In the wake of the devastating hurricanes, tornadoes, and wildfires in the United States in just the last year, Professor Daniel Schwarcz’s forthcoming article in the Harvard Environmental Law Review is especially timely. With “Obamacare for Homeowners Insurance: Fixing America’s Broken Insurance Markets in a Time of Climate Change,” Schwarcz proposes a new blueprint for homeowners insurance markets, one that mirrors the approach taken with the Affordable Care Act (ACA).
“Homeowners insurance markets are straining under the burden of crises due to climate change,” says Schwarcz. “Yet federal and state reforms have failed to produce accessible, affordable insurance recognizing that impact. Much like Obamacare addressed a broken state health insurance market, I believe this new way forward could successfully address our broken homeowners’ insurance market.”
Schwarcz has been working in the property insurance arena for many years and says this latest article builds on that body of work. “As I witnessed the impact of climate change over the past decade, I realized home insurers would be the canary in the coal mine on this issue,” he says.
Schwarcz’s scholarship has received numerous accolades. In 2017, the American Law Institute awarded him its highly selective Early Career Scholars Medal, which recognizes “outstanding law professors whose work is relevant to public policy and has the potential to influence improvements in the law relevant to the real world.”
For this most recent article, Schwarz examined markets with particularly large issues, such as Florida, where homeowners’ insurance premiums have surged by 40 to 100% over the past few years, and California, where aggressive regulatory measures have led to the exit of many major insurers. He also noted that insurers in 25 states have raised rates by double digits over the past year, a sign that the challenges of homeowners insurance markets are now a national issue.
“The primary driver of these disruptions in the U.S. homeowners’ insurance markets is clear,” he says. “Climate change is escalating natural hazard risks across multiple regions of the United States.”
This research led Schwarcz to discover a striking parallel between today’s homeowners’ insurance markets and health insurance markets before the ACA was passed. “Both markets have endured sustained nationwide disruption, posing significant economic risks beyond the confines of the insurance sector,” says Schwarcz. “And in both contexts, state-level efforts to mitigate these risks have largely fallen short.”
Those risks include disruption to real estate markets when homes become uninsurable. That disruption can upend financial markets, Schwarcz says, which can trigger federal bailouts and undermine efforts to promote climate resiliency.
“To date, state reforms have done little to help adaptation to climate change,” he says. “Instead, they have subsidized building in areas where climate change poses significant risks.”
With an ACA-inspired framework for homeowners insurance markets, Schwarcz hopes to focus a national conversation on a more sensible regulation of property insurance markets that recognizes the impact of a rapidly changing climate.
This framework begins with the proposition that states should no longer bear sole responsibility for regulating homeowners’ insurance markets, similar to how states are no longer exclusive regulators of health insurance markets.
“The ACA was solving a similar set of problems,” says Schwarcz. “State health insurance markets weren’t reasonably priced and things like pre-existing conditions were penalizing people who then got excluded and had to get care in a way that cost the system a great deal more expense.”
The ACA’s cooperative federal model specifies key principles for selling, underwriting, pricing, and subsidizing health insurance while giving states options to customize. Schwarcz argues that a similar model would bring stability and transparency to homeowners insurance markets, leading to a uniform federal baseline that addresses all major risks associated with climate change.
Further, he argues that this system would ensure premiums accurately reflect the true cost of insuring against catastrophic events driven by climate change. Doing so, he says, will help homeowners be better equipped to make informed decisions about where to live and how to invest in protective measures, as well as drive insurers to develop innovative risk mitigation programs.
Schwarcz proposes an approach focused on four interconnected areas of reform: coverage terms, pricing, market structure, and coverage subsidization. For coverage terms, homeowner insurers would be required to provide comprehensive coverage against the most significant catastrophic risks of climate change, just as the ACA mandated that health insurance policies cover all essential health benefits.
“In both contexts, such reforms help ensure that insurance provides the protection that consumers reasonably expect, forcing insurers to compete along dimensions that are socially productive and reasonably responsive to consumer preferences,” he says.
To address pricing and structure, Schwarz believes centralized insurance marketplaces, modeled after Obamacare, are essential, as are subsidies for low-to-moderate-income consumers.
“Ultimately, these reforms would promote protection against catastrophic climate loss while promoting behavioral changes that mitigate climate vulnerability, encourage safer development patterns, and bolster long-term community resilience,” he says.
Schwarcz acknowledges that while parallels between the homeowners’ insurance markets and the pre-ACA state health insurance markets are imperfect, he argues that there are enough similarities to guide a new future for property insurance.
“We cannot continue down the same path as we are on today,” he says. “Obamacare offers a powerful model for homeowners insurance markets to be more fair, stable, and resilient.”