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Testimony: Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers

Public Citizen Testimony Before the Senate Committee on Banking, Housing, and Urban Affairs

By Carly Fabian

Chairman Brown, Ranking Member Scott, and Members of the Committee:

On behalf of Public Citizen, a national public interest organization with more than 500,000 members and supporters, we appreciate the opportunity to submit this testimony. Decisions by State Farm, Allstate, AIG, and other insurers  to limit coverage in multiple climate-vulnerable areas of the country have suddenly spurred national recognition of a climate-driven insurance crisis. As more frequent natural disasters lead to higher insured losses, this crisis threatens to render areas of the country uninsurable. Insurers that have fueled and continue to fuel the climate crisis with their underwriting and investment decisions are now scrambling to protect their profits at the expense of communities harmed by climate-related disasters like hurricanes, torrential thunderstorms, and wildfires. 

A climate-driven insurance crisis is drawing necessary attention to the realities that climate risk is financial risk and the public is already paying the price. While insurance is regulated primarily at the state level, Congress must identify and address serious gaps in state regulators’ ability to address this unique crisis, starting by assessing the national impacts, supporting the collection of comprehensive national data, and evaluating the potential for systemic risks to threaten the entire financial system.

Congress must also recognize that a just approach to climate mitigation, adaptation, and climate risk communication cannot rely on an industry whose focus on one-year contracts, short-term profits, and secrecy are at odds with long-term adaptation. The clearest sign, and perhaps the strongest example of moral hazard in the insurance crisis, is insurers’ practice of underwriting and investing in fossil fuels while using one-year contracts that allow them to abandon other ratepayers as soon as climate harms grow too severe. Early signs from this summer are already showing the devastating impact this strategy has on insurance markets, local and regional economies, and the potential threats to the financial system as a whole. Additionally, because low-income and communities of color are disproportionately exposed to climate-driven disasters, allowing insurance markets to face this crisis without oversight and intervention will replicate and compound past harms, forcing those who contributed the least to the risk to pay the highest price. 

Congress should prioritize efforts to limit warming to 1.5°C, as there is no solution for insurance access that will succeed in the long-run without reductions to risk. However, there are steps that Congress should take to start addressing unique insurance aspects of the climate crisis now, including developing public data sources and models to help consumers, regulators, and policymakers understand both climate impacts on insurance markets and insurers’ contributions to climate change. Additionally, as reinsurance costs rise and existing stopgaps prove unsustainable, Congress should not wait until a crisis moment to begin working with impacted communities and consumer advocates to develop a federal backstop program that stabilizes insurance markets, stops insurers from profiting by driving catastrophic harm to their own customers and markets, encourages and supports resilience and adaptation and, where necessary, provides ample support for those who need to relocate.

Congress should support a national, comprehensive insurance data collection. 

While climate impacts on insurance markets have been growing for some time, a shocking lack of granular data on insurance premiums and claims has prevented earlier recognition of the national scale of the crisis. As a result, media coverage has relied on selective information and withdrawal announcements from insurers, leaving the public, policymakers, and community planners vulnerable to whatever narrative the industry pushes to advance its own narrow interests. In addition to evaluating broad trends, the lack of granular data makes it difficult to differentiate between bluelining trends and unfair discrimination. As the industry increasingly presents higher premiums as a form of climate risk communication—price signaling that informs ratepayers about climate-related risk—the industry cannot continue withholding data necessary to evaluate climate impacts properly and assess whether insurers are in fact serving ratepayers fairly.. 

The lack of data also leaves federal financial regulators flying blind. While Secretary Yellen has stated that the Financial Stability Oversight Council (FSOC) must examine the impacts of insurance gaps on the rest of the financial system, it is not clear how FSOC will examine those impacts without data sufficient to begin measuring even the extent of the insurance gaps. Rather than wait for disasters to reveal gaps in coverage or financial instability, FIO should provide a comprehensive view of the scale and severity of the crisis across the country.

While insurance is regulated at the state level, Congress created the Federal Insurance Office (FIO) with the explicit recognition that the federal government must, at a minimum, play a coordinating role in collecting data due to limitations in individual states’ abilities to evaluate affordability and assess and mitigate systemic risk. Congress must not only support the data call, but ensure that FIO has sufficient resources to expand it to address affordability issues for other groups, such as small businesses and renters. The recent announcement from the National Association of Insurance Commissioners that it will begin assisting a growing number of states with similar data calls is a welcome development. However, given the speed and scale of the crisis, a comprehensive national data collection continues to be necessary—and a high priority. 

Congress should require transparency and accountability from insurers on their fossil fuel ties.

