Pulse Points Summer 2023: Weathering Financial Setbacks From Natural Disasters

Our brief draws on this data to document a gap in insurance coverage between those living in high- and low-loss states. Based on our findings, we offer recommendations for insurance providers, financial institutions, state and local governments, and landlords to help Americans weather the financial fallout of natural disasters.

Our research shows that two out of five (40%) Americans – 103.4 million in total – live in 11 high-loss states with above-average expected annual losses from natural disasters.²⁰  

This suggests that the potential to experience loss from a natural disaster is widespread, emphasizing the importance of purchasing adequate homeowners or renters insurance to prepare for such a possibility. It also indicates that the coverage of a considerable share of Americans may be impacted in the future as insurers raise rates or decline to issue new policies in certain states.

Figure 1. 2 in 5 Americans could experience higher-than-average natural disaster losses.
Percentage of people living in high-loss versus low-loss states.

Note: Loss from natural disaster occurrence determined with FEMA data. N = 5,648 respondents.

Losses from natural disasters are also an equity issue. Those living in high-loss states were more frequently Financially Vulnerable than residents of low-loss states and were also disproportionately Asian, Latinx, or selected multiple races or ethnicities (analyses not shown).²¹ These findings point to the increased importance of insurance to safeguard the finances of those living in high-loss states, since they may find it especially challenging to weather the financial consequences of a natural disaster.

Insurance can play a critical role in managing the financial challenges that arise in the aftermath of a disaster.²² Yet, we find that renters and homeowners living in high-loss states were less frequently covered by residential insurance than those living in low-loss states (Figure 2). With lower rates of insurance coverage among residents of states facing the greatest losses from natural disasters, consumers in high-loss states may be financially unprepared should a disaster occur. Moreover, given that residents of high-loss states were more often Financially Vulnerable, they may not have the financial resources to cover unexpected expenses in the wake of a disaster.

Figure 2. Residents of high-loss states carry residential insurance less frequently.
The percentage of homeowners and renters covered by residential insurance living in high-loss versus low-loss states.

Note: * Statistically significant vs. people living in low-loss states (p < 0.05). N = 5,648 respondents.

Indeed, in the wake of a disaster, prior research finds that disparities often widen.²³ Although this brief does not examine what happens to consumers’ financial health in the aftermath of a disaster, access to residential insurance in high-loss states may be a contributing factor to financial health disparities. For instance, in analyses not shown, we find that residential insurance coverage is lower among Asian, Black, and Latinx residents of high-loss states relative to White residents of those same states. Assuming that residential insurance offers adequate protection to consumers, this suggests that people of color are less likely to be shielded from financial losses incurred by a natural disaster and may contribute to disparities in wealth among residents of high-loss states.

In part, the low rates of residential insurance coverage in high-loss states are driven by the disproportionate share of renters in these states. Over a third (37%) of residents in high-loss states rented their homes, but renters comprised only 27% of residents in low-loss states (Figure 3). Consistent with other research, we also find that renters purchased renters insurance at relatively low rates, regardless of the natural disaster loss in their state (analysis not shown).^{24, 25, 26}

In the event of a disaster, renters are not responsible for financing repairs to the building where they live, but they may need to replace or repair belongings that are damaged or destroyed. Navigating the financial implications of a disaster without insurance may be especially challenging for renters because they typically have lower incomes, less wealth, and lower financial health than homeowners.²⁷ In addition, renters are more often Black or Latinx, so experiencing a natural disaster without insurance may contribute to racial disparities in financial health.²⁸ 

Figure 3. Residents of high-loss states are more frequently renters.
Percentage of residents who are renters by residence in high-loss and low-loss states.

Note: * Statistically significant vs. people living in low-loss states (p < 0.05). N = 5,648 respondents.

However, renters are not solely responsible for the gap in residential insurance coverage observed between high- and low-loss states. Although most financial institutions require home insurance as part of a mortgage agreement, insurance can sometimes lapse or insurers can cancel policies. In addition, those who have paid off their homes are no longer required to purchase insurance.

Thus, homeowners insurance coverage was relatively common in both high- and low-loss states. However, contrary to what we would anticipate based on the likelihood of loss, homeowners in high-loss states less frequently reported coverage than homeowners in low-loss states (91% vs. 93%). While this difference is small, it represents about 8.8 million Americans living in uninsured homes in 11 high-loss states, which is about 240,000 more than the number of Americans residing in uninsured homes across all 39 low-loss states.²⁹ This difference may also grow in the future as insurance providers reconsider offering new applications for coverage in high-loss states.

Figure 4. Homeowners in high-loss states less frequently carry homeowners insurance.
Percentage with homeowners insurance coverage among homeowners by residence in high-loss and low-loss states.

Note: * Statistically significant vs. homeowners living in low-loss states (p < 0.05). N = 3,991 respondents. These analyses focus on homeowners who knew if they held home insurance.

Along with fewer insurance options and different perceptions of risks, the ability to afford insurance plans is one barrier that prevents insurance takeup. Cost may play a role in the homeowners insurance gap observed between high- and low-loss states. In states prone to natural disasters, insurance premiums can be more expensive, but residents in these states also typically have lower household incomes.^{30, 31} To understand whether affordability is associated with the lower takeup of residential insurance in high-loss areas, we show how homeowners insurance coverage varies by household income in high- and low-loss states. 

