Just days after the destruction and flooding from Hurricane Helene caused more than 230 deaths and billions of dollars in damage to homes and property, and just hours before Hurricane Milton was predicated to wreak more havoc, Katherine Hempstead talked to Rethinking65 about her new book on the history of the American insurance industry.
In “Uncovered: The Story of Insurance in America,” Hempstead concludes, “Protection from flood risk is greatly undersupplied.’’
The headlines followed Hurricane Milton’s descent on Florida, on Oct. 9: “Four dead from deadly spate of tornadoes ahead of Milton;’’ “Three million without power;’’ “St. Petersburg records 16 inches of rain,’’ and this, “Florida issues emergency rule to prevent ’post-storm fraud’ by insurers.’’
This Florida directive “aims to protect homeowners against ‘unfair and deceptive acts’ by insurers handling disaster claims,” the Washington Post reported on Oct. 10.
Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation, Princeton, N.J., wants to see more protections and transparency.
“Disputes between policyholders and insurers about claims are a constant strain that runs through all lines of business, but can get exacerbated during large loss events,” she said during our interview. “Creating a more transparent process will hopefully help policyholders and reduce costly litigation.’’
Hempstead seeks to inform policy discussions at the federal and state level by making data and analyses widely available — especially to researchers and the public sector.
Insurance Reform is Slow
Following the storms Sandy (2012) and Katrina (2005), wide dissatisfaction ensued over lowball estimates and long claims adjustments by insurers participating in the National Flood Insurance Program (NFIP), Hempstead writes.
An overhaul of the flood insurance rating system called for more actuarially fair rating, but a bloc of NFIP members gave that the thumbs-down. Instead, they’re pushing for subsidies that, they say, will make insurance more affordable, with premiums based on income.
But not much has changed. As Hempstead writes in her book, “Take-up is slow.’’
In the aftermath of costly storms, insurers in high-risk states such as California and Florida try to dump policyholders on other companies, but market withdrawals and insolvencies are complicating this transition, she told us during our interview.
Homeowners Underestimate Flood Risk
Whether climate change is the culprit, the reality is property insurance is becoming less affordable, and conflicts about claims adjustment after natural disasters keep mounting.
“There are increasing areas where there are affordability and availability problems in home and commercial property insurance. There are disputes about claims adjustment but the bigger problem is that losses are increasing and it is not clear what can be done to mitigate them,’’ Hempstead said.
“Also, people are increasingly having losses who didn’t necessarily have any reason to think they were at risk, so it is very hard to prepare for these kinds of events,” she said. For example, Hurricane Helene’s flooding from torrential rains wiped out homeowners who didn’t realize they needed flood insurance, or couldn’t afford it.
“People that think they are at risk for flooding have flood damage insurance. But then there are the people who didn’t expect all that rain and the flooding,” she said. “Some of them have given up on insurance a long time ago because of low income; they couldn’t pay for it or for the repairs or the deductible. That is just heartbreaking.’’
But freakish weather is becoming less unusual. Many states are having severe weather events. “Even states you never thought were at risk, like Iowa, are having huge amounts of rain. To me, that is starting to make a fact pattern,’’ said Hempstead.
Coverage Gaps Likely to Widen
At the same time, a coverage gap is emerging in the homeowners’ market, Hempstead said. This is either because people can’t afford the insurance or won’t even be offered insurance. An important part of the social safety net is eroding, she said. And when insurers exit the market, existing companies often raise prices to levels that people can’t afford.
Still, insurance sells. In 1895, there were two million policyholders in the U.S. with $5 million worth of policies, or about three times the total of deposits in savings banks.Today, the American insurance industry has an estimated $9 trillion in assets under management and employs three million people. And as of 2022, more than 12% of U.S. GDP — $25.44 trillion, according to the World Bank — was spent on insurance premiums.
However, “if we can’t reduce losses we will probably need to prepare for a world of less coverage and more out of pocket expenditures,’’ Hempstead warns. This is already a big problem in other corners of the insurance market. For example, 30 million Americans lack health insurance, and many millions drive without auto insurance.
Insurance Upheaval
Hempstead’s history of the American insurance industry ends almost as it began: Insurers continue to struggle with government regulation and calls for reform. Fragmentation, Hempstead said, has complicated reform because each state has its own insurance commission, which serve the widely differing needs of 50 states spanning 3.8 million square miles.
