The Five Mostly Disastrous Paths Through Our National Insurance Crisis

One good option and four bad ones.

This is fine. (Photo: Getty)

We’re three weeks away from the beginning of Atlantic Hurricane Season 2024. A forecast by researchers at Colorado State University predicts a “hyperactive” season with 23 named storms, more than 50% more than an average year. Part of the forecast is due to La Nina, a regularly occurring weather pattern, but more of it is due to the climate change-drive warming of the oceans, which acts as fuel for devastating storms.

More terrifying hurricane seasons, more destructive wildfire seasons, more floods, more droughts—these are the cheery messengers of global warming, who will deliver their messages more loudly and frequently with each passing year into the foreseeable future. There is little reason to believe that the trend of worsening disasters will let up any time soon. A new Guardian survey of 380 leading global climate scientists finds that a huge majority of them “foresee at least 2.5C of global heating” this century, far above the 1.5 degree goal that the world’s governments have, collectively, failed to take seriously. That level of warming implies decades’ worth of intensifying weather disasters. Though the scientists hasten to say, correctly, that we should not stop trying to limit carbon emissions, they aren’t optimistic we’ll do so any time soon. Our rational baseline assumption should be that all of the climate-related problems that have now begun to plague our society in earnest will only be getting worse for the remainder of most of our lives.

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It would be nice if we lived in a world where “the dire warnings of 380 leading climate scientists” were enough to make us change our ways. Alas, we live in capitalism instead. The insatiable urge to sell out the well being of as yet unborn generations in order to get rich today is built right into the fabric of the thing. I have written before about the fact that the most likely mechanism for spurring serious governmental action on climate change may end up being rising property insurance rates, along with the corresponding economic panic and inevitable goofy political mismanagement that they cause. And I am going to keep writing about it periodically, because it is one prediction that is playing out exactly as I knew it would, and the sooner that we can reach a consensus to get ahead of this extremely predictable crisis, the sooner we can decide to opt out of the most painful way of learning our lesson.

In a nutshell: climate change and its increasing disaster risk causes insurance rates to skyrocket for homeowners in areas exposed to fires and storms. Those skyrocketing rates become unaffordable, sparking an outcry from homeowners. State and local politicians step in to try to artificially limit the rise of rates, which does not fix the underlying problem, which guarantees that the size of the eventual national reckoning will only get bigger. We have already reached the “financial publications writing ‘Teetering on the Edge of a Crisis’” stories phase of this process. And it’s still early.

This week Even Greenberg, the CEO of insurance giant Chubb told an industry gathering that the effort by states to limit insurance rates would backfire.

“Climate change is sending price signals. Society will not adjust its behavior to the change of climate just because people talk about it,” Greenberg said. “We’re sending price signals very rationally. That starts driving behaviors.” […]

“We haven’t told people to live in a high-wildfire zone, and we haven’t told them to build magnificent homes in a wildfire zone,” Greenberg said. “I’m willing to insure them if I can charge the right price for the risk.”

Let me do something uncharacteristic here and agree with an evil insurance company CEO. In a qualified way, at least. This is a case where stepping on the insurance companies will do almost nothing to solve the problem at hand.

Affordable home in sunny California!

To illustrate why, it’s useful to imagine the five basic approaches that we as a society can take regarding insuring homeowners in risky areas:

1. No insurance. Live where you want. If your house gets burned up or flooded or blown away in a storm, you’re fucked. This is a recipe for creating a desperate refugee crisis. Not practical.

2. Private insurance with prices strictly regulated by the state. This works okay in normal times. But when actuarial tables tell insurance companies that risk is rising and that they must therefore drastically raise their rates, it breaks down. Politicians, who want to look like they are “doing something” about the immediate financial burden on homeowners, tell insurance companies they can’t raise their rates quite so high. Many insurance companies therefore make the decision to leave the riskiest markets. (This is a serious problem when the riskiest markets are not small, off the grid areas but rather, you know, “California and Florida.”) The hole left by the departing insurance companies is filled by A) fly by night pretend insurance companies that are not well capitalized enough to survive any big disasters, and B) state insurance entities that offer insurance to everyone, and also they backstop the fly by night private companies, and by the way they also lack the capital to cover payouts for a serious disaster. So, in essence, states enable citizens to get imaginary insurance so that the banking and development and real estate economies can continue operating as usual. This looks fine until a big disaster hits, at which time the states go begging the federal government for enormous bailouts. This is guaranteed to happen more frequently, and at bigger dollar figures, as time goes on. ***THIS IS WHAT WE ARE DOING NOW***

3. Absolute free market insurance. Risk to homeowners increases. Private insurance companies raise their prices accordingly. Existing homeowners in risky areas begin getting priced out of their own homes, because they can’t afford the insurance rates. Eventually this causes real estate prices in the area to crater, as anyone buying a home demands a discount to make up for the insurance burden. The real estate crisis causes a wider economic crisis. Given the value of coastal real estate, this economic crisis quickly becomes national and international, likely prompting a federal bailout that not only costs a bazillion dollars but also fails to solve the underlying problem. This is not great.

