Within just a week, the sheer devastation of the Los Angeles wildfires has pushed to the fore fundamental questions about the impact of the climate crisis that have been largely avoided by lawmakers, influencers and the public.
Among them: What is the future of insurance when people’s homes are increasingly located in areas of climate risk — whether wildfires, hurricanes, flooding or the rising sea levels?
Those questions have bedeviled policy makers in California — where insurance giants like State Farm, Farmers and Allstate announced last year that they were no longer writing new policies in the state due to the surge in wildfires (in 2024 alone, firefighters across the state battled 8,024 wildfires that burned more than 1 million acres and destroyed 2,148 houses and other structures).
Insurers have long been aware of the risk of climate change — rising premiums, increasing losses. In 1973, the German insurance firm Munich Re published a brochure on flooding that it claims was the first use of the term “climate change” in the industry, warning of the growing risk of rising temperatures and increased carbon dioxide in the air. Some 40 years later, the CEO of French insurance giant AXA said it would be impossible to insure a world that is 4 degrees Celsius (7.2 Fahrenheit) warmer.
Nonetheless, insurance companies have become some of the biggest financiers of fossil fuels, which are the primary cause of climate change — the extraction and burning of oil, gas and coal are responsible for over 75% of greenhouse gas emissions and nearly 90% of carbon dioxide emissions.
Fossil fuel companies made up 4.4% of the investment portfolio of the insurance industry in 2023, up from 3.8% nine years earlier. Two insurance giants, Berkshire Hathaway and State Farm, increased their fossil fuel positions by around $200 billion in that period. Overall, however, more than half of the country’s 238 property and casualty insurers recently surveyed by the Wall Street Journal have reduced their investments in oil, gas and coal over the past decade. But while insurers around the world have restricted their coverage of fossil fuel projects, U.S. companies continue to write policies for conventional oil and gas projects.
Spokespersons for State Farm and Berkshire Hathaway did not respond to requests for comment.
It’s a vicious cycle, some insurance industry experts say, with insurers investing their customers’ premiums in fossil fuel companies, whose activities accelerate climate change, which in turn increases the risk of the wildfires, super storms and flooding that are causing insurers to drop coverage for millions of homeowners in order to avoid losses.
“That’s a significant amount of capital that is supporting polluting industries,” said Frances Sawyer, the founder of Pleiades Strategy, which works to stimulate climate action. “That hasn’t been as much of a focus as it should be in their total structural risk — fossil fuel investments that are directly making the risk environment worse that they’re handling on the other side of the balance books.”
In the U.S., about 15% of homeowners who earn less than $50,000 a year are uninsured.
By the numbers, climate change is having an enormous impact on the industry. The insured weather losses attributable to climate change have increased from 31% to 38% in the last decade, an annual increase that “significantly outpaced” the growth of losses in other sectors. Overall, about $600 billion in such losses over the last two decades can be attributed to climate change, according to a report by Insure Our Future, a global consortium of groups pushing insurance companies to stop investing in fossil fuels.
For many insurers, the losses are not being offset by the premiums they collect from their coverage of fossil fuel companies. For more than half of the 28 leading insurance companies, their estimated losses due to climate change exceeded their fossil fuel premiums. Overall, climate-attributed losses for all 28 insurers totaled $10.6 billion, erasing most of the $11.3 billion they collected in premiums from fossil fuel companies.
As a result, insurers have now dropped more than 1.9 million home insurance contracts since 2018, with nonrenewal notices tripling in more than 200 counties across the country, according to a recent congressional investigation.
The burden falls heaviest on lower-income Americans and people of color. About 15% of the country’s homeowners who earn less than $50,000 a year are uninsured, according to the Consumer Federation of America. And 14% of Latino and 11% of Black homeowners are uninsured.
Increasingly, more Americans are underinsured, making it likely that the full cost of reconstructing a house won’t be reimbursed. A University of Colorado Boulder study on the 2021 Marshall Fire, the worst in that state’s history, revealed that 74% of affected homeowners were underinsured.
Among them was Erica Solove, a mother of two who was forced to flee their family home barefoot when it was destroyed in the Marshall Fire. Because her policy reflected the valuation of her home when she bought it years ago, it wasn’t nearly enough to help build a new home. She had to rely on savings and a GoFundMe campaign to finish reconstruction.
When she tried to get homeowners insurance for that home, “We were rejected by all of them,” she said.
“The insurance companies are not being held responsible for not insuring people to any reasonable level reflecting the current reality,” said Solove, who started the group Extreme Weather Survivors, and recently started an online Slack community for California wildfire survivors. “It’s not an individual problem, it’s a systemic industry problem.”
And the cost of homeowner insurance has skyrocketed, jumping more than 30% between 2020 and 2023 (13% adjusted for inflation), according to a study by the National Bureau of Economic Research.
Because homeowners insurance is required for most home loans, some economists are concerned that the insurance crisis could reignite a mortgage crisis.
