Run for Coverage

Climate change poses unique problems and potential solutions for insurers

Fires, floods, droughts; climate change is taking its toll. As more areas become more prone to extreme weather events, insuring homes becomes an expensive proposition. Home insurance premiums have gone up 31% in the U.S. since 2019, and in high-risk areas those figures will keep going up. Climate risk analysis nonprofit First Street forecasts huge increases in coastal cities such as Miami (322%), Jacksonville (226%), Tampa (213%), New Orleans (196%), and Sacramento (137%). At the same time, home values in those areas will go down as buyers shy away from the risk. It leaves insurers, which paid out 10% more in claims than they took in in premiums in 2023, with a dilemma. How they respond will define the industry’s future.

Left Behind

First Street identified more than 21,000 “climate abandonment neighborhoods,” about a quarter of census tracts, where populations are likely to decline because of climate risk and high premiums.

“What we’re seeing is that in some places where the economic structure is a little bit weaker, the impact of climate is stronger,” Jeremy Porter, head of climate implications research at First Street, told Fast Company. “It’s something that’s just an additional factor that people decide, ‘OK, that’s enough. I can’t get a job here, and I also don’t want to put up with persistent extreme rainfall events’ or something like that.”

First Street’s analysis forecasts that more than 5 million Americans will migrate internally this year, seeking out more climate-friendly areas, which, in turn, will see home values go up. Over the next 30 years, First Street projects climate risks will have more than 50 million Americans moving in search of greener pastures.

While some insurers are pulling out of high-risk areas, others are innovating to find ways to insure homeowners and stay in business. California startup Stand Insurance is using AI modeling to predict how things would burn in the event of a fire and help homeowners make changes that lower risk and make their homes insurable.

“We think that the traditional way of doing insurance, which is to take the last 10 years of what we’ve seen and then price that for the next 10 years, is not actually going to work when the number of these wildfires or windstorms are growing very rapidly and causing a lot of uncertainty,” CEO and cofounder Dan Preston told Fast Company. “The only way to really solve this problem is to directly intervene and work with property owners to actually make the properties themselves safer.”

Addressing Risk

Climate change is leaving insurers exposed, but they “can also be key agents in identifying, mitigating and managing climate risk, thereby contributing to a sustainable transition to net-zero,” the International Association of Insurance Supervisors says.

The association’s 2021 Global Insurance Market Report found that more than 35% of insurers’ investment assets are “climate-relevant.” In response, the IAIS has focused on providing supervisors with tools to monitor, assess, and address climate risk in the industry. One result is the Climate Training Alliance, a platform full of resources for responding to climate-related financial risks with knowledge from central banks and the Sustainable Insurance Forum.

Another is the Natural Catastrophes Assessment tool developed by CLIMADA Technologies, which helps “supervisors assess the potential materiality of natural catastrophe risks and how climate change may impact them,” IAIS says. Among other things, the tool estimates the effects of climate change in 2030, 2050, and 2080 so they can assess how and where to alter and price coverage.

For his part, Stand’s Preston also wants to help homeowners see how they can protect themselves and their livelihoods.

“I think one of the most frustrating things for homeowners right now is that insurers will ask for all of these really onerous changes and then they’ll get dropped at the end,” he told Fast Company. “What this technology allows us to do is actually create a connection to the ‘why’: what actually is going to change when I have to cut down this tree or I have to replace this window. By showing that with like a physics simulation, I think it really helps to illustrate why the changes are actually helpful to them.”

Scaling up, stands modeling could help developers and city planners design more climate-resistant communities.

Creative Solutions

On a larger scale, catastrophe modeling that simulates the effects of various extreme weather scenarios on cities can help insurers figure out how to write policies for high-risk areas. To make those policies affordable, the Brookings Institution suggests, insurers can offer discounts for those who take advantage of virtual home inspections and fire safety certification programs. They, and regulators, can also promote investments that mitigate the worst effects of climate change.

“There is mounting evidence that wind-resistant roofing, fire-resistant siding, hail-resistant shingles, and other investments can cost-effectively reduce losses during extreme weather events,” Brookings says. “Achieving broad take-up of risk mitigation investments could limit increases in insurance premiums by decreasing vulnerability to climate catastrophes. Carefully crafted building code mandates like California’s wildfire building codes or Florida’s hurricane wind codes have been successful in overcoming these barriers for recently-built homes.”

You can’t change the weather, but with the right tools, you can learn to live with it, and thrive.