4. Genuine state insurance. Fuck private insurance companies and their profit motives! State governments offer their homeowners state-backed insurance. Theoretically, by eliminating the need for private profits (I’m disregarding the ideological insanity of red state legislatures here), the state can offer citizens lower rates than private companies would. That’s the good news. The bad news is that the better rates might be “ten percent cheaper than a rate that is one hundred percent too expensive for you.” If states wanted their own insurance companies to remain solvent, they would still have to charge rates able to cover expected payouts, which means the same dynamic would be at play driving unaffordable insurance prices. You could have the federal government do this instead of the states, which would be more financially stable, but would also create a situation where America was constantly using an ever greater share of its national wealth for the bizarre purpose of allowing people to continue living in places that are becoming less and less habitable. Sooner or later this would also precipitate a national political crisis, as states less exposed to disaster risk begin to argue, not unreasonably, that they should not be paying to subsidize beach houses.

5. Managed retreat. One thing you may notice about all of the preceding options is: they are all bad. Though they take slightly different paths, and unfold in slightly different time frames, they all end up in crisis. That is because they do not address the underlying problem, which is that climate change is making it more and more irrational for people to live in places that were perfectly nice places to live in before global warming. If you live on an island and the island is swallowed by the sea, it is no longer a good place to live. If you live in a forest and the forest is scorched by wildfires, it is no longer a good place to live. It’s easy to understand this in a vacuum. But human nature—our fierce attachment to our homes, our deep-rooted sense of belonging in certain places, our family histories that tie us to land—ensures that this will, in reality, be an excruciating process. Until we actually roll back climate change itself, the only path that makes sense is pursuing the systematic retreat of humanity away from high risk areas and into areas more suited for a burning, hurricane-wracked age.

Because most of our political leaders are cowards, it is very unlikely that they will reach a consensus to pursue this difficult but necessary path now, while there is still time. That would require, for example, Ron Desantis to come out and say things like “We’re not going to keep doing new construction on Miami Beach. Maybe you should all consider moving to Michigan.” Ha. Instead these politicians will pursue the other paths listed above. Climate change and its associated frequency and intensity of disasters will continue to worsen. I fully expect that we will end up at the “national political and economic crisis” stage of this process, which we will get to after the federal government is forced to say it will insure high risk homeowners and then sinks an enormous amount of wealth into rebuilding stupid things, until the investment class does the math and says “holy hell not even the damn federal government is stupid enough to spend $3 trillion rebuilding Florida beachfront homes” at which time real estate values will crater and the economic crisis described above will occur.

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That path involves spending insane sums for the sole purpose of pointlessly kicking the can down the road. We don’t need to do that. We can skip that part. We can, if we decide to be wise, proceed directly to the stage that will come after that, which is: spending insane sums for the necessary purpose of adapting to a new world that climate change has produced. That does not mean that the US government should order 50 million Americans to move. In practice, it probably means creating strong economic incentives to end new construction in risky areas, which must be paired with incentives to make up for that with new housing construction in more rational areas, which must be paired with a huge pool of money to soften the blow for existing homeowners to sell their homes in the teeth of a declining market, which must be paired with another pool of money to help less wealthy residents of risky areas move to new areas. One straightforward way to encourage this process is to allow insurance rates to keep going up and then—you can’t skip this part!—create a government program to enable the resulting hordes of insurance refugees to successfully relocate without losing all of their net worth.

This process will, at best, take decades. It will be shockingly expensive. But not as expensive as the alternatives, all of which will end up in the same place, with much, much more pain along the way.

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Also

• Related: Insurance Politics at the End of the World; The Heat Death of the American Frontier; The Insurance Apocalypse Conversation America Won’t Have.

• I wrote a book about the labor movement called “The Hammer,” which has now been reviewed in both New York and LA, so that I can begin calling myself a Coastal Elite. If you care about inequality, labor, and/ or politics, I think that you would enjoy the book. You can order it online, or wherever books are sold. I’m considering setting up a few more book tour dates in the coming months. If you’d like to bring me to your city to speak, email me. If you’d like to Paypal me $40 for a signed copy of the book, email me. Hamilton.Nolan@gmail.com.

• Forgot to mention that last week I wrote an important piece about popcorn for Flaming Hydra. This is the very definition of “news you can use.”

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