Yves here. This informative interview with political economist Tom Ferguson is consistent with our recent discussions of the climate change train that is bearing down on the real estate insurance and housing markets. Ferguson describes how insurers have been well aware of how climate change is set to make insurance unaffordable in many markets, yet have chosen to stay mum out of reluctance to have the fossil fuel industry target them (I would like to have learned more about exactly what the carbon emitters could do). Ferguson argues that insurers are acting just like mortgage lenders in the runup to the 2008 crisis. I don’t agree with that analogy with respect to property and casualty insurers: their policies are only for one year, unlike mortgages, so they can reprice or exit a market. Ferguson include the example of State Farm in California doing just that.
No one has legally tested the legal validity of state regulators requiring insurers to issue new policies to existing customers after an adverse climate event. If that requirement also includes price restrictions and costly new “exit” provisions, that looks like a Constitutional “taking,” as in eminent domain lite. Mind you, I haven’t seen any evidence that regulatory pressure to keep insurance artificially affordable has yet gone that far. But you can see the direction of travel.
Where the train wreck is coming, however, is in mortgages and home (and commercial real estate) prices. Mortgage lenders will first factor in higher insurance costs in their lending models, as in how much credit they extend in light of borrowers having less of their income remaining to service a mortgage. They may start requiring much higher down payments for mortgages in climate-afflicted areas. The end game, as we indicated, is that mortgages will become scarce and costly in climate-change exposed areas, leading to falls in housing prices. That in turn will cycle through to property tax revenues, wrecking municipal budgets.
As Ferguson has said, “If you want a happy ending, watch a Disney movie.”
By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
veryone’s freaking out about soaring homeowner’s insurance costs in the wake of devastating California fires. Right now popular anger focuses mostly on greedy insurance companies, but is that the whole story? Are they truly the main reason behind these rising premiums, or are other factors at play?
Thomas Ferguson, Director of Research at the Institute for New Economic Thinking (INET), dives into the growing crisis, arguing that climate change denialism is hiding its true extent. Insurance companies, he notes, are fully aware of the rising costs linked to climate change, but they avoid confronting the powerful political influence of the fossil fuel industry. When regulators don’t approve their demands for higher rates, private insurers simply pull out of high-risk markets. Meanwhile, local real estate and construction interests keep building in places that our increasingly unpredictable climate just can’t handle anymore.
The result is a no-win scenario where everyone tries to shift the real costs of a warming planet onto someone else, while key players continue to pretend that climate change isn’t happening. The result? Homeowners are paying higher premiums for policies that provide less coverage, whether through private insurers or underfunded state-backed programs designed as a last resort.
Ferguson highlights that the challenges homeowners face go beyond just rising insurance costs and limited coverage—they also include broader economic consequences, like being unable to secure a bank loan or mortgage without proper insurance. He warns that while the Federal Reserve and other regulators avoid addressing climate change, risky building practices continue at the local level, putting homeowners at even greater risk. Meanwhile, big banks keep investing in fossil fuel companies, worsening the overall threat to our financial stability. Together, these factors create a dangerous cycle that leaves homeowners and the broader economy vulnerable.
Ferguson spoke to INET about what media reports are overlooking and what you really need to know about the problem – and how we can tackle it.
Lynn Parramore: We’ve all seen the reports about how home insurance is getting more expensive and harder to find in parts of the U.S. What’s your take on this, especially with the growing threats of wildfires, weather, and other factors at play?
Thomas Ferguson: So many weird things are flashing past us these days that it often feels like some Matrix-style alternate reality. Current discussions of homeowners insurance will do little to quiet such feelings.
First off, it seems that this January was the hottest on record – a result that shocked many climate scientists who were expecting that a swing back in ocean cooling conditions related to La Niña would retard that. This did not deter the U.S. from pulling out again from the Paris Climate Accord or stop the Environmental Protection Agency and other federal government agencies from drastically revising their websites to bury mentions of climate change.
Meanwhile, major media outlets are publicizing studies by a private data service that forecast which parts of the country face very large increases in homeowners insurance in the next decades. With smoke from the Los Angeles fires still hanging in the air, the Wall Street Journal has also recounted in detail how State Farm Mutual, a leading insurer, deliberately underpriced insurance in California to gain market share even as it knew that likely losses from climate-related catastrophes were increasing. After profiting handsomely, a new management team started to pull the plug in the year before the fires. They canceled policies in many high-risk areas leaving policyholders high and dry.
