The US property and casualty insurance market is experiencing major stress due to increasing climate-related losses. In many states with high climate risk, regulations limit how much insurers can raise premiums to reflect these growing exposures. Because of these restrictions, insurers are not just raising prices-they are also rationing coverage, tightening their underwriting, or even exiting certain markets altogether.
This trend is having a growing impact on real estate markets. Households, lenders, and investors are finding that private insurance is becoming more expensive, harder to obtain, or even unavailable in some high-risk areas. At the 2025 Goodwin Law – Columbia Business School Real Estate Capital Markets Conference, I discussed these pressures in insurance markets and how they are forcing households and businesses to re-think how they manage risk, finance projects, and plan long-term investments.
Trends and Risks in US P&C Insurance
Exposure: Insured P&C losses have exceeded $100 billion globally for the past five consecutive years, according to Swiss Re, with the US accounting for about two-thirds of the global total of $135 billion in losses in 2024. Rising losses can be attributed to a variety of factors, including inflation, construction costs, litigation risk, and climate change. However, across a range of studies, the number one driver of rising losses is what insurers call “exposure”, that is rising, economic exposure in risky areas due to new development and population growth particularly in disaster-prone regions, such as areas vulnerable to fires, floods, and hurricanes. According to Redfin, over half of US homes are now in high fire risk zones, nearly double the share from the 1980s. Furthermore, the population growth rate in high-risk counties has been nearly 3 percentage points higher than low-risk counties over the last three decades (Indaco and Ortega , 2024). Taken together, Swiss Re estimates that rising exposure alone is responsible for 30% of the growth in total catastrophic losses between 2008 and 2023.
Regulation: Why is economic exposure increasing so much in risky areas? The research suggests that mispriced risks in mortgages and insurance due to regulatory and political frictions are a key part of the equation. Insurance pricing is heavily regulated at the state level, with pricing models and rate increases requiring regulatory approval. In some states, like California, insurers that wish to increase rates by more than 7% are subject to a public hearing, making this functionally a price cap (Boomhower, Fowlie, Gellman, and Platinga, 2025). These state regulations are intended to limit market power, but have led to a disconnect between insurance pricing and actuarial risks (Oh, Sen, and Tenekedjieva, 2025). At an extreme, severe and persistent mispricing this can lead to insurer losses or even insolvency, prompting many to exit or scale back in high-risk markets to manage their exposures (Sastry, Sen, and Tenekedjieva, 2025). As a result, many households may struggle to find adequate insurance coverage from private insurers, forcing them to state-run insurers of last resort like Florida Citizens or the California Fair Plan, which are themselves subject to pricing frictions. Many worry that homeowners insurance today may mimic what happened back in the 1970s, with the near complete exit of private insurers from the flood insurance market, which prompted the creation of the government-run National Flood Insurance Program (Sastry, 2022).
Effects of rising premiums: At some point, regulators do let prices go up, often abruptly and dramatically. We already seeing the effects of this residential real estate markets, including with dramatic declines in house prices and rising inventories in risky areas (Ge and Lewis, 2024; Mulder and Keys, 2025). We are also seeing households responding to rising premiums by choosing to be under-insured, leading to what insurers call the rising “protection gap” (Sastry, Scharlemann, Sen, Tenekedjieva, 2025). The insurance gap is particularly large for states with both high climate risk and high poverty levels, such as Texas and Louisiana, where coverage is on average less than 70% of replacement costs.
The Insurance Protection Gap
Source: (Sastry, Scharlemann, Sen, Tenekedjieva, 2025)
Commercial Real Estate: Similar trends are playing out in commercial P&C. The NAIC Commercial Property/Casualty Market Index shows that starting in 2018, there were 25 consecutive quarters of rate increases in commercial P&C. Similarly, Kroll estimates that nearly 90% of appraised buildings were underinsured. One challenge driving underinsurance is that replacement costs are often updated only every 3-5 years in commercial markets, suggesting that more frequent property valuations can help mitigate this issue.
Resiliency is the way forward: Mitigation and risk-reduction will be a key for keeping insurance affordable without creating the distortions that arise from restricting insurance prices. The Chamber of Commerce and Allstate write that a common estimate in the insurance industry is that each $1 of resiliency investment can reduce property damage by $6. This is a key area of research right now with policymakers working closely with academics, developers, and insurers to consider how to best to promote resilient building. Insurers are conducting studies to quantify how much various resiliency investments reduce risks. Some states are looking at regulatory reforms to give insurers more flexibility in pricing discounts for resiliency investments. Governments are also considering directly investing in community resilience measures or update zoning and building codes to help reduce future risks and insurance costs. We will likely continue to see considerable movement on these fronts over the coming years.
References
Boomhower, Judson, Meredith Fowlie, Jacob Gellman, and Andrew Platinga. “How Are Insurance Markets Adapting to Climate Change? Risk Classification and Pricing in the Market for Homeowners Insurance.” NBER Working Paper No. 32625, June 2024.
Ge, Shan, Ammon Lam, and Ryan Lewis. “The Effect of Insurance Premiums on the Housing Market and Climate Risk Pricing” SSRN Working Paper No. 4192699, 2022.
Indaco, Agustín and Francesc Ortega. “Adapting to Climate Risk? Local Population Dynamics in the United States.” Economics of Disasters and Climate Change (2024).
Katz, Lily and Taylor Marr. “America Is Increasingly Building Homes in Disaster-Prone Areas.” Redfin. September 9, 2022.
Mulder, Philip, and Benjamin J. Keys. “Property Insurance and Disaster Risk: New Evidence from Mortgage Escrow Data.” NBER Working Paper No. 32579, June 2024.
National Association of Insurance Commissioners (NAIC). 2023 Annual Property and Casualty Insurance Industry Analysis Report. 2024.
Oh, Sangmin, Ishita Sen, and Ana-Maria Tenekedjieva. “Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies.” SSRN Working Paper No. 3762235, 2021.
Wright, Alex. “Underinsured Properties Are Crushing Reinsurers: Why Proper Valuations Will Be a Focus for Years to Come.” Risk & Insurance. March 8, 2023.
Sastry, Parinitha. “Who Bears Flood Risk? Evidence from Mortgage Markets in Florida.” SSRN Working Paper No. 4306291, 2022.
Sastry, Parinitha and Ishita Sen. “Opinion: We have to stop subsidizing people who move to Climate Danger Zones.” The New York Times, January 16, 2025.
Sastry, Parinitha, Therese Scharlemann, Ishita Sen, and Ana-Maria Tenekedjieva. “The Limits of Insurance Demand and the Growing Protection Gap.” SSRN Working Paper No. 4909444, 2024.
Sastry, Parinitha, Ishita Sen, and Ana-Maria Tenekedjieva. “When Insurers Exit: Climate Losses, Fragile Insurers, and Mortgage Markets.” SSRN Working Paper No. 4674279, 2023.
Swiss Re Institute. “Natural Catastrophes in 2023: Facts Sheet.” March 2024.
U.S. Chamber of Commerce, Allstate, and the U.S. Chamber of Commerce Foundation. “The Preparedness Payoff: The Economic Benefits of Investing in Climate Resilience.” June 25, 2024.
Van Nieuwerburgh, Stijn and Parinitha Sastry. “Opinion: Your Home Insurance Costs More in High-Risk Areas. Your Mortgage Should Too.” MarketWatch, December 14, 2024.