Insurance for a Changing Climate

“One of the biggest challenges is designing insurance products that can be profitably offered by the private sector against potentially catastrophic risks — they’re dealing with real risks of bankruptcy — that can be offered at a price point that people can afford and are willing to pay for,” she said. “And that’s a real challenge, especially because we know that the people who need the financial protection of insurance the most are the least able to afford it.”

Collaboration will be key to meeting that challenge, she said. “A really important piece of it, and a piece that’s sometimes hard, is developing new partnerships across sectors. So can we get the public and private sector working together to solve these problems?”

Governments routinely intervene in disaster insurance markets, she explained, given how challenging disaster risks can be for industry. Losses from the severe wildfires that swept through California in 2017 and 2018 wiped out — more than twice over — 30 years of profits for property insurers in the state.

“That’s just not a financial model that’s going to work for the private sector, which is why you see the public sector get involved,” she said. A growing amount of wildfire insurance in California is being provided through the state’s FAIR program, which offers insurance to properties that aren’t insurable on the private market.

Governments have also stepped in when rebuilding becomes too risky, she noted later. Some federal buyout programs will purchase repeatedly flooded areas and protect the land from future development, so that other people don’t move in and face the same risk, said Kousky. However, money for such programs is very limited and very slow to reach people after a disaster — sometimes on the scale of years.

Another possible approach would be for private insurers to allow people to collect claims and use that money to relocate somewhere safer — but this would require a shift from how things are currently done, she said; lenders usually have to sign off on the claim, and they often want people to rebuild.

Building Resiliency, and Educating About Risk
Another way to keep insurance sustainable is to invest in measures that can reduce damage and losses, said Martínez. “Part of the solution is resiliency,” she said. “[When the] same events happen in the same areas — what can we do so we don’t incur the same losses?” For example, eco-forestry management approaches and “hardening” homes could help reduce risks from wildfires and storms.

She later stressed that the problem of climate change is not going to be solved with shortcuts, such as particular products. “What the Earth is doing to us, and what we are doing to it … they are huge, complex issues,” she said. “For starters, we have to teach [about climate change] in school … We will be able to manage this, but we have to be transparent and we have to take this seriously, and it will take a huge change in mentality.”

Kousky agreed. “Education is so important about climate change as an issue — and also specifically for households — about the specific risks they’re facing, and how they’re changing over time,” she said. “And, unfortunately, that’s hard for households to do on their own, and we need to help them. We need public policies and tools that can make that easier.”

She added a bit of practical advice for homeowners: “Ask your agent about the details of your insurance policy. You don’t want to get stuck after a disaster realizing you have a bunch of sub-limits and high deductibles and don’t have the dollars you need.”

Sara Frueh is Senior Writer & Media Officer at the National Academies of Sciences, Engineering, and Medicine. The article was originally posted to the website of the National Academies of Sciences.