In earlier work on the causes of inflation, Servaas Storm and I zeroed in on rising insurance costs.
Some of the price hikes were due to temporary supply issues with lumber and other materials during the height of Covid. And, of course, there’s probably been some opportunistic pricing by certain firms as well. But we concluded that a key driver of rising homeowner’s insurance prices is a powerful structural force, impervious to Fed monetary tightening: sharply rising costs from climate change. We also spotlighted the role of money-driven, politically determined regulatory bodies in generating inflation – another topic that the Fed and most mainstream economists shy away from discussing.
So the terrible news about Los Angeles and the ensuing din about holes in home insurance coverage came as no surprise. It is obvious that homeowners insurance is now a classic case of what my old friend Edward S. Herman used to call “Deep Doublethink.”
LP: So basically, rising damages from climate change are pushing up insurance costs, but the government and big corporations keep brushing it off and making choices that just make things worse.
TF: Correct. In the current federal and most Republican state governments, talk about climate change resembles what happened with newsreels picturing Leon Trotsky in the Soviet Union after Stalin became dictator: you can’t mention it; it has to be scrubbed out of everything. But the problem is real and rather worse than a Treasury assessment published in January lets on, even in the short run.[1]
Fortunately late last year, the Senate Budget Committee issued a separate staff report on the insurance crisis and published data squeezed out from most major insurance companies on the extent of homeowner policy non-renewals – the most dramatic expression of insurers’ unwillingness to take on more risk.[2] The Senate report is valuable for the additional year of data it adds and for breaking down patterns by counties. My colleague Jie Chen and I reorganized the array by state since homeowner insurance is state-regulated. We then plotted policy non-renewals over time.[3]
The resulting picture is worth more than a thousand words: Non-renewals are up virtually everywhere, with some states seeing explosive rises.
It’s unrealistic to believe there’s a simple solution to this tough situation. Even if you can be sure that threats to leave the market are sometimes scare tactics to pressure state regulators, the increase in non-renewals speaks for itself. Walking away is costly for insurers.
The repricing and reluctance to do business at old rates is also clear in the market for reinsurance. Primary insurers normally mitigate some of their risk by selling portions to reinsurance companies – which you can think of as insurance for insurers. Reinsurance, though, is a worldwide market, and many of the biggest firms outside the U.S. are now balking. In contrast to American companies, European insurers talk much more openly about climate change. Officials with Swiss Re and other firms are forthright about their doubts that private markets can absorb all of the risks that global warming is creating at anything like current prices.
As California discovered, forbidding insurers from updating models to better forecast climate losses is self-defeating. Companies just start leaving. States can use regulation to make sure homeowners get credit for investments that increase their resiliency, but there’s a real risk that everyone is being overly optimistic, given the rapid pace of global warming.
States can perhaps improve things by building their own models to check hazard assessments by individual insurers and even reinsurers. That can help identify cases where insurance concerns are crying wolf. Or, as California also tried, regulators can slow down requests to adjust rates via a thicket of red tape.
But such measures do not solve the underlying problem.
The climate is really warming, and a shrinking market opens doors to oligopolistic behavior among the few remaining insurers, including some that may be taking risky bets on short-term profits. Underpricing insurance also reduces incentives for localities to take steps to reduce their vulnerability by rezoning, upgrading building codes, and similar steps.[4]
LP: What do homeowners do when insurers pull out of town?
TF: As insurers withdraw, homeowners and state regulators have no great options. Private markets for individual properties do exist in the so-called “excess and surplus” part of the market. But the costs are very high. That market is also far less regulated than standard homeowner insurance, with markedly fewer restrictions on firms’ behavior and business models. That brings hazards of its own.
As a result, states dealing with skyrocketing premiums often reluctantly turn to under-the-radar socialism, setting up contingency insurance systems to help cover the gap. Those policies are also expensive, though nothing like what “excess and surplus” markets charge. But they typically come with coverage caps and onerous exclusions.
Many state-run schemes have another problem: commitment to fiscal austerity (“no new taxes”) leaves them struggling with insufficient funding.