In addition to supporting FIO’s proposed data call on homeowners insurance, Congress should require insurers to provide FIO with data on their fossil fuel investments and underwriting. 

While public statements and sustainability claims from insurers have proliferated, a recent investigation launched by the Senate Budget Committee highlighted that a lack of updated investment data and near absence of underwriting data makes it difficult to compare companies’ claims with their actions. In 2016, the California Department of Insurance took the first step to initiate a state-level data collection on insurers’ fossil-fuel investments, and recent iterations of the data call shows that in 2019 insurers had more than $500 billion invested in fossil fuels in 2019. State Farm alone had over $30 billion. 

A national, annual data collection that includes underwriting is an important next step, particularly to provide data to federal financial regulators tasked with evaluating the micro- and macroprudential risks related to the climate crisis and clean energy transition. While physical climate risks for insurers have dominated the news this summer, a  paper by New York Federal Reserve staff warns the potential stranding of carbon-intensive assets could lead to systemic undercapitalization of the insurance industry and that the impact of this type of transition risk on insurers “appears to be more meaningful than the impact of physical risk.”

The Polluter Portfolio Disclosure Act, H.R. 4888, provides a model for collecting this data. The Act requires large insurers to provide investment and underwriting data to FIO and requires FIO to make versions available to the public for transparency and to the Financial Stability Oversight Council and Office of Financial Research for review and analysis.

Congress should support investments in usable climate data and advance public oversight of catastrophe models.

As attention to climate-driven disasters grows, more and more Americans are factoring climate change into their decisions about where to live, with 30% citing it in 2022. Yet at the same time, research not only shows patterns of migration away from certain vulnerable areas, such as flood zones near the Mississippi River, but also patterns of migration toward vulnerable areas. This seeming contradiction can be partly explained by the reality that there is not a single, static hazard to flee from but rather multiple, overlapping hazards that are spreading quickly while  in frequency and severity. As these hazards spread, the risk is quickly outpacing the minimal data available to average homebuyers to weigh risks over a long time frame. As a result, it’s not surprising that so many Americans are trading one hazard for another in the homebuying process, fleeing hurricanes, for example, while unknowingly flocking to extreme heat.

Attention to the crisis in insurance markets this summer has understandably led to hope that, as insurers claim, insurance premiums themselves will spur awareness of climate risk and lead to adaptation. Yet while broad attention to the connection between climate change and insurance is useful directionally, property insurance premiums are not designed for accurate communication of long-term risk. The first and most obvious limitation is that property and casualty insurers offer one-year contracts, which provide scarcely any information to a homebuyer considering a 30-year mortgage. Additionally, the multitude of factors involved in determining premiums, including inflation, can make it difficult to discern the relative impact of climate change. If experts at the National Association of Insurance Commissioners struggle to differentiate these factors—as the NAIC has argued to FIO—it is unlikely that the individual consumer would easily succeed.

As the Consumer Federation of America has highlighted through numerous studies and reports, insurers frequently try to offer premiums that reflect risk plus whatever else they can get away, including the use of credit scores that create racial disparities but also strategies like price optimization (charging more from consumers who are less likely to switch companies) or, in some cases, racial discrimination. If insurers continue to raise premiums after disasters even in areas that were not impacted or fail to offer discounts to homeowners who take mitigation steps, these profit-maximizing strategies will directly undermine efforts to evaluate climate risk. Additionally, as highlighted by United Policyholders, insurers increasingly seek to limit their exposure by changing policy terms to exclude coverage through alterations to terms that are increasingly difficult for even a highly educated consumer to read. In short, insurers simply do not provide straightforward information to consumers through pricing, much less any other means. 

Certain steps could increase the value of insurance premiums, such as requiring discounts for homeowners who take mitigation steps, as California has recently done, or providing baseline national coverage standards. However, Congress should recognize the inherent limits of insurance companies and premiums to communicate risk—and that insurance companies and their premiums sound like appealing solutions for communicating climate risk not because they are well-designed for this purpose but because there is so little else available. Congress should at a minimum support FIO and other federal agencies in filling that gap and should also support the National Oceanic and Atmospheric Administration in developing more robust sources of publicly available and usable climate data to inform the public’s decisions about when to move and where to live. 

Congress should also highlight and address a growing gap between the industry and the public’s understanding of climate-related risk as insurers increasingly seek to rely on proprietary catastrophe models that piggyback on federal data collection but are not made unavailable to the public. As climate change increases the frequency and severity of certain perils, forward-looking information is increasingly important for evaluating physical risks. The best modeling of those risks, based on information produced by the federal government or with its support, cannot be conducted in secret and kept from the public.

