November 20, 2020
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The most vulnerable Americans will bear the cost of climate change

The climbing costs of natural disasters will hit low-income families the hardest. A public-private partnership insurance model would create more equitable policies.

Hybrid public-private insurance policies could subsidize insurance rates based on need, protecting families as natural disasters become more prevalent. Photo by Malven/Getty Images

Climate change will affect everyone, but it won’t affect everyone equally.

The cost of climate disasters will hit low-income families, people of color, and women harder than other Americans, says a recent study by the Wharton Risk Management Center at the University of Pennsylvania. As climate change increases the pressure of natural disasters, the United States–along with the rest of the world–will see longer and more severe disaster seasons like wildfires and hurricanes. This year broke records with California’s largest recorded wildfire and most active Atlantic hurricane season on record. As of October, natural disasters in 2020 cost the U.S. over $45 billion in damages and resulted in the deaths of 188 people.

The price of recovering from these disasters will continue to climb, and those costs can act as tipping points for families and individuals on the edge. While analyzing the costs of rebuilding in the wake of severe flooding, the study found that almost half of Americans can’t afford to start over because they lack the savings or the credit for a loan.

“Very affluent households can tend to cover the cost of rebuilding, repairs, reconstruction with their savings, but that’s not the case for the majority of Americans,” said Carolyn Kousky, executive director of the Wharton Risk Management Center, in a FEMA talk at George Washington University. “Forty-four percent of Americans do not have $400 in liquid funds for an emergency. And if you don’t have $400 for an emergency, you certainly don’t have enough funding to cover the cost of a very severe disaster event.”

Kousky’s research concluded that disaster insurance is the best safety net for families that live in the increasingly large swaths of the U.S. that are at-risk for hurricanes, fires, and more. But the frequency of natural disasters, and their attendant rising costs, don’t only affect families—they also affect insurance companies, who pass those costs on to the homeowners who buy their policies.

This year, the credit-rating firm Moody’s Investors Service estimated that it will cost insurance companies up to 8 billion in wildfire rebuilding costs in California alone—a price tag that caused some to drop high-risk zip codes from their coverage altogether. Facing a future of endlessly ballooning disaster costs, insurance companies are looking to the federal government for help.

“You need really disaster protection because if the weather keeps getting worse, the private market for those really big events is going to be too expensive,” Tom Wilson, chief executive of Allstate, told Reuters.

A public-private partnership insurance model would create more equitable policies for individuals in areas where the high disaster risk makes private insurance too expensive, Wilson said. Kousky agrees—whereas federal aid is limited, often delayed, and inaccessible to those with low credit scores—hybrid public-private policies could specifically target low-income families. These “micro-insurance” policies could subsidize insurance rates based on need, protecting families who currently can’t afford it. They could cover non-property costs, such as evacuation expenses or compensation for lost income, that would help entire communities recover more quickly and limit economic disruption.

In lieu of a federal program, some local governments have already begun experimenting with insurance support for low-and-middle-income families. In Oregon, the Portland Housing Bureau worked with the nonprofit Enhabit to cut the cost of flood insurance for neighborhoods routinely flooded by a tributary of the Willamette River. City officials created the Flood Insurance Savings Program to help prevent the displacement of vulnerable communities, like seniors and communities of color.

“Pilot programs like this one can point the way to how we could have more states and local governments helping in this space, but it probably could never replace what a universal federal program would do,” said Kousky. Effective insurance, she said, is one piece of a broader culture of disaster risk management.

“I think if we do that, put all those pieces together, then we will have really made headway on making sure that households and communities are resilient in the face of the increasing disasters that we now face.”