In 2023, two out of every three American homes were underinsured. Nationally, “insurers paid out more in claims than they received in premiums” over the past decade, according to the New York Times. Taken together, these statistics illuminate the problem at the heart of the home-insurance industry: the cost of damage is higher than homeowners or insurers can afford.

It wasn’t always this way. Costs have been growing across the country for twenty years, in large part due to the effects of climate change: rising sea levels, intensifying hurricanes and wildfires, and “once in a century” storms that are now common occurrences. But while coastal properties and towns near drought-stricken forests have long been considered high risk, recent reporting shows how even “safe” regions are affected. Home insurers recorded net losses on coverage in eighteen states—more than a third of the country—in 2023. Wind, hail, and rain have been so destructive that some insurers (and the reinsurers that back them) are completely pulling out of the market in states like Iowa. What coverage remains for homeowners can be ruinously expensive and stuffed with limiting caveats, but without insurance, a potential buyer can’t get a mortgage. 

If neither the private market nor the individual homeowner can foot the bill, the insurer of last resort may eventually become the state or federal government. This has already happened for flood insurance, the overwhelming majority of which is provided by the National Flood Insurance Program (NFIP) because it’s not profitable for private insurers. The aid NFIP provides, insufficient as it can be, is critical for families, but it also perpetuates—and inflates—development in high-risk areas at taxpayer expense. A parallel problem has emerged in California, where the state provides insurance in wildfire-prone areas that private insurers have dropped. Insurance guarantees or caps on premiums, which protect homeowners, also prop up the housing market in places repeatedly struck by natural disasters.

The situation is worst for low-income and minority communities. As a result of decades of redlining, Black Americans were often forced to build in disaster-prone areas like floodplains. This “makes it difficult to both price climate risks and not divest from underserved communities,” climate journalist Lois Parshley explains. Low-income homeowners, who are least able to afford insurance, are also least able to access recovery dollars elsewhere. But expanding federal insurance to cover all disasters would be an enormously expensive undertaking, “one of the biggest government programs that exists.”

There is no perfect solution, only a patchwork of necessary adjustments. In her testimony before the U.S. Senate regarding improvements to the NFIP, Carolyn Kousky of the Environmental Defense Fund explained that “[i]nsurance and risk reduction need to be viewed as complements.” For some homeowners, this will involve individual “hardening”—adaptation that makes home infrastructure more resilient to disasters—but it cannot be the responsibility of only the individual to try to counteract a disaster. Contractors or developers should be required to meet more rigorous standards for new construction. In some especially vulnerable places, government buyouts can help prevent repeat losses, particularly if buyout dollars are made immediately available after a natural disaster. States should invest in large-scale, forward-looking measures like building seawalls, restoring wetlands, or planning controlled burns. Insurance works by spreading risk across a pool, but when the whole pool is affected, as we are witnessing now because of climate change, the system breaks down. Our resilience measures, like our increased risks, must be collective rather than individual.