The ‘Insurance Bubble’: What Is It, and What Can Communities Do About It?

Dec 14, 2023 | Blogs

By Sarah Dobie, Ph.D. and Lisa O’Fiesh

Many homeowners rely on insurance to protect themselves when disaster strikes. Insurance provides homeowners with a safety net and helps them to recover and rebuild quicker when the unthinkable happens.

Climate change is placing unprecedented pressures on the insurance industry. Over the past several decades, the economic losses from these disasters have grown substantially. Since 1980, there have been over $2.63 trillion in losses, or an average of $59.9 billion per year. Nearly a quarter of these losses occurred from 2018 to 2022 alone. As economic losses rise, so do the number of insurance claims issued by these programs.

A recent report by First Street Foundation paints an alarming picture of the state of the nation’s insurance industry, highlighting the rising insurance costs, limitations faced by insurance companies, and the emergence of government-backed insurance programs in high-risk regions. Regions with high environmental risks are facing unique insurance issues due to increased frequency and intensity of wildfires, floods, and wind storms.

As a result, insurance companies are drastically increasing rates, with high exposure states like Louisiana seeing an average increase of 234% in premiums since 2009. In addition to increasing premiums, well known companies like Allstate, American International Group, Inc.< (AIG), Farmers Insurance, Nationwide, AAA Insurance, and State Farm, have also been limiting or pulling out of coverage completely in high-exposure zones, making some areas like Florida and California seemingly “uninsurable.”

These actions will create “insurance bubbles” by providing insufficient coverage in areas prone to climate-related risks, which will destabilize the insurance market. In fact, the report estimates that nearly one-quarter of all US properties are in regions with high climate risk due to inadequate insurance protection. The report also discusses the impact of rising insurance costs on the real estate market and the role of insurance in protecting property owners from financial ruin caused by flooding. Areas with lower insurance premiums are seen as more attractive and may experience increased property values, while areas with higher insurance costs may see decreased property values.

Previously, high-exposure communities have been able to rely on government-backed insurance programs like the Citizens Property Insurance Corporation and FEMA’s National Flood Insurance Program, but the high volume of claims have created an unsustainable financial burden, threatening the continuation of these programs. FEMA has attempted to address these problems by creating the Risk Rating 2.0 for flood insurance, which aims to price insurance based on specific risk factors and actuarial principles. However, it does little to address the root of the problem since the program doesn’t account for the risk of future climate-related issues.

Communities can take action to prevent the bubble from bursting – and reduce the impacts of rising premiums on homeowners – by scaling up efforts for climate resilience. Local governments, utilities, and other community stakeholders have a wide range of solutions at their disposal that can take some of the burden off insurance, such as moving development out of harm’s way (e.g., voluntary property buyouts, moratoria on development), building infrastructure to increase stormwater retention and infiltration (e.g., gray and green infrastructure), restoring natural habitats (e.g., urban reforestation, wetlands restoration), and weather-proofing residential, commercial, and municipal buildings. Combined, these solutions can help communities to skirt disaster while providing a wide range of environmental, social, and governance benefits.

These large-scale changes can be difficult to implement and manage to deliver these desired outcomes. Oftentimes, climate resilience solutions lead to maladaptation or exacerbation of social inequities, such as by contributing to green gentrification. CIS, and companies like us, are well-suited to provide assistance to local and regional governments through asset management and advisory services to maximize the positive impact of these solutions, including delivering workforce training to build the community’s adaptive capacity and ensure equitable outcomes. For more information about how we can help your community see our services.

Sarah Dobie, is Water and Climate Resilience Associate at CIS. She can be reached at info at

Lisa O’Fiesh is Water Policy Intern at CIS, and is a graduate student at Harvard University.