CLIMATE & DISASTER INSURANCEInsurance for a Changing Climate
Among the many facets of the economy being challenged and changed by warming global temperatures is the insurance industry. Damaging extreme events such as wildfires, hurricanes, and floods are happening with greater frequency and intensity, which leaves insurance companies facing larger financial risks and paying out more in claims — and it also leaves policy holders paying higher prices to insure their homes and businesses.
Among the many facets of the economy being challenged and changed by warming global temperatures is the insurance industry.
Damaging extreme events such as wildfires, hurricanes, and floods are happening with greater frequency and intensity, which leaves insurance companies facing larger financial risks and paying out more in claims — and it also leaves policy holders paying higher prices to insure their homes and businesses.
As risks and premiums climb, insurance may become too expensive for some people to afford, and certain properties may be at such high risk of damage or destruction that insurance companies become unwilling to insure them at all.
At the same time, more people are living in harm’s way, with about 40 percent of the U.S. population now residing in a coastal county, noted Vox senior correspondent Umair Irfan, who moderated a recent Climate Conversations webinar that explored how climate change is affecting property insurance.
“There’s a lot of people and property that we have to worry about here,” said Irfan. “And that brings up the looming question: How do we pay for the damages that do occur and distribute the risk? This is a huge concern for the insurance industry in particular, and it’s already forcing a reckoning in the U.S. and around the world.”
Irfan was joined in the discussion by Carolyn Kousky, associate vice president for economics and policy at Environmental Defense Fund, and Nidia Martínez, director of climate risk analytics at the insurance broker and consultancy company WTW.
New Approaches to Insurance
Climate change is already prompting new types and applications of insurance. Martínez offered an example of how insurance is being used to protect not a home or a business but a coral reef.
Located off the coast of Belize, the reef plays an important role in protecting people living in coastal communities, but it is increasingly vulnerable to damage as hurricanes become more intense, said Martínez. It’s insured using “parametric” insurance, which means that whenever an event occurs that meets certain parameters — such as a hurricane that reaches a certain intensity — a payment is made to the government, which sends workers to clean up the reef.
“There’s been lots of really interesting innovation happening in this space,” said Kousky, but she noted some barriers, including regulatory and policy frameworks that often lag behind new approaches, and the basic economics of trying to develop affordable insurance products in a high-risk environment.
