The climate crisis is here. Are the insurance companies ready?
Entire cities of California have been wiped off the map by wildfires. Hundreds of people killed or injured in extreme flooding in Western Europe. Record-breaking heat waves in Oregon.
The world has always faced natural disasters, but climate change means we face higher volatility in it, said Matthew Kahn, environmental economist at USC.
Insurance companies have a hard time keeping up because of the way they calculate risk.
“Most insurance companies have a very backward world view. So they’re going to look at the data and say, “That’s the likelihood of something catching on fire,” said Kia Javanmardian, senior partner at McKinsey. “When you have a phenomenon like climate, the past is no longer representative of the future.”
Some insurance companies are trying to adapt to a warming world and are taking small steps to prevent property damage. In the case of forest fires, for example, they could clean up flammable brush or install sprinklers, Javanmardian said. But there is little that these preventative measures can do.
“In terms of the climate, we think things like where you are will trump things like the makeup of your roof,” he said.
In the future, Javanmardian said, insurance companies may have a bigger role to play in shaping human behavior. Home buyers are unlikely to buy (or be able to buy) a home in uninsurable areas, for example. This could potentially mean moving to more climate-safe areas.
California’s insurance regulator has already approved a halt to construction of new homes in fire-prone areas.
Moving to areas isolated from floods, wildfires or other natural disasters is great, but what it means for people who already live in areas increasingly affected by climate change is playing out in time. real.
Colorado homeowners have been denied coverage by insurance companies who say their homes are at risk for damage from wildfires. The same can be said of homeowners in California, where properties built at the forest-urban interface – areas highly susceptible to wildfires – have faced unaffordable coverage options among those already available.
Insurance companies are also feeling the pain of climate change in their own wallets. Insurance payments averaged $ 31 billion per year from 2010 to 2020, according to Grist. This is an increase from the $ 19 billion per year of the previous decade.
Some insurance companies could go bankrupt. Poe Financial, at one point Florida’s fourth largest insurance provider, went bankrupt in the wake of Hurricane Katrina.
So what can be done to ensure that insurance is increasingly responsive to climate change in the future?
On the one hand, governments can play a more important role in the insurance market. The United States already allows homeowners to purchase federal flood insurance. But some economists, like Javanmardian, fear that this is simply a BandAid solution: While it offers stability in the short to medium term, the spending on construction and reconstruction can be unsustainable.
Another solution may be for insurers to turn to the use of geospatial data.
“Auto insurers can charge more for men than for women. Life insurers can charge older people more than younger people for a policy, ”Kahn said. “Will US courts allow insurers to charge more for properties in fire zones and flood zones and less for properties and safe places?” If the answer is yes, the insurance industry can push economic activity from higher ground to safer places. “
Safe places which, of course, can become increasingly unaffordable as the climate crisis causes mass migration, further dividing the impacts of climate change by social class.
One company looking to push insurers to adapt to geospatial data is Jupiter Intelligence. Launched in 2018, Jupiter assesses climate change risk management for businesses.
Using climate projections and asset data (think neighborhoods or power plants), Jupiter quantifies climate risk – things like flooding, wildfires, drought, heat, and wind – as well. that the cost of a disaster for any point on the planet. The company’s clients include Liberty Mutual Insurance, BP, NASA, New York City, and the City of Miami.
“The world is a very, very different place, even in just five years, in terms of awareness of [climate change] risks and impacts on businesses, businesses and reputations, ”said Rich Sorkin, CEO and co-founder of Jupiter.
A complicating factor may be the mismatch between the insurance rates assessed annually and the assets held. Take the example of a 30-year residential mortgage. Although they are more inherently involved in risk activity, “banks actually move much faster than insurance companies. [on climate change]”Sorkin said.
“So quickly in fact what I think is going to happen is that the banks are going to be so far ahead of the insurance companies that the insurance companies will actually have to react in their business model simply to because of the banking sector, ”he said.
Banks more frequently engage in net zero investments, for example. Some banks also transfer mortgages from homes located in vulnerable areas to organizations such as Fannie Mae and Freddie Mac.
While banks can transfer the risk of potential default to other lenders, it may not be as easy for vulnerable communities as low- and middle-income families are pushed to higher risk areas. forest fires or floods. (Areas that some reports may be “uninsurable”.)
And as Americans flock to areas more likely to be uninhabitable in the decades to come, insurance companies must read the writing on the wall or risk collapsing – which would put those who do so even more at risk. buy insurance policies.
But, Khan said, insurance companies have an opportunity to play a role in alleviating the worst of the worst of the climate crisis for consumers. If they act quickly enough, of course.
“We need a Paul Revere here,” Khan said. “The insurer can be the adult in the room, educating people who may not fully appreciate the new risks we face – sea level rise, smoke, fire hazard – because the insurer is responsible.”