through higher premiums and market withdrawal. Regulatory adjustments in California, including allowing catastrophe modeling in rate setting and sharing residual market shortfall burdens, aim to sustain insurer participation but face skepticism regarding long-term efficacy. Insurers like State Farm have limited intentions to re-enter high-risk underwriting despite approved rate hikes. Short to medium-term state-level policy measures proposed include mandating insurers to divest from fossil fuel investments and underwriting, pursuing subrogation lawsuits against fossil-fuel companies, and integrating risk reduction and resilience measures into underwriting and pricing models. Land-use strategies involve strengthening building and zoning codes, restricting development in high-risk areas, requiring developers in such zones to post bonds covering potential insurance losses, and promoting higher-density development in lower-risk areas to balance housing supply. Investment in property-, community-, and landscape-scale mitigation—such as wildfire home-hardening techniques, defensible space, forest fuel reduction, and fortified home standards for wind and hail—is encouraged through insurance incentives and regulation. Some states, like Colorado, have mandated insurers to incorporate mitigation data into models, though voluntary adoption remains limited. To strengthen financial resilience, states are advised to bolster residual insurance markets via bond issuance and catastrophe bonds. Federal engagement is suggested, with a focus on establishing a reinsurance program for FAIR Plans and residual markets to reduce premiums and improve availability, alongside means-tested premium subsidies for low-income policyholders. Arguments against a broader federal all-risk insurance scheme emphasize risks of market distortion, regressive impacts, high costs, and historical underperformance of such programs. The long-term viability of property insurance is intrinsically tied to climate change mitigation and transitioning from fossil fuels. Without addressing greenhouse gas emissions, the insurance market will face escalating uninsurability, with wide-reaching economic and social consequences. This comprehensive analysis clarifies the regulatory landscape, market dynamics, and forward-looking interventions critical for insurance professionals navigating this evolving challenge.