First, proprietary models make it difficult for regulators to determine when insurers may be raising in an unjustified or unlawful manner. As it becomes increasingly important for regulators to determine whether low-income communities and communities of color are paying more because of higher environmental risks or unfair discrimination, the potential for opaque models to reproduce bias is particularly concerning. Moreover, as the industry itself frequently acknowledges, catastrophe models and their integration of climate models remain limited in value, particularly for perils like wildfires. Overconfidence in opaque models could lead consumers, insurers, regulators, and policymakers to misjudge risks. 

As Boston University law professor Madison Condon argues, climate data should be a “public good.” Condon has pointed out that the federal government’s role in the development of global climate models has not yet translated into equivalent investments in “usable” climate science to inform adaptation decisions. At the same time, private climate service firms that charge high prices for access to proprietary catastrophe models rely heavily on public inputs.

Catastrophe models should be developed to benefit consumers, regulators, and policymakers. A report from the President’s Council of Advisors on Science and Technology provides a pathway for producing robust, usable climate data to inform adaptation, as well as investments to better evaluate proprietary catastrophe models and develop public catastrophe models. “Just as Americans today have access to high-quality operational weather forecasts,” the report states, “the time has come to invest in an operational climate science that provides improved tools for risk assessment and management.”

Congress should develop a public reinsurance program. 

Congress should also recognize—and remedy—gaps in insurers’ ability to provide a stable, just approach to adaptation. As insurers face greater uncertainty about climate-driven losses, primary insurers will increasingly pull back from vulnerable areas. As insured losses increase around the world, dependence on a small group of reinsurance companies that provide a backstop for high losses through reinsurance contracts (insurance for insurance) is already proving insufficient and unstable.

Without intervention, sudden gaps in insurance access could spread to the rest of the financial system, and taxpayers will inevitably end up bearing these costs and bailing out insurers. In 2020, the Commodity Futures Trading Commission warned that “sub-systemic” shocks like these one could create a “systemic crisis in slow motion.” Instead, the federal government can proactively intervene with a backstop that would create a stronger safety net for consumers and their insurers while incentivizing needed reforms. 

Additionally, as taxpayers and consumers across the country are already paying more for disasters through inequitable disaster aid and higher insurance premiums, the question should increasingly focus not on whether someone will need to pay for greater losses but who should pay and what programs are worth paying for.

When the private market fails to offer sufficient coverage, the government can offer a backstop for the highest costs. By developing a public reinsurance program, the federal government could reimburse insurers with a percentage of the claims that exceed a specified threshold in exchange for minimum requirements for coverage. By offering a limit to losses, public reinsurance provides insurers with certainty they need to reenter areas they otherwise would withdraw from. In exchange for reinsurance, insurers must cover certain perils or individuals, creating a stronger safety net and more stable foundation for adaptation. Insurers should also be required to provide reasonable rates and to end their current practice of participating in and profiting from the root cause of the current harms to ratepayers and turmoil in insurance markets—fossil fuel production wildly in excess of science-based climate pathways. 

Public reinsurance provides an alternative to existing stopgaps that have proven increasingly unsustainable. While many consumers in vulnerable areas now depend on state Fair Access to Insurance Requirement (FAIR) plans for expensive, last-resort coverage, these programs concentrate risks and are increasingly overburdened. As insurers increasingly seek to cut out additional risks, single-peril models like the National Flood Insurance Program (NFIP), which has primarily benefited insurers and the wealthiest homeowners without successfully expanding coverage, should not be replicated for additional perils like wildfire.

At the federal level, the Terrorism Risk Insurance Program provides a model for ensuring access. International models from New Zealand, France, and Spain also provide examples of national reinsurance backstops that cover natural disasters. 

An essential component is mechanisms to support low-income communities, who are more exposed to perils like wildfires and floods. While the development of a public reinsurance program could provide a more stable and just foundation for adaptation, it must also address difficult questions about homes that are increasingly becoming uninsurable. Congress should actively consult affected communities, particularly low-income communities and communities of color in answering these questions.

To address the question of who will pay, Congress should also consider the development of a “polluter pays” fund to require the biggest emitters and their financial supporters, including insurance companies, to provide initial funding to support low-income communities and communities of color that are hardest hit by the insurance crisis. After decades of undermining their own markets and using policyholders’ money to bet against them, insurers should pay too. In Connecticut, a bill to establish a surcharge on fossil fuel insurance premiums to fund climate resiliency provides an example of a way to ask insurers to pay their fair share of the costs of climate change. Similar policies that both disincentivize insurance support for damage-causing fossil fuels and incentivize investments in climate resiliency and renewable energy can be built into a public reinsurance program.