First, consistent with prior findings, homeowners with lower incomes less frequently carry insurance.³² We find that this is true in both high- and low-loss states. For instance, regardless of disaster loss, about 3 in 4 homeowners with household incomes less than $30,000 carried insurance, whereas coverage was nearly universal among those with incomes of $100,000 or greater. This suggests that low household incomes may act as a barrier to insurance takeup, regardless of the risk of natural disaster loss.

Second, once income is accounted for, we show that the takeup of homeowners insurance coverage is very similar for homeowners in high- and low-loss states (Figure 5). The one exception to this pattern was homeowners with household incomes between $30,000 and $59,999. For homeowners in this income bracket, insurance coverage was less common in high-loss states than low-loss states (87% vs. 94%). For all other income groups, there was no discernible difference in the takeup of homeowners insurance. 

Figure 5. Households with higher incomes more frequently have insurance.
Percentage of homeowners with homeowners insurance by income and residence in high-loss versus low-loss states.

Note: * Statistically significant vs. homeowners living in low-loss states (p < 0.05). N = 3,991 respondents.

Because many high-loss states also have a greater share of households with lower incomes, some of the gap in insurance ownership between households in high- and low-loss states can be explained by differences in the income distributions of these states, where high-loss states have greater proportions of households with lower incomes.³³ However, given the greater risk associated with living in high-loss states, we would anticipate insurance ownership in these states to be higher on average when compared with low-loss states, rather than equal. This lack of difference could stem from either an inability to obtain insurance or a difference in consumer preferences. 

Natural disasters can cause considerable damage to homes and belongings, with potential ramifications for financial health. The threat and severity of these disasters will continue to increase, meaning that the consequences to financial health will also likely grow and impact more Americans over time. Understanding who is at risk, what protection they have in the face of a disaster, and if there are barriers to accessing that protection are all critical to helping Americans prepare for the unpredictable.

This brief focuses on residential insurance for renters and homeowners, which can protect against natural disasters. Certain natural disaster-specific insurance, such as flood or earthquake insurance, must be purchased separately, making the insurance market even more expensive and complicated to navigate. Although homeowners and renters insurance cannot cover damages incurred from all types of natural disasters, they offer a baseline level of protection that not all Americans are accessing.

Given their greater exposure to losses, we would expect that residents of high-loss states would more frequently purchase insurance than residents of low-loss states. Instead, we find the opposite. Consumers in high-loss states could be facing barriers to insurance ownership. For instance, consumers in high-loss states may struggle to find any insurance options or they may hold different perceptions of risk. Alternatively, they may struggle to find affordable insurance products. Indeed, our findings suggest that purchasing homeowners or renters insurance may not be financially feasible for Americans with lower levels of income, possibly preventing greater uptake of insurance.

This brief focuses on one specific barrier to insurance takeup, but developing a clear understanding of why residents in high-loss states are not insuring their property at higher rates is a critical area of future exploration. To identify solutions, a closer examination of these barriers may be beneficial:

• • Higher insurance premiums typically found in high-loss states may also contribute to affordability issues. This, coupled with the higher proportion of lower-income households in these states, may mean that households are simply priced out of the insurance market. 
  • Recent announcements that larger insurers have or will be pulling out of a number of high-loss risk markets may also mean that the choices and availability of policies in these areas is highly constrained.^{40, 41, 42}
  • In addition, the comparable rates of insurance coverage in high- and low-loss states among those with similar incomes suggests that Americans residing in high-loss areas may not be aware of their greater exposure to natural disaster losses, potentially due to less exposure to insurance advertising in these areas. 
  • Alternatively, high-risk residents may have developed an “immunity” to discussions of the risks associated with such disasters, believing that they are not personally at risk or that insurance won’t help.⁴³
  • Finally, given that Asian, Black, and Latinx people less frequently purchase residential insurance, it is critical that any investigation of barriers considers the unique challenges experienced in these communities.

Natural disasters pose significant financial risks to Americans. Although insurance coverage for homeowners and renters offers some financial buffer should a disaster strike, there is more work to do to make insurance more accessible and safeguard financial health for Americans who are especially vulnerable to these disasters.

The data used in this analysis comes from the 2021 Financial Health Pulse survey and the FEMA 2021 data. The 2021 Financial Health Pulse survey was fielded to the Understanding America Study panel between April 22, 2021 and May 25, 2021 and had a total sample size of 6,403 respondents (total margin of error +/-1.23%). The overall sample is weighted using U.S. Census benchmarks to be representative of the noninstitutionalized civilian adult population of the United States along gender, race/ethnicity, age, education, and Census region.  

We use the Pulse data to identify respondents who reported they were covered by residential insurance policies in 2021. We used data from FEMA to identify states that experience high losses from natural disasters. High losses are defined using the expected annual loss, which measures the expected loss of building value, population, and/or agriculture value each year due to natural hazards.⁴⁴ We employ descriptive statistics to analyze and summarize our data.

For this analysis, we constructed a final sample of respondents who were homeowners or renters, reported on their insurance status, responded to our indicators and race and income questions, and provided information on the state in which they currently reside. As a result, we omitted 752 respondents with missing data, or 12% of the total sample. This left us with a final analytic sample of 5,648 respondents.