How Climate Change Is Turning Into the Biggest Insurance Crisis the World Has Ever Seen

Imagine that there is water in your living room when you wake up. Not a tiny leak. The couch floats. For the second time in five years. When you call your insurance company, you don’t get sympathy or a visit from a claims adjuster. A letter informing you that the policy will not be renewed is the response. In other places, premiums have tripled. The mortgage lender has called. And in a market that has begun to price in risk the way actuaries always knew it should but politicians never permitted, the house—the one you saved for, the one the children grew up in—is subtly losing value.

This is no longer a hypothetical situation. Homeowners are quietly breaking their mortgage contracts due to rising premiums in low-lying English neighborhoods near rivers, parts of Florida, large portions of California, and coastal Australian communities. The insurance industry, which has been modeling risk for decades using outdated weather patterns, is coming to a realization that, up until recently, was easy to ignore.
Even the most climate-skeptical insurance executive would find it difficult to dispute the stark 2024 figures. Munich Re, the largest reinsurer in the world, estimates that climate-related disasters caused about $320 billion in economic losses worldwide that year. Only roughly $140 billion of that was covered by insurance. The gap between what disasters cost and what insurance covered is wide, and it’s getting wider every year. Everyone pays for worsening weather extremes, but particularly those in nations with weak insurance markets and inadequate government safety nets, according to Munich Re’s chief climate scientist.

The math has become truly uncomfortable in the United States. Between 2018 and 2023, the average cost of home insurance increased by almost 34%. This is not inflation; between 2008 and 2024, insurance increased by 74% and home prices increased by 40%. Climate risk is subtly restructuring the cost of home ownership, and most buyers aren’t factoring that in when they sign the mortgage, as indicated by the two numbers moving in the same direction at different speeds. In the United States, 27 distinct weather or climate-related incidents in 2024 alone resulted in losses exceeding $1 billion. The National Oceanic and Atmospheric Administration estimates that the total cost was $182.7 billion.

Although the issue is not limited to them, Florida and California have emerged as the most prominent pressure points. The average annual premium for homeowners in Florida is currently about $15,000, which ten years ago would have seemed ridiculous. In 2023, Farmers Insurance withdrew from the Florida market, leaving about 100,000 clients behind. Since 2022, seven of the twelve major carriers in California have either stopped providing coverage or drastically cut it. Speaking at a conference in Sacramento, California’s Insurance Commissioner made a statement that was surprisingly direct for a regulatory official: people are no longer looking for insurance in California. They’re looking for it.

Beneath the surface, most homeowners are unaware of a reinsurance squeeze. To guard against disastrous years, insurance companies purchase their own insurance, a process known as reinsurance. Reinsurers sharply increase their rates in response to an increase in disaster losses, and the costs are borne directly by consumers. Even when regulators aren’t paying attention, the market is listening to the clear signals that the biggest reinsurers in the world are sending through their pricing. More than half of the risk-driven premium increases homeowners have seen over the last five years can be explained by rising reinsurance costs alone, according to a study by economists Benjamin Keys and Philip Mulder. According to their estimate, households in climate-exposed areas may have to pay an additional $700 in premiums annually by 2053, on top of already-absorbed increases.

The deeper structural issue, which the US Senate Budget Committee referred to as a “looming economic threat” in its report from December 2024, is what occurs when insurance not only becomes more expensive but also vanishes. Insurance is necessary for banks to grant mortgages. A house cannot be mortgaged without insurance. Property values plummet in the absence of a mortgage market. Climate risk expert Spencer Glendon, an executive fellow at Harvard Business School, has made a direct comparison to 2008, pointing out that while physical damage would be the mechanism this time rather than financial engineering, the cascade of declining asset values, increasing defaults, and losses bundled into securities is structurally similar. According to Loughborough University researchers, if current trends continue and flood defenses continue to lag behind schedule—by 40% as of 2024—up to 3 million homes in the UK could become practically worthless within 30 years.

Watching all of this unfold gives me the impression that the insurance crisis is the aspect of climate change that will affect the majority of common people before flooding, fires, and storms do. It first appears as a notice of renewal, then as a notice of non-renewal, and finally as a search for coverage that is becoming less and less available at a cost that allows the mortgage. Ishita Sen, an insurance market researcher at Harvard, put it in terms that are worth considering: in extreme cases, rising insurance costs could force households to default on their mortgages. She warned that a crisis might arise if those numbers significantly increase.

It’s still unclear how much of the political response will concentrate on the actual source of the issue, including choices about where to build, what to build with, and how much it will cost to sit in a floodplain or on a hillside that is prone to fire. Florida and California have not yet taken significant action to limit construction in high-risk areas. That is politically challenging, and local governments, who rely on development for tax income, make the majority of the decisions regarding land use. The incentive system operates in the exact opposite way. The insurance sector will continue to shrink until it is reorganized, and the disparity between the costs of climate change and what is truly covered will continue to widen.