Geography, and perhaps climate change, have made California and Florida and coastal states more vulnerable to hurricane and wildfire damage. As a result, properties in these states are more likely to experience insurance upheaval, and become more expensive to insure.
“A major argument of the book is that the fragmented nature of insurance regulation has impeded the development of effective national solutions to many insurance problems,’’ Hempstead writes. But insurance companies have clung to malleable state regulation as preferable to federal supervision.
The industry created the National Association of Insurance Commissioners (NAIC) to deal with the federal government and to educate members on topical concerns such as cyber risk and the growing role of private equity in the industry, and to be a bulwark against investigation.
Federal Insurance Office Caves Under Pressure
When the “too big to fail’’ insurance conglomerate AIG bailout cost U.S. taxpayers $182 billion in 2009, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Federal Insurance Office (FIO) to supervise the insurance industry.
The FIO largely played advisory and research roles, until this year. But an attempt in early 2024 by the FIO to collect detailed climate risk data from property and casualty insurers failed, subverting the Dodd-Frank legislation.
The FIO dropped is investigation after “facing howls of protest from the insurance industry, state regulators and conservative members of Congress,’’ Hempstead writes in her book. “Republican lawmakers introduced a bill to eliminate the FIO’s subpoena power, and a bill that went a bit further — the Federal Insurance Office (FIO) Elimination Act.”
The push-pull between profit and public service continues, Hempstead added during our interview.
“I think it is never a settled matter. In health insurance, I think people know that coverage expansion has to be publicly financed. Even ‘private’ health insurance is heavily subsidized. Home and auto insurance has been more privatized but recent events raise questions about how much longer that can continue,’’ she said.
Bad Agents Still Exist
Another prickly issue is the quality of insurance agents, who advise and sell all kinds of policies to clients.
“For insurance agents there has been slow progress toward a better reputation over time, but there are still problems with agents steering people into health insurance plans that are not best for them,” Hempstead told us. “The distribution system in insurance is pretty inefficient and creates a lot of bad incentives.’’
In its early years, the American insurance industry lobbied legislators with perks like trips, liquor and gifts, and plush junkets to New York (where the biggest insurance companies were based). But public scrutiny, investigative journalism and consumer activism have eroded blatant influence buying.
The Shared-Risk Dilemma
“Insurance is about values. At its core, insurance is more than a business — it is a way of governance that helps a society share risk,” added Hempstead. “The way a society regulates and finances insurance says a lot about its concept of fairness and what they think different people ‘deserve.’ That’s what makes insurance a really complex and fascinating area.”
Yet, “there is a lot of polarization about how people think we should share risk,” she said. For example, creating high-risk pools in health insurance is often discussed — such as charging more for, or excluding, people with pre-existing conditions.
“These issues have come up a little less on the P&C (property and casualty) side because there has been less government involvement, but now with big affordability problems there are questions like how much should risk be pooled within a state,” said Hempstead.
Legislation has been proposed for a federal catastrophe reinsurance program. “It remains to be seen whether that will gather any real momentum. There is a lot of opposition to the federal government oversight of the homeowners’ market,” she said. There is also a proposal to provide a tax credit for insurance costs.
Final Thoughts
Hempstead’s book also recalls the shocking inland flooding caused by Hurricane Agnes in 1972. The costliest hurricane at that time, it causing $2.1 billion in damages. It cut a swath that flooded the Susquehanna River and the Lackawanna River, causing major damage in the Scranton/Wilkes Barre metropolitan area.
“People in that part of Pennsylvania didn’t think they had risk of flooding,” Hempstead elaborated during our interview. “At the time, there was talk of starting a national disaster insurance but in general, that gets a thumbs-down: ‘Oh, that’s a bailout for the beach houses!’
However, “it’s a lot more complicated than that: Those homes in North Carolina (damaged or destoyed by Hurricane Helene) weren’t beach houses. The facts are altering how people see these situations,” she said.
“But there is still a lot of opposition to big fixes, and the fact that we have a state-based system makes it hard to fix things,” Hempstead said as Hurricane Milton hurdled toward Florida’s West Coast. “Changing from state to federal isn’t on the table, more likely it will be federal involvement.’’
Copies of “Uncovered: The History of Insurance in America’’ purchased through its publisher, Oxford University Press, will receive a 30% discount by using the code ASFLYQ6.
