Rising Catastrophe Risks: A Look at State Insurance Policy and Market Dynamics

States struggle with the financial strain caused by the growing frequency and intensity of natural disasters, which tax public resources and challenge the insurance sector's ability to manage escalating risks.

Legal and regulatory hurdles further increase expenses for insurers, highlighting the need for effective state regulation of property insurance rates. Though many states maintain competitive markets, regulations such as rate suppression have been linked to issues with insurance availability and market instability, leading some states to consider reforms.

Some argue that rate suppression, catastrophe backstops and other measures might disrupt market dynamics, particularly in how private reinsurers and alternative capital markets participate in disaster risk management. In response, insurers and policymakers are weighing the importance of infrastructure improvements, stricter building codes and expanded risk mitigation initiatives as part of a broader strategy to manage rising disaster risks.

State policies on land use, building codes and insurance design also play a crucial role in tackling the growing threat of natural disasters. Approaches that strike a balance between affordability and adequate protection can shape insurance coverage levels and overall market outcomes. As the risks from natural catastrophes evolve, discussions about disaster preparedness, insurance regulation and resilience are becoming increasingly central to both the insurance industry and state policy.

State Responses

In the past year, Florida has enacted several bills aimed at tackling insurance issues related to hurricanes and natural disasters. The My Safe Florida Condominium Pilot Program (HB 1029) allows licensed inspectors to assess condominiums for hurricane mitigation improvements and identify potential insurance discounts. Another bill (HB 1503) changes how surcharges are applied by the Citizens Property Insurance Corp., which provides windstorm and general property coverage for homeowners who could not get insurance elsewhere. The bill also adjusts how the corporation manages its accounts and includes quota share primary insurance in some policies. A third bill (HB 1611) strengthens protections by preventing insurers from canceling or refusing to renew policies in areas hit by severe flooding, while updating rules for public housing authority self-insurance funds and requiring reciprocal insurers to maintain specific premium reserves.

In Georgia, new legislation (HB 279) provides insurance premium discounts or rate reductions to property owners who construct new buildings or retrofit existing ones to better withstand tornadoes, hurricanes or other windstorms. The bill encourages safer building practices by offering financial incentives for resilience improvements.

Hawaii has recently focused its efforts on wildfire insurance and risk management. One bill (SR 79) directs the insurance commissioner to coordinate the development of a wildfire insurance compact, while another (SR 160) calls for a comprehensive study on wildfire risk and insurance. The study aims to explore market-based approaches to better address wildfire threats across the state.

Similarly, an Oregon measure (S 82; 2023) requires insurers to send detailed notices to homeowners when canceling or not renewing policies, or increasing premiums on policies, due to wildfire risk. The legislation aims to enhance transparency and inform residents about changes in their insurance related to wildfire threats.

Additionally, some states are exploring the role of utility companies in natural disasters, particularly when inadequate maintenance or outdated infrastructure contributes to catastrophic events. A California bill (AB 1054; 2019) allows property owners to pursue compensation for damage resulting from natural disasters such as wildfires that are triggered by utility equipment, under the legal principle of inverse condemnation.

As states continue to adapt policies to the evolving risks posed by natural disasters, the insurance landscape will likely see further shifts in regulation and market strategies. Balancing protection, affordability and resilience will remain a central challenge for policymakers and the insurance industry alike.

Tom Klein is a policy associate in NCSL's Energy, Environment and Transportation Program.