When Hurricane Ian hit Florida in 2022, it caused over $110 billion in damage, making it one of the costliest storms in US history. In its wake, homeowners saw their insurance premiums soar, while others lost coverage altogether.

From California wildfires to Vermont floods, insurers are pulling out of climate-exposed markets. Nearly one in five American homeowners now live in counties where insurers have reduced or completely eliminated coverage as climate losses in high-risk areas have risen over 360% since 1980.

As a result, millions of homes are underinsured, unprotected and increasingly reliant on federal disaster aid. The United States is entering a climate insurance crisis — one that reveals how economic systems built for the past century are failing to manage today’s environmental risks.

When markets misprice risk

Traditional insurance models rely on historical data and predictable risk probabilities. But climate change has made that data obsolete, resulting in skyrocketing premiums and coverage withdrawals as private insurers fully price in the escalating risk. A dramatic shift in federal policy compounds this new reality.

The administration is actively reducing the national commitment to long-term climate adaptation and pre-disaster mitigation, shifting the burden and cost to the state and local level.

Federal agencies have signaled a retreat from forward-looking climate planning, having halted implementation of flood protection standards and systematically eliminated key future risk assessment tools and climate planning pages from government websites. Most critically, the primary vehicles for federal resilience funding — including the Building Resilient Infrastructure and Communities (BRIC) program and Flood Mitigation Assistance (FMA) — have been suspended or canceled, jeopardizing billions in planned mitigation projects nationwide.

While the Federal Emergency Management Agency (FEMA) is prioritizing streamlining disaster response for immediate relief, this focus on quick recovery at the expense of pre-disaster mitigation leaves states and localities on their own to future-proof against extreme weather. In this environment of federal retreat, the financial gap between rising climate risk and available resilience funding has widened significantly.

An economic tool for an uncertain climate

Indexed (or parametric) insurance offers a data-driven alternative. Instead of paying for verified losses after a disaster — often a slow and contested process — payouts are triggered automatically when a pre-agreed threshold is met. For example, if rainfall exceeds ten inches in 24 hours, or wind speeds top 120 miles per hour, coverage holders receive payment — fast. The trigger is the event itself, not the damage report.

This model has worked elsewhere: the Caribbean Catastrophe Risk Insurance Facility (CCRIF) pays governments within weeks of hurricanes, while African Risk Capacity (ARC) covers drought losses before famine strikes.

In the US, corporations and city governments are beginning to use similar tools to hedge against business disruption. New wildfire parametric products, for instance, are emerging in California with support from global reinsurers. But for ordinary Americans — especially homeowners and small businesses — parametric insurance remains rare.

A public use for a private innovation

The US could adapt indexed insurance for the public good. Imagine if state disaster agencies used parametric triggers to issue automatic relief payments to affected households: no paperwork, no waiting, fewer political fights over aid. 

Local governments could also purchase community-level parametric coverage to stabilize budgets after extreme events. Cities like New York and Miami are already exploring “climate-triggered” municipal bonds — why not extend that logic to disaster response?

Even small businesses could benefit. A coastal café that loses customers during mandatory storm evacuations could receive a payout the moment wind speeds cross a certain threshold, keeping workers paid and recovery faster.

Basis risk and data inequality 

Yet, this model isn’t without flaws. The greatest challenge is basis risk — the mismatch between the index and actual experience on the ground. A farmer might lose crops to localized flooding even if rainfall gauges in her county (or other local area) record below-threshold totals. In that case, she gets nothing. The data says she’s fine; reality disagrees.

In the US, this problem intersects with data inequality. Wealthier regions often have dense sensor networks, detailed flood maps and robust modeling. Rural and low-income areas often lack those systems. Reducing basis risk requires investment in high-resolution, open-access climate data. 

The National Oceanic and Atmospheric Administration (NOAA) has begun building county-level hazard mapping tools and vulnerability indices, but more granular data — especially for rainfall, soil moisture and wildfire risk — is needed.

Open and publicly accessible datasets from agencies like NOAA and the National Air and Space Association’s (NASA) Socioeconomic Data and Applications Center (SEDAC) should underpin parametric models. Transparency in how triggers are calculated is essential to maintaining trust.

Equity and public oversight 

If left purely to private markets, parametric insurance risks deepening inequality. Wealthy property owners could easily buy coverage, while lower-income households — already hit hardest by disasters — remain uninsured. This is where environmental economics meets public ethics. Indexed insurance is most effective when embedded in a social contract:

— Publicly subsidized premiums for low-income or high-risk households.

— Clear disclosure rules so buyers understand triggers and exclusions.

— Integration with FEMA and state recovery systems for transparency.

The California Wildfire Fund and Louisiana’s parametric pilot program are early steps. But a national strategy — modeled on the Community Rating System used in flood insurance — could link coverage affordability to local resilience efforts like wetland restoration or defensible space around homes.

Leveraging indexed insurance

From an environmental economics perspective, indexed insurance helps internalize the costs of climate volatility by signaling where adaptation investments are most needed. If parametric payouts spike in a certain region year after year, that’s not just a budget problem — it’s a warning. It means the true cost of inaction is now visible in economic terms. By connecting financial systems to environmental indicators, indexed insurance can turn climate uncertainty into actionable information — aligning markets with physical reality.

Beyond national borders, indexed insurance could anchor the US role in global climate finance. Channeling part of that funding into global risk pools — backed by US expertise in data analytics and insurance modeling — would demonstrate solidarity while leveraging American innovation. 

If the US modernizes its domestic disaster insurance system using parametric principles, it could export that framework worldwide — especially to small island states and low-income countries facing similar climate risks.

The path forward 

To make indexed insurance part of a fair, effective climate resilience strategy, the following need to be considered: 

— Launch federal and state pilot programs for parametric insurance in high-risk areas, focusing on floods, droughts, and wildfires.

— Invest in open-access climate and hazard data to reduce basis risk and ensure fairness.

— Subsidize premiums for vulnerable households and small businesses, funded through federal resilience grants or carbon revenues.

— Link payouts to adaptation actions, such as floodplain restoration or wildfire risk mitigation.

The beauty of indexed insurance lies in its speed and simplicity: when disaster strikes, help arrives automatically. Less red tape, less uncertainty. But simplicity is not the same as justice. If these systems are to serve all Americans — not just those who can afford them — they must be built on public data, transparent governance and equitable access. 

As the climate crisis deepens, insurance is no longer a niche financial product; it is a pillar of resilience. Indexed insurance won’t stop the storms, but it can ensure that when the wind rises, Americans aren’t left to weather it alone.

[Kaitlyn Diana edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.