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All across the United States, extreme weather is costing people money. In the Northeast, air pollution from drought-fueled, record-breaking wildfires in eastern Canada briefly made New York City’s air quality the worst in the world. In California, wildfire damages totaled $102 billion in 2018 alone. In the South, the average homeowner has seen huge rises in homeowners’ insurance premiums in flood-prone Florida, while Texas regulators are spending tens of billions to protect the power grid from more weather-driven blackouts.  

Noah Gordon
Noah J. Gordon is acting co-director of the Sustainability, Climate, and Geopolitics Program and a fellow in the Europe Program at the Carnegie Endowment for International Peace in Washington, DC.
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The development of insurance for physical assets such as buildings, boats, warehouses, and commodities was among the foundational developments of modern capitalism. But the limits of insurance are being tested, leaving behind the question of who should pick up the tab. The three most populous U.S. states—California, Florida, and Texas—are taking different approaches. And the different, often increasingly divergent, directions these states take will do much to influence other jurisdictions, both within the United States and beyond.

In California, the five largest wildfires on record have all occurred since 2018, and private insurers are no longer willing to bear the risk of future destruction. State Farm, California’s largest homeowner insurance company, announced last month that it will stop selling new coverage to homeowners, not just in fire zones but everywhere in the state. Allstate took a similar step last year, explaining that “the cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes and higher reinsurance premiums.” State regulators had been forcing private companies to renew policies they would have liked to cancel, but insurers seem to have had enough.  

Ian Klaus
Ian Klaus is the founding director of Carnegie California. He is a leading scholar on the nexus of urbanization, geopolitics, and global challenges, with extensive experience as a practitioner of subnational diplomacy.
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When California homeowners can’t get private insurers to cover their homes against fire, they often turn to the FAIR Plan, a state-run “temporary safety net” meant to provide basic but expensive coverage until they can get traditional private insurance. The FAIR Plan is funded by all insurers licensed in the state, so as costs rise, private insurers could be forced to ask all California homeowners to subsidize FAIR Plan coverage in high-risk areas. But when the price of insurance rises, fewer people obtain or renew their coverage. And when people suffer losses not covered by insurance, federal aid programs step in with taxpayer dollars to help them out. For the state as a whole, there’s no cheap insurance against fires in a warming world.  

While forest fires are little threat to Florida, the Sunshine State has long dealt with a broken market for private insurance against another natural disaster: floods. Earlier this week, a Florida news outlet reported that Farmers’ Insurance had stopped writing new property insurance policies in February. In a memo to agents, the company noted that “catastrophe costs are at historically high levels,” and rising prices on factors such as lumber and labor are increasing the cost of claims and driving down profitability.

But Florida’s insurance problem isn’t new. Following the catastrophic 1927 flooding of the Mississippi River, most U.S. private flood insurers retreated from the market. By 1968, in the wake of America’s first billion-dollar hurricane (Betsy), the U.S. Congress decided that it had to step in where private insurers wouldn’t and created the National Flood Insurance Program (NFIP). NFIP is a federally subsidized program that offers affordable insurance to residents and businesses as long as their communities agree to undertake efforts to reduce flood risk, such as adopting certain building codes and making flood maps of at-risk areas. 

Since Hurricane Katrina smashed New Orleans in 2005, the program has been unable to cover its costs with the premiums it collects. It has had to borrow tens of billions from the U.S. Treasury, and in 2017, Washington forgave $16 billion of NFIP’s debt so that the damages from Hurricanes Harvey and Irma wouldn’t exhaust its borrowing authority. As sea levels rise, flooding is becoming more frequent along the U.S. coastline—not only along the East and Gulf coasts but also on the West Coast.

In response, the Federal Emergency Management Agency, which oversees NFIP, is gradually raising premiums so they actually reflect the increased flood risk. Florida, though, is one of ten states suing President Joe Biden’s administration over the plan to raise rates. Its state legislators expect government of all levels to shield Floridians from the consequences of climate change, without doing anything to address the causes of the crisis.

Florida Governor Ron DeSantis is spending $893 million in state funds to try to salvage the doomed Florida Keys, even as he calls climate change “politicization of the weather” and bans state agencies from using public funds for sustainable investments that might reduce carbon emissions. In addition, the state does not require home-sellers to disclose whether their properties have previously flooded, and such regulatory gaps are one reason why sea-level rise has yet to affect the price of waterfront properties. (Residential properties prone to flooding are overvalued by at least $121 billion.)

In Texas, the problem is the electricity grid, which suffered a blackout in February 2021 amid severe winter storms. Millions were left without power for days, and hundreds of people died. The biggest threat to supply was the freezing of natural gas pipelines. The incident was a reminder of the strain climate change places on electricity grids, as more activities are powered with electrons rather than molecules, increasingly by highly variable wind and solar power, and heatwaves increase demand for cooling. A group of more than 100 insurance companies active in Texas are suing the state utility provider, alleging that it “failed to plan and prepare for the winter storm event, and the energy failure caused significant property damage to the policyholders of plaintiffs.” The companies expect to pay more than $10 billion in claims resulting from the winter storm and blackout.

However, instead of focusing on expanding its thriving renewable energy sector or expanding interconnections to neighboring grids—Texas is the only state with its own power grid—the Texas state government has responded to these pressures by making it harder to connect rural renewable projects to the grid. 

Three big states, three different approaches to paying for damages caused by extreme weather. California has state-run insurance step in as private firms pull out as it tries to mitigate climate change’s effects. For example, the state has proposed to make electricity bills partially dependent on residents’ incomes. In doing so, it’s asking wealthier citizens to shoulder the burden of modernizing the power grid, including by burying power lines so they don’t spark so many wildfires. Texas, meanwhile, is subsidizing the construction of new natural gas power plants, which have helped drive the climate crisis, and paying for them by adding charges to all residents’ power bills and drawing funds from the regressive state budget. And Florida is spending state funds to try to shore up low-lying coastal areas while fighting federal efforts to make publicly subsidized insurance reflect the cost of living in a floodplain in a world with rising water levels. 

Who will bear the cost of climate change? It’s a burning question in international affairs, as the climate finance community prepares to meet in Paris to discuss a “new global financing pact” to accelerate the green transition and help developing economies. It’s a burning question on the subnational level, too, from the offices of State Farm in California, to the Texas state Capitol in Austin, to the sinking Florida Keys. The residents of these states all have their own ideas about our climate-changed future: assuming perhaps that warming won’t be as bad as expected, or that state and federal governments will pay to construct higher seawalls or rebuild scorched homes, or that they wouldn’t be allowed to buy a home in a place considered uninsurable. Many of them will be wrong.