Where rising climate risks and insurance costs will hit hardest

With recent federal actions and policies creating additional cost pressures for energy, groceries, and fuel for most Americans, a core driver of unaffordability has taken a back seat in the coverage: climate change. National inaction to adapt to and curb the impacts of climate change has created a growing gap between the risks of extreme weather and disasters and the ability of our structures to withstand these shocks. The strain from this gap is already undermining the affordability of homeownership—a crucial asset that most Americans rely on to build, retain, and pass on wealth.

Through its effect on the homeowners insurance sector, climate change could pose a massive threat to affordability. First, as premiums increase in response to rising risk in some regions, homebuyers may struggle to take out an affordable mortgage. Second, low-income homeowners tend to be price elastic, meaning that they respond to higher premiums by dropping or reducing coverage. With more families living in disaster-exposed areas than ever before, this means cash-strapped families will be forced to accept a higher level of financial risk when a disaster inevitably occurs.

But these pressures are not borne equally across communities; they vary due to a range of place-based factors largely correlated with disadvantage. In low-income Black and Latino or Hispanic communities (where substantial barriers to homeownership already exist), instability in the homeowners insurance market is more likely to have large, negative effects. With federal funding for climate resilience unlikely to materialize anytime soon, disadvantaged families and communities are left bearing a greater financial responsibility for adapting to the climate risks they face.

One concept to help us understand how climate-related risks could differentially impact households across the U.S. is adaptive capacity, or the ability of a household or community to plan for and respond to the impacts of climate change. By analyzing adaptive capacity in relation to instability in the homeowners insurance market, this report identifies which regions and demographic groups that instability is likely to adversely impact. Drawing on data from the U.S. Treasury Department on homeowners insurance, the Federal Emergency Management Agency’s (FEMA) National Risk Index, and Census Bureau demographic data on wealth, race, and ethnicity, this report shows the insurance premium increases and nonrenewal rates (the proportion of policies that an insurer decides not to extend at term’s end) that different demographic groups and regions faced between 2018 and 2022.

While the insurance market commands headlines when it falters, the sole culprit isn’t market failure. It’s also a lack of political will, consistency, and action to address runaway climate risks. This report shows that without policy support to reduce risks and bolster adaptive capacity, homeowners insurance market instability has the potential to widen wealth divides and entrench race-based gaps in homeownership. These relationships are complex and can be highly localized. The dynamics of state and local policies that can also affect housing affordability and access in uneven ways are discussed at length in a companion article to this report.

Assessing household-level adaptive capacity in relation to homeowners insurance

Adaptive capacity is a measure of the potential for a household, community, or nation to successfully respond to or reduce the impacts of climate change over the long term by taking individual or political actions. At higher geographic scales, it is largely a function of governance, shaped by the effectiveness and technical expertise of government, spending on infrastructure, and civic and community engagement, among other factors. However, at the household level, adaptive capacity is correlated with predictors of financial security that shape individual decisions over spending, mobility, and other choices. These include wealth, income, debt, education, homeownership, and employment stability. Finally, adaptive capacity is a relative measure. This report, for example, measures average household-level adaptive capacity across ZIP codes rather than in relation to a predefined benchmark.

Adaptive capacity is a relevant concept in understanding how climate change is likely to affect the affordability of homeowners insurance and access to homeownership. Differences in adaptive capacity ultimately shape how households experience rising insurance costs, whether as a manageable increase or as a strain that makes it harder to stay in place or purchase a home. For example, a household with a high adaptive capacity living in a fire-prone area may respond to increasing wildfire risks by fireproofing their home, purchasing stronger insurance coverage, or migrating to less exposed areas. In contrast, a household with low adaptive capacity may lack the resources to take these actions, instead being forced to live with higher risks of disaster-related property damage and displacement as well as less affordable housing.

Among the many factors that contribute to adaptive capacity at the household level, income, homeownership, and home value are powerful proxies, as they provide an indication of the wealth—and thus, financial liquidity—of the households within a region. Therefore, to assess which areas are likely to be affected by insurance instability, this research categorizes ZIP codes across the U.S. into four categories based on how climate risks overlap with an index combining median home values, income, and homeownership rates. Shown in Table 1, these four categories are “adaptable,” “at risk,” “vulnerable,” and “low risk.”

