Home insurance is supposed to help us recover from natural disasters, but climate change is disrupting the industry. This week on Possibly, we look at how states are responding to this problem.
Megan Hall: Welcome to Possibly, where we take on huge problems, like the future of our planet, and break them down into small questions with unexpected answers. I’m Megan Hall.
We already know that climate change is making natural disasters more extreme and happen more often. Home insurance is supposed to help us recover from those natural disasters, but now climate change is affecting that industry, too.
Juliana Merullo and Nat Hardy are here to walk us through how states are responding to this problem.
Juliana Merullo:: Hiya Megan!
Nat Hardy: Hey there!
Megan Hall: In our last episode, we talked about how climate change is making the home insurance industry more risky all over the country. So why should we be thinking about states?
Juliana Merullo: Well, home insurance is regulated at the state level. There’s an official, normally called the insurance commissioner, in each state, and their office sets the policies and regulations that the insurance companies have to follow.
Nat Hardy: That means some states, like California, regulate their insurance industry much more than other states, like Louisiana or New Hampshire.
Megan Hall: What do they do to regulate insurance companies?
Juliana Merullo: It looks different in different states! They give licenses to insurers, they make sure those insurers can pay their claims, and they approve the rates that companies charge homeowners.
Megan Hall: And I imagine that means insurance rates are different in each state?
Nat Hardy: Exactly. These differences in regulation between states have created a really complicated insurance situation. To find out more, we spoke to an expert who studies how climate change and regulation are affecting insurance markets.
Ishita Sen: My name is Ishita Sen. I am an assistant professor of finance at Harvard Business School.
Juliana Merullo: Ishita says that the way insurance markets are supposed to work is pretty straightforward.
Ishita Sen: Anyone would tell you, places that are more exposed to disaster risk, are the places where you would expect insurance prices to be higher.
Nat Hardy: Ishita and her colleagues published a study that showed in reality, it’s not that simple.
Juliana Merullo: They found that in some states, insurance rates are artificially low. That means the rate doesn’t match the actual risk of that house.
Megan Hall: Why is that?
Nat Hardy: Well, the major insurance companies operate all over the country, right? In both more-regulated and less-regulated states. And it’s easier to raise the rates in the less-regulated states, where there’s less oversight.
Juliana Merullo: Some insurance companies deny this, but Ishita’s study suggests that if a company can’t raise the rate to reflect the full risk for a home-owner in say, California, insurers might raise the rates on homeowners in a less regulated state like Oklahoma instead.
Nat Hardy: And Ishita says that’s a problem:
Ishita Sen: And to the extent that prices actually do not reflect these risks, then people may not actually fully internalize the cost of living in a high, high risk area.
Megan Hall: Okay, but why does it matter that the risk doesn’t match the premiums?
Nat Hardy: On the one hand, in less regulated states, where insurance rates are climbing, it can make homeownership way less affordable.
Juliana Merullo: But the reality of climate change is that it’s making more places susceptible to natural disasters. And the prices should reflect that.
Nat Hardy: At a certain point, we might have to pay more and accept the risk, or adjust where we’re living.
Megan Hall: I guess so. But California recently made some big changes to the way it regulates home insurance, right?
Nat Hardy: Yes! Major insurers like State Farm stopped offering new policies in the state, so the insurance commissioner made some reforms, hoping it would encourage them to come back.
Juliana Merullo: The state has one of the most regulated insurance industries, and it’s likely that regulation encouraged insurers to leave the state.
Megan Hall: I see, so the regulations are causing this problem?
Nat Hardy: Partially, but it’s not quite that simple. Dave Jones, the former insurance commissioner in California, says, all sorts of states- those with tight regulations, and those with looser rules are all seeing this same phenomenon:
Dave Jones: Which is, insurance companies raising prices as well as declining to write and renew insurance. So there’s not some get-out-of-climate-change deregulation card here that’s going to solve the problem.
Megan Hall: So if regulating more or less won’t help, what’s the solution?
Juliana Merullo: We’ll have to cover that in the next episode!
Megan Hall: I guess so! Thanks Juliana and Nat! That’s it for today. You can find more information, or ask a question about the way your choices affect our planet, at askpossibly.org. You can also subscribe to Possibly wherever you get your podcasts or follow us on Instagram, Facebook, LinkedIn, X, or Bluesky at “askpossibly”
Possibly is a co-production of Brown University’s Institute for Environment and Society, Brown’s Climate Solutions Initiative, and the Public’s Radio.
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