Public authorities justify the practice by confidently claiming they can tap into tax-advantaged bond markets if things take a turn for the worse. That can work in isolated cases, but if, for example, major storms wreak havoc across several states all at once, the price of topping up coverage will go way up. There are other options: as in California, regulators can contrive schemes to spread the costs of real catastrophes over the rest of the state or hit up insurers doing business there for extra payments. This won’t end well; just watch what’s going to happen in California.
LP: Where are we headed if things continue this way?
TF: First of all, insurers are not stupid. If they stay in the state at all, they will try to price in that additional risk, raising everybody’s premia for the indefinite future. No less crucially, the lack of access to insurance threatens overall financial stability. To get a bank loan or a mortgage in both residential and commercial real estate, you simply must have insurance. When you have an insurance desert, though, broader downward economic cascades easily get started.
Real estate sales suddenly get difficult. That can spread to other nearby areas. Problems can quickly multiply beyond the immediate area. Banks and other asset holders experience their own “Minsky moment,” fearing that the loans or mortgages they hold are worth far less than they originally thought.
How bad things get is a question of degree: How far in arrears borrowers are; who is able to negotiate what, etc. When some areas in certain states slowly become uninhabitable because of global warming, a crash like 2008 may not necessarily result, but real threats remain. When a Republican Senator from the hard-hit state of Louisiana says, “I hate to see the federal government get into the insurance business — but my God, it looks like we’re going to have to,” reality is sending a message it would be unwise to ignore.
This is especially true given the evidence in the earlier mentioned Wall Street Journal piece: It appears that the dreaded “IBG” – “I’ll be gone” – syndrome is back. This was the pattern of carefree lending characteristic of the mortgage-backed securities boom before 2008: corporate executives happily created and sold mortgages that they knew very well were likely to blow up at some point down the road. But in the meantime, their company’s revenues boomed, along with their own bonuses. Turnover among executives ran high, making the temptation to take the money and run overwhelming
According to the Journal, in recent years State Farm Mutual deliberately underpriced California homeowner insurance as other carriers retracted and restructured itself to make sure weakness in the state unit could not spread to the rest of the concern. As a result, the company’s share of the market increased sharply as did profits. Unlike most of the herd that thundered into the abyss in 2008, though, State Farm artfully checked itself before the fall. New management insisted on more realistic actuarial standards, leading the firm to decline to renew thousands of policies. This time the policyholders ended up holding the bag, along with, of course, the other parts of the state whose insurance rates are likely to rise sharply as the state fund digs itself out of its monster hole.
The Journal account is a warning: We have run this experiment before. Trusting all insurance companies to self-police in the face of the temptations of climate change is no more sensible than trusting all banks and mortgage companies to issue sound mortgages. The legendary justification Citibank’s Chuck Prince offered for pushing the envelope so aggressively in the run-up to 2008 – “as long as the music is playing, you’ve got to get up and dance”– says it all.
Early in the Biden administration, Senate Republicans and West Virginia’s Joe Manchin joined forces to block Sarah Bloom Raskin, a highly qualified nominee to the Federal Reserve Board, because of her interest in climate change’s effect on the financial system. Now, with a new administration taking over, media accounts detail how the Fed isrunning from the public discussion of the issues. In 2025, climate change is not the only threat to financial stability, but it is a real one. It is foolish not to monitor interactions between climate change and insurance and to make sure that pricing reflects real changes in climate hazards. Even in this post-modern world, reality still bites hard.
Notes
[1] Opposition from Republicans and state insurance commissions created major problems for the Treasury’s study, limiting the data it could draw on. It is a puzzle why the Treasury did not respond more forcefully to the recalcitrants or refer to the Senate Budget Committee data discussed below since the latter came out before the Treasury published.
[2] The Senate report indicates its data cover large companies aggregating to about two-thirds of the national market for homeowners insurance. Cancellations, which are not the same as non-renewals, arising from payment delinquencies have also risen, as homeowners find themselves squeezed by rising costs. See the comments of a Treasury analyst on the study.
[3] Data and jurisdictions in Alaska are sui generis and were dropped.
[4] The remaining insurers can and do offer incentives for threat mitigation. In the American dual economy, there are obvious issues of equity and public investment, since the poor will have the biggest problems adjusting. Addressing those issues, though, is unlikely as long as discussions of global warming are taboo. The topic is too complex for this post. Some years back, a fine INET study published data that broke down air pollution hazards by congressional district for both income and race; climate groups and congressional committees were not interested.