In the following sections, these categories are used to analyze premium increases and nonrenewal rates in the homeowners insurance market in relation to wealth, climate risks, and race and ethnicity. Importantly, this analysis is intended only to provide a preliminary indication of how instability in the homeowners insurance sector may differentially impact regions and demographic groups. A more rigorous, causal analysis would require a greater level of disaggregated and longitudinal data on homeowners insurance, and a more comprehensive specification of adaptive capacity that combines neighborhood- and household-level factors. As explored in the companion article to this analysis, a range of other neighborhood- and household-level factors also influences pricing in the homeowners insurance market, as well as climate risks, housing access, and affordability.

Premiums have increased most for households in ‘adaptable’ ZIP codes, but ‘vulnerable’ ZIP codes are more likely to feel the impacts of increased costs

Table 2 shows that in terms of total dollar values, premiums have increased most for ZIP codes in the “adaptable” category. These ZIP codes—which include households facing high or moderately high climate risks, but are also more likely to be high-wealth households—may be better positioned to absorb or respond to rising costs by expanding coverage or undertaking home alterations. For this group, average premiums increased by $204 (or 10.66%) on average, compared to $54 (4.02%) for low-risk ZIP codes.

In contrast, average premium increases and the rate of those increases were small for ZIP codes categorized as at risk or vulnerable, with average premiums increasing by $89 and $54, respectively, from 2018 to 2022. This is well below the national average of $104 (or a 6.75% increase over the period). However, looking at the ratio of premium changes to median home values (which provides an indication of how significant premium changes are in relation to home values), vulnerable ZIP codes saw slightly higher relative premium increases, though the variation is minimal across the adaptable, at risk, and vulnerable categories. Even where increases were smaller in dollar terms, they may represent a greater strain relative to household resources in lower-wealth communities. Low-risk ZIP codes—areas with high or moderate wealth and low climate risks—saw small premium increases in dollar terms and also small increases proportional to median home values.

Other research that has analyzed the same Treasury Department insurance dataset has shown that much of the increase in insurance premiums that is observable at the national level can be explained by high-wealth ZIP codes, where premiums have substantially increased. The correlation of these ZIP codes with high climate risks could partially be explained by the overlap of desirable, highly valued property in areas with exposure to hazards, including low-lying beachfront properties and neighborhoods at the edge of fire-prone forests and bushlands.

Households in Black-majority ZIP codes are likely to be more impacted by instability in the homeowners insurance market

Trends in the homeowners insurance sector and data on climate risks also show patterns involving race and ethnicity. Black, Latino or Hispanic, and other nonwhite individuals represent relatively small shares of the residents living in ZIP codes where premiums have increased fastest, but represent higher shares of residents in the most vulnerable ZIP codes. Figure 1 shows that in all U.S. regions aside from the West, Black residents comprise a higher share of the population in vulnerable or at-risk ZIP codes. In the South, for example, including states such as Louisiana, Florida, South Carolina, and Mississippi, the average percentage of Black residents in vulnerable ZIP codes is 28.8%, compared to only 10% in adaptable ZIP codes.

Premium changes—both in average value and as a percentage of median home values—also vary with the racial demographics of the ZIP code. Overall, as the percentage of nonwhite residents increases in a ZIP code, average premium rates also increase. However, the relationship doesn’t hold when looking only at Black residents. Figure 3 shows that insurance premiums relative to median home values increase as the share of Black residents reaches above 20%. For ZIP codes where over 50% of residents identify as Black (well above the average of 9.1% for the dataset and the 14.4% of Black-identifying Americans nationally), premiums increased by an average of 0.05% of home values. For a low-income homebuyer, this increased cost could be prohibitively expensive, creating a new barrier to homeownership.

Importantly, because the Treasury Department insurance data is only available at the ZIP code level, these correlations do not represent the experiences of actual homeowners. Insurance premiums are likely to vary substantially within a ZIP code, and moreover, the racial profile of homeowners is unlikely to reflect the racial profile of ZIP code residents. Recent analysis of homeowners insurance markets has indicated that other neighborhood-level factors, including individual credit scores, may be a larger driver of insurance premium variation, particularly among Black and Latino or Hispanic households.

