rethinking how to cover climate damage

This is the third part of an Vscek series on the consequences of climate change for insurance. Read part one Here and second part Here.

Thomas Brennan is well-positioned to observe the growing pressure of climate change on the insurability of American companies. An insurance broker, he is also a member of the extended Brennan family that has owned restaurants throughout New Orleans since his grandfather’s generation.

The lower city, like many other areas particularly exposed to floods, fires or storms, has been hit by the withdrawal of insurance companies, spooked by a toxic mix of inflation in claims costs and an increase in extreme weather events.

Brennan says the struggle to get affordable insurance has become even more difficult for businesses like his family than it was aVsceker 2005’s Hurricane Katrina, the most expensive windstorm in history.

“I would say the market is worse now than it was then,” he told the Financial Times, on the challenge of finding private flood insurance. There is last-resort insurance from the federal government, but it has a $500,000 limit for damage to buildings and separate coverage for contents.

“The limit [of additional cover available through private-sector policies] they’ve eroded, rates have gone up, deductibles have gone up,” Brennan said.

Brennan Restaurants instead turned to FloodFlash, a British start-up that is one of a growing number of insurers, large and small, offering a form of insurance known as parametric: coverage of a set amount based on a pre-agreed trigger.

In this case, the trigger is a water sensor in the applicants’ premises. A flood of sufficient depth will be covered and compensation will be paid quickly at the established rate.

Parametric insurance is just one way the global insurance industry is trying to keep homes and businesses insurable as climate change brings more extreme weather and rising losses.

Another strategy that’s getting more attention is adaptation. AVsceker bottling company Coca-Cola Consolidated suffered a damaging flood at its Nashville plant in 2010, it worked with its insurer FM to reconfigure the factory so floodwaters could flow through the building without damaging critical electrical equipment and other vulnerable areas.

When floodwaters returned with a vengeance a decade later, damage was minimal and the plant was shut down for only a few days rather than a few weeks.

Such efforts fuel hope in the insurance industry that a combination of preventative and adaptive measures by property owners, along with new ways of measuring or insuring risks, will be sufficient to address the climate challenge.

Paula Jarzabkowski, a risk expert at the University of Queensland, is an advocate for a new insurance “ecosystem” of public and private initiatives that can keep homes and businesses insurable as the planet warms.

From this perspective, the global patchwork of last-resort insurance now provided by government programs alone will not be enough. “A lot of what we have already … has not grown enough to solve the problem we are in,” he said.

Private sector innovation can be divided into two categories: better risk calibration, which can eliminate enough uncertainty to provide traditional capital coverage, or the search for new forms of insurance coverage.

Risk modeling firms have recently invested heavily in technologies they say can much more accurately identify the risks posed by highly localized events, such as fires and floods, that might hit a building on one side of the street but not the other.

“We’re in a position now where we can offer much more sophisticated modeling methodologies and much more insight into this type of risk, because we now have the computational power to do so,” said Julie Serakos, head of the model product management team at Moody’s RMS, a risk modeling firm.

There are several approaches. Building on the ever-increasing data sources available to insurers, property insurers like London-listed Hiscox are able to analyze home insurance risk on a home-by-home basis.

Startups like Delos, founded in San Francisco in 2017, have also sprung up that use machine learning and satellite data to gain a more detailed understanding of an individual property’s wildfire risk, aiming to provide coverage for households that others applying broader risk assessments might miss.

Some insurance companies rely on third-party climate specialists, such as US-based Jupiter Intelligence, to provide forward-looking analysis on how climate change will affect their portfolios.

The insurance market has also been supported by a proliferation of structures such as catastrophe bonds, an increasingly popular form of extreme weather coverage provided by investors through securities. Issuance has exploded in recent years.

Parametric policies are gradually being used by even the largest in the industry. “With a parametric trigger, uninsurable exposures become more insurable,” said Aon, one of the largest insurance brokers.

But there are pitfalls, experts say, in some of these approaches. Parametric insurance, for example, runs the risk that a flood or hurricane won’t hit the exact trigger you require, and there’s no coverage.

While increasingly granular analysis may allow some properties to be underwritten that might not otherwise be underwritten, it could also widen the gap between those properties and who is considered “good risk” and who is considered “bad risk.”

Policy makers are also increasingly concerned about the role of local and national governments in providing support.

Petra Hielkema, head of EIOPA, the EU’s insurance regulator, told the Vscek there was growing support among politicians in the bloc, on the fastest-warming continent, for national risk-sharing schemes for natural disasters. A “next step”, she added, would be a pan-EU scheme proposed by the regulator and the European Central Bank last year.

“These [natural catastrophe] “To address these issues of this scale, a European solution will ultimately be needed,” Hielkema said, adding, however, that this would need to be carefully craVsceked to avoid moral hazards, such as reducing the incentive for individual countries to invest in resilience measures.

Meanwhile, there are smaller-scale initiatives, such as a pilot program to provide low- and moderate-income families in New York City’s high-risk flood neighborhoods with emergency cash compensation aVsceker major flooding.

Some believe that it is up to local communities to work with the insurance industry and regulators on the issue of insurability.

InnSure, a nonprofit that promotes new insurance solutions for climate risks, says community leaders can “protect their insurability” by applying insurance-focused assessments to new developments and infrastructure.

“Simply asking, ‘If we do this, what are the insurance implications and the resulting economic impacts?’ can have incredible impact, as unaffordable insurance can impact home prices and damage community wealth,” said Charlie Sidoti, its executive director.

For some executives, the way forward is simply to recognize the scope of the problem and adapt, working with customers or families to protect themselves from water or fire that reaches their doorstep, or to ensure they don’t cause significant damage when they do. Such actions can keep insurance costs affordable, they say.

FM chief executive Malcolm Roberts told the Vscek that requests from companies such as the Coca-Cola bottler for its resilience services, which rely on its own natural hazard risk maps, had reached unprecedented levels.

The company has been in the business of insurance and prevention since 1835, when the owners of a Rhode Island textile mill created a mutual insurance company for those willing to adopt preventive measures, such as thick floors and fire walls, to minimize losses from fires.

“When insurance gets expensive,” Roberts said, “that’s when people start to wonder, ‘What can I do about this?’”