State insurance regulators, as well as federal bodies such as the FIO and the FSOC, must urgently adopt a holistic and forward-looking approach to addressing climate-related financial risk in insurance markets in order to avoid future economic crises.
As these agencies consider improvements in their supervision of the industry, they should be guided by the four principles detailed below.
1. Insurers must be more transparent and accountable in their approach to managing climate risks
Property and casualty insurers, along with the reinsurers that share the risks they cover, collect detailed data on economic losses experienced by households and businesses, as well as other information related to the policies they write. The effects of adverse climate events are reflected in these data and are included in business decisions about what insurance coverage will be sold and at what price.
Because these data are proprietary and not aggregated, they have not been used for systematic analysis. Access to these data would allow policymakers to better assess the potential impacts of climate-related losses on insurers’ ability to serve consumers as well as on the stability of insurers and the financial entities that depend on insurers’ continued safe operation.
In March 2024, the NAIC and FIO announced a first-of-its kind, joint effort to collect detailed ZIP-code level data from homeowners’ insurers across the United States. This data call would include information related to premiums, claims, losses, deductibles, and nonrenewals, among other items. These data will be important in building state regulators’ and the FIO’s understanding of how severe weather events and other effects of climate change are affecting insurance availability and affordability.
The NAIC and the FIO should publish research results based on these data in formats that will be useful to households making decisions about their own welfare, as well as to inform insurers and allow expert evaluation. Going forward, the NAIC and the FIO should: consider what other analyses would enhance policymakers’ understanding of the climate-driven insurance crisis, including examining the roles of reinsurers, and appropriately expand the scope of data collection; execute statistical research to measure and forecast the extent and distribution of economic losses related to climate change; and aid financial regulators concerned with the stability of financial markets.
2. Insurance regulators must encourage firms to manage climate risks
Just more than half of property and casualty insurers who responded to a 2020 survey by the National Association of Insurance Commissioners attested to having a climate-related risk and investment management policy. In recent months, many insurers have backed off their voluntary commitments to reach net-zero decarbonization targets.
In June 2023, the Federal Insurance Office issued a report finding that “there are nascent and important efforts to incorporate climate-related risks into state insurance regulation and supervision. … However, these efforts are fragmented across states and limited in several critical ways.” The report lays out several recommendations that state regulators should begin to take to address gaps in climate risk oversight.
Some states are further along in their approaches to climate risk supervision than others. For example, in November 2021, the New York Department of Financial Services issued guidance “to serve as a basis for supervisory dialogue and to help insurers familiarize themselves with climate risks and develop their capacity and processes for managing them.” This guidance clarifies expectations related to scenario analysis, public disclosure, and other forms of risk management. In 2022, the Connecticut Insurance Department also issued guidance related to climate risks, while in 2024, California, Oregon, and Washington jointly conducted climate stress tests of large insurers’ investment portfolios. The results of the 2024 stress tests suggest that insurers’ transition risk exposure may be significant, with the potential to amount to $40 billion in losses over the next decade on their corporate bond portfolios alone.
Insurance regulators across the United States should issue guidance to help insurers integrate climate risk management measures. Additionally, where firms have made net-zero commitments, regulators should ensure that firms have credible transition plans in place and that internal strategies are aligned with these plans.
3. Insurance regulators must monitor the industry for instances of bluelining
Bluelining is an “emerging practice in which financial institutions increase prices or withdraw services altogether from regions they perceive to be at high environmental risk, most commonly insurance, credit, and banking services.” Insurers are already pulling back from some of the most climate change-affected states. For example, in Louisiana, 17 percent of homeowner policyholders reported that their insurers canceled their policy and 63 percent said the cost of their coverage increased over the past year.
Moreover, a 2021 study by the U.S. Environmental Protection Agency (EPA) examined the degree to which climate change may affect socially vulnerable populations, defined by income, education, race and ethnicity, and age. The EPA found “the most severe harms from climate change fall disproportionately upon underserved communities who are least able to prepare for, and recover from, heat waves, poor air quality, flooding, and other impacts.” As insurance becomes increasingly unaffordable and unavailable, those most exposed to the effects of climate change will bear the greatest share of the burden.
The effects of the United States’ history of racist housing practices are still felt today—and they are being amplified by climate change. The high-flood risk maps of many major cities resemble the redlining maps of the 1930s, which served as the basis for the systematic denial of financial services to certain geographies based on their racial makeups and disproportionately affected Black communities. With respect to wildfire risk, research shows that census tracts that are majority Black, Hispanic, or Native American are 50 percent more vulnerable than other census tracts. A 2024 Office of Financial Research report examining the uneven distribution of climate risks in real estate finds “properties located in counties that are poorer, less educated, older, more rural, and that have less belief in climate change tend to have more climate risk.”
State insurance regulators should issue guidance and train examiners to help firms balance their climate risk management without the bluelining that denies families access to affordable insurance and other financial services as well as the ability to recover from extreme weather events and climate disasters. Additionally, the FIO has the statutory responsibility to “monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable non-health insurance products.”
So far, instances of bluelining have been largely anecdotal. The NAIC-FIO data call should provide helpful insights into how climate change is affecting consumers’ ability to access insurance, and for future collections, they should continue to consider what other analyses and underwriting, pricing, product, and claims data are needed to identify and prevent unfair discrimination and dangerous coverage gaps in the market.
4. Policymakers must mitigate systemic risk before it threatens financial and economic stability
Insurers are highly interconnected with the U.S. financial system and economy at large. As the FSOC wrote in its 2023 Annual Report:
Higher insurance costs could drive homeowners to underinsure against growing climate-related risks. Some homeowners without mortgages may even choose to go entirely without coverage. Where losses are uninsured or underinsured through private or residual markets, they have the potential to spill over into other parts of the financial system and real economy.
As climate change continues to ravage insurance markets, the FSOC must play an active role in preemptively addressing these systemic risks. The FSOC has a number of tools well-suited for monitoring and addressing climate-related financial risks, including the authority to collect and analyze data; make policy recommendations to Congress and other agencies; and, where appropriate, subject high-risk insurers to enhanced regulatory standards.
Regulators of exposed financial institutions, such as those that oversee banks and credit unions, should analyze how the insurance availability and affordability crisis may raise microprudential concerns, such as increased credit risk, for institutions under their remit and should then help those institutions prepare accordingly.
Conclusion
State regulators and federal financial agencies must play a larger role in stabilizing insurance markets and protecting consumers, especially those living in Black, Hispanic, and Native American communities most vulnerable to the effects of climate change. However, addressing the root causes and far-reaching effects of climate change will require a whole-of-government approach. Beyond these principles, policymakers at all levels should also consider large-scale solutions that incentivize loss prevention and climate risk mitigation, and are shaped by equity considerations, to help communities become more resilient and to enable insurers to serve U.S. households and businesses more effectively.
The author thanks Carly Fabian; Anne Perrault; Birny Birnbaum; Doug Heller; and colleagues across the Center for American Progress’ Inclusive Growth, Rights and Justice, and Energy and Environment departments for their helpful edits and thoughtful conversations.