However, these correlations do warrant deeper analysis. In particular, future research should examine the extent to which prospective homebuyers in vulnerable ZIP codes will be impacted by housing price fluctuations and how that intersects with race and ethnicity.

The geography of insurance instability and adaptive capacity in California

California provides a useful case study for examining how adaptive capacity and insurance trends vary across regions within a single state. California is arguably the “canary in the coal mine” in terms of the extent to which climate risks could shape housing market instability, with wildfires over the last several years leading to high-profile cases of insurance nonrenewal in some areas. Housing affordability, irrespective of climate risks, is also a major issue for the state, making this connection to climate risks and insurance markets all that more important for policymakers to pay attention to.

To some extent, the data from California in Table 3 show similar patterns to data from the national and regional levels, with households in adaptable ZIP codes having high premium increases in dollar terms and as a percentage. The correlations between race/ethnicity and adaptive capacity categories is also similar to other regions, with about a 10-percentage-point difference in the proportions of nonwhite residents living in adaptable and vulnerable ZIP codes. However, as a proportion of median home values, premium costs are substantially higher for households in vulnerable ZIP codes compared to other groups.

Map 1 shows adaptive capacity for California ZIP codes with adequate insurance data, demonstrating how unaffordability and adaptive capacity could play out geographically. Hovering over the map provides the demographic characteristics of each ZIP code, the changes in insurance premiums from 2018 to 2022, and the relative climate risk. While making broad conclusions is difficult, some geographic trends do emerge. Adaptable ZIP codes appear to be clustered in high-wealth neighborhoods surrounding major metropolitan areas, including the San Francisco Bay Area, Los Angeles, and San Diego, while bands of at-risk ZIP codes are spread along the city outskirts. A range of relatively low-risk ZIP codes stretches across the Sacramento area and toward parts of Fresno and Tulare counties, while vulnerable and at-risk ZIP codes span much of the state’s north and in the suburban counties surrounding its major metropolitan areas.

Explored in more detail in the companion report to this analysis, these data only provide a high-level indication of the geographic trends in affordability that could emerge as instability in the homeowners insurance market increases. In reality, they are likely to also intersect with other historic and ongoing policies, including around land use, segregation, public spending on resilience, and other factors that shape community-level climate resilience and adaptive capacity. Together, these factors could be used to assess how climate risks will likely shape home access and affordability in locally specific ways that intersect with other place-based factors.

Stronger policies on climate adaptation and resilience can help to reduce insurance and housing risks

This analysis highlights that insurance market instability is unlikely to affect all communities equally. Instead, it’s a product of adaptive capacity, exposure to hazards, and underlying differences in access to affordable homeownership, among other factors.

The homeowners insurance market exists to help pool and share risks, reducing the likelihood that a disaster or unforeseen shock will plunge a family into debt, displacement, or chronic poverty. It’s a crucial market as disasters increase in both frequency and severity. However, insurance isn’t a panacea. On its own, insurance market reform can help moderate new and more complex risks. But it can’t mitigate against them. Without intervention, these dynamics could reinforce existing disparities in housing affordability and access to wealth-building through homeownership.

To protect homeowners and ensure more Americans can access homeownership and the opportunities for upward economic mobility that it can provide, the federal government needs to be proactive in reducing climate risks. That starts with bolstering the resilience programs that the Trump administration has threatened, including FEMA’s Building Resilient Infrastructure and Communities(BRIC) program and others that were providing funding for climate-resilient infrastructure. In addition, federal policy should build a new, stronger, and more coherent system for climate resilience and adaptation, removing these functions from our emergency management system in order to target them in a more comprehensive and intentional way.

Housing policy and affordability also need to be central to that strategy. Low-hanging policies to curb risk include new regulations for assessing and disclosing parcel-level climate risks, rezoning land use to mitigate future hazards, and instituting mechanisms to link risk mitigation to insurance premiums. Changes such as these and others will help ensure that individual resources and capacity don’t become the defining separator of how climate change affects communities and families across the U.S.