Climate change comes to insurance
Natural disasters have cost the United States more than $600 billion over the past five years. With climate change, those costs are expected to continue increasing. Moving forward, managing and distributing these harms will become increasingly important. Insurance is one tool to do so. Unfortunately, the insurance system is also at risk from climate change.
Insurance works by pooling risk across a population. Essentially, policyholders pay into a pot. When a policyholder suffers a harm, they collect from the value in the pot. Because only a small number of policyholders are likely to suffer an insured harm in a given period, the money from the lucky policyholders covers the claims of the unlucky.
Underwriters and policyholders need better access to climate data in order to make informed decisions with regards to climate risk. Where private insurance is uneconomical, however, policymakers should consider how public insurance programs can play a role, with an eye toward designing those programs to distribute risk equitably. Alongside this research, policymakers should investigate how resilience measures can reduce damages from disasters, limiting overall risk in the first place. Federal resilience grants have been found to save the public $6 for every $1 spent.
Policymakers should take action to unearth hidden risk in insurers’ portfolios. Requiring insurers to identify and disclose the climate risk in their portfolios is a necessary step. Disclosure would create a foundation from which policymakers could consider how climate risk threatens insurer solvency and, from there, regulate the risk. This is important not only to insurers and policymakers, but to all Americans who rely upon a well-functioning financial system.