That dynamic has increased pressure on insurers to shun the fossil fuel industry — both by no longer providing coverage to oil, gas and coal projects and by no longer investing in the industry. “Insurers’ self-reinforcing cycle of driving climate risks higher and restricting coverage for those risks is threatening public interest and financial stability,” warned Insure Our Future.
Some insurance giants are taking steps — Italy’s largest insurer, Generali, announced in October 2024 that it will no longer provide new coverage for oil and gas companies in the midstream and downstream sectors, which includes liquefied natural gas terminals and gas-fired power plants.
But U.S. insurers in general continue to back the industry, and they have played a prominent role in the liquefied natural gas boom along the Gulf Coast. All of the senior lenders for the giant Rio Grande LNG terminal in Texas were insurance companies — Fidelity & Guaranty Life Insurance (F&G), Everlake Life Insurance, American General Life Insurance, Security Life of Denver Insurance, Symetra Life Insurance and Allianz Life Insurance of North America — according to an SEC filing by the developer, NextDecade. Spokespersons for the companies did not return requests for comment.
That role was highlighted in an industry publication, Insurance Asset Risk, which noted that “despite seemingly making progress towards net-zero goals, insurers seem to be taking on a role previously occupied by banks in financing fossil fuel projects.”
In recent years, some insurance regulators have pushed for more transparency from the industry and warned it of the danger of investments that contribute to climate change. The insurance commissioners of California, Oregon and Washington did a first-ever stress test of insurance company investments last year to detail the “hidden cost” of delaying climate action. In addition to exacerbating the climate crisis, such investments could be risky for insurance companies’ bottom line as the world moves to a clean-energy future, making it harder for them to write policies going forward.
The three insurance commissioners warned in their report: “Insurance companies invest premiums that they collect from people and businesses, generating returns that enable them to pay future claims, meaning the performance of investment income can have a direct impact on a company’s ability to take on additional policies down the line.”
According to the insurance commissioners’ findings, insurers face greater exposure to climate risk in their corporate bond portfolios than in their equity investments. Their future losses on corporate bonds could range from $7 billion to $40 billion, per the analysis.
Because homeowners insurance is required for most home loans, some economists are concerned that the insurance crisis could reignite a mortgage crisis on a scale of the 2008-2009 recession. “Rising premiums and limited availability of insurance can have significant ripple effects across housing markets, reducing demand (and housing values) for homes in high-risk areas,” according to a new Brookings Institute study.
Most states have developed insurer-of-last-resort programs. But they are at risk of being overwhelmed.
“Any wide-scale decline in property values” would present “a systemic risk to the U.S. economy similar to what occurred during the 2007-2009 mortgage meltdown and ensuing global financial crisis,” the Senate Budget Committee warned in a December 2024 report.
“It has a sort of this chilling effect where if insurance companies are announcing that they’re no longer writing policies in entire neighborhoods or entire communities or in some cases even entire states, that has implications for whether you’re going to be able to sell your home because the mortgage market won’t be available,” said Jordan Haedtler, climate finance strategist with advocacy group the Climate Cabinet.
The crisis has prompted most states to develop an insurer-of-last-resort program, available to those who can’t get coverage from private insurance companies. But they are at risk of being overwhelmed. California’s FAIR Plan, which has only $200 million in reserves and $2.5 billion in reinsurance, has exposure of $5.9 billion from homeowners policies in Pacific Palisades alone, where the number of policyholders grew by 85% from last year.
As California’s former insurance commissioner Dave Jones told Capital & Main, provisions in the FAIR Plan leave homeowners across the state on the hook for losses if the government plan is exhausted.
Moving forward to address this crisis may take some dramatic steps, say experts. Publicly funded climate risk insurance, such as the FAIR Plan, don’t adequately address the problem since they would “face many of the same challenges as the private market in terms of managing rising costs and increasing climate risk exposure, plus the added complexity of political pressure to keep premiums artificially low,” according to the Brookings report.
The think tank recommends that state regulators develop initiatives to make more advanced catastrophe modeling tools available to insurers and incentivize them to offer discounts to policy holders for taking steps to make their homes more resilient by installing wind-resistant roofing, fire-resistant siding and hail-resistant shingles.
Unfortunately, insurers aren’t on board yet in California. Last year, Jones worked with state Sen. Josh Becker and the Nature Conservancy on a bill that would have required the models used by insurers to account for risk mitigation efforts such as forest treatment, creating defensible space around homes and home hardening.
“The insurance industry killed it,” Jones said. “They killed the bill through lobbying and donations to lawmakers. They basically went in front of the insurance committee of the Senate and the Appropriations Committee of the Assembly and, and said, ’We’re opposed to this,’ and convinced those two committees to gut the bill.”
What’s key is addressing the role of climate change, said Sawyer. “We’ve got to think about how we’re reducing climate pollution and continuing and accelerating California’s commitment to emissions reduction and investments in resilience,” she emphasized. “The last thing we need is solutions that try and treat this as a temporary financial crisis without reaching down to those roots and really thinking about the [insurance] sector’s role in decarbonization and making us safer across the board.”
