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Publication Date

6-10-2024

Abstract

Private insurers are declining to issue or renew homeowner policies in California, Colorado, Florida, and Louisiana following massive payouts due to hurricane and wildfire damage in recent years. As climate change worsens, more private insurers will withdraw from property insurance markets. Governments, particularly at the state level, will likely expand their insurance programs to fill the gap. Just as the federal government now underwrites most flood insurance policies, public insurers will come to dominate the fire and wind insurance markets. Property insurance can generate price signals reflecting the risks of living in climate-vulnerable areas. However, public insurance programs often prioritize insurance availability and affordability while muting or eliminating accurate price signals. Because premiums collected by public insurance programs usually do not cover the payouts that follow a catastrophic event, expanding these programs could prove financially disastrous. Unfortunately, by offering underpriced coverage, such programs have encouraged development in climate-vulnerable areas, such as floodplains and the wildland-urban interface. Managed retreat policies aim to move people and communities out of climate-vulnerable areas. Typically involving public buyouts of private property, managed retreat can mitigate the damage associated with climate change, counter inefficient building practices, and facilitate disaster recovery. Yet managed retreat is logistically and politically challenging, and buyout programs thus far have had limited impact. Linking public insurance with buyouts can promote access to insurance coverage, break the disaster-rebuild cycle, and jump-start the relocation of people and communities from climate-vulnerable areas. This Article proposes that public insurance coverage in climate-vulnerable areas be made contingent on insureds agreeing to buyouts if property damage exceeds a predetermined threshold amount. If a covered event causes property damage above the threshold, the government will choose between paying on the insurance policy or purchasing the property. The government’s choice would depend on funding availability, the value of the property as open space, the presence of other buyout properties nearby, the history of repetitive loss, and other relevant factors. The proposed mechanism, which can be incorporated into federal or state-backed insurance programs, would make the most of disaster-caused damage by compelling retreat after such damage has occurred. It would also sidestep some of the difficulties that have hampered voluntary buyout programs. Part I of this Article discusses the growing reluctance of private insurers to offer policies in climate-vulnerable areas, the accompanying rise of state-backed insurance, and ongoing managed retreat efforts. Part II considers the objectives of public insurance programs. Part III shows how governments might try to advance these objectives as climate change worsens. In the context of a dramatically expanded government role as an insurer of last resort, the proposal can facilitate managed retreat without compromising these objectives.

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