In the wake of the devastation caused by Hurricanes Milton and Helene, it has become painfully clear that the financial security of millions of Americans is under threat, not just from extreme weather, but from the crumbling homeowners insurance system.
These storms are the latest in a series of climate-driven disasters that have stretched insurance markets to the breaking point. As wildfires sweep through the West, hurricanes batter the Gulf and floods inundate inland areas, homeowners insurance markets are facing unprecedented disruption — and it’s only getting worse.
Americans, particularly those in the most vulnerable regions, are feeling the squeeze. Insurers are fleeing states like Florida and California, leaving homeowners scrambling to secure coverage. Even where coverage is still available, costs are skyrocketing, pushing premiums to levels that make owning a home a precarious financial risk for many families.
This isn’t a crisis that will fix itself. If the U.S. doesn’t take bold steps to overhaul homeowners insurance markets, we risk a catastrophic fallout — one that could crash real estate markets, destabilize local economies and derail efforts to build resilience to climate change.
What’s happening in homeowners insurance markets today echoes the dysfunction we saw in health insurance markets before the passage of the Affordable Care Act, commonly known as Obamacare. Before Obamacare, millions of Americans faced rising costs, coverage denials for preexisting conditions and confusing, inadequate health plans. The law tackled these issues head-on with a cooperative federalism approach, leveraging both state and federal expertise to create affordable, accessible health coverage.
It’s time we took a similar approach to homeowners insurance, which is currently regulated solely by states but demands broader federal intervention to address today’s climate challenges.
As with health insurance, there’s a national interest in stabilizing homeowners insurance markets. After all, homes that aren’t insured can’t be sold, and uninsured homeowners can’t rebuild after a disaster. This can trigger a ripple effect, undermining real estate markets and leaving taxpayers to foot the bill for disaster recovery through the National Flood Insurance Program and FEMA emergency assistance.
States are ill-equipped to handle this insurance crisis on their own. Many rely on outdated regulatory strategies — such as pre-approval of premium changes to ensure they are not “excessive” — which can backfire by driving insurers out of the market. In California, insurers like State Farm and Allstate have pulled out of the market, largely due to the state’s aggressive rate regulation that doesn’t reflect the new realities of climate risks.
That’s why a federal intervention modeled on Obamacare makes sense. The solution lies in cooperative federalism: setting federal standards for homeowners insurance while allowing states the flexibility to adapt those standards to their unique risks. (I describe this proposal in depth in a forthcoming Harvard Environmental Law review article.)
Much like Obamacare did for health insurance, federal standards for homeowners insurance should mandate comprehensive coverage, including for climate-driven risks like floods and wildfires. It should also ensure that prices remain affordable through progressive subsidies for low-income households.
Further echoing Obamacare, federal reform should focus on promoting managed competition among private insurers in lieu of outdated state regulation of “excessive” rates, which can be accomplished by establishing state-run insurance exchanges on which competing insurers sell standardized coverage on an apples-to-apples basis. Even more than Obamacare, such structured competition would help contain insurance rate increases, as there are numerous competing homeowners insurers in every region of the country.
Although this market-based approach would result in increased insurance rates for those who did not qualify for income-based subsidies and who live in harm’s way, accurate risk-based pricing for those who can afford to pay these prices is essential to communicating the real risks posed by climate change. When state regulations artificially depress premiums or subsidies skew prices for high-risk and high-cost properties, the true cost of living in disaster-prone areas is hidden. This distorts incentives, encouraging continued development in regions vulnerable to floods, wildfires and hurricanes.
In contrast, if insurance rates accurately reflected climate risks, homeowners would be more likely to make smarter choices about where and how to build, and might even consider relocating to safer areas. Over time, this approach could discourage risky development altogether and promote more climate-resilient communities.
Such sweeping reforms would of course face significant political and practical challenges. Yet, as we learned with Obamacare, federal involvement is necessary when the stakes are this high. And when it comes to homeowners insurance, the stakes are rising faster than floodwaters. Without action, millions of Americans will find themselves priced out of adequate insurance, with devastating consequences for real estate markets, the financial system and our ability to adapt to climate change.
A national crisis demands a national response. Just as Obamacare transformed health insurance for millions of Americans, it’s time for a similar solution to fix the broken homeowners insurance markets before it’s too late.
Daniel Schwarcz is the Fredrikson and Byron Professor of Law and a Distinguished University Teaching Professor at the University of Minnesota Law School.