Watch the replay of this event held on September 27, 2022. (Transcript below.)

As climate change makes floods, wildfires and other extreme weather events more frequent and damaging, many people can no longer access disaster insurance just when they need it most. Is the disaster insurance industry hurtling toward a crisis? What must we do to shore up our disaster insurance programs, and how can we leverage them to help individuals and communities strengthen their climate resilience?

In 2021, the massive Dixie Fire blazed across nearly a million acres in Northern California, torching more than 1,300 homes and other structures. Many people who lost their homes and businesses had no homeowner’s insurance, an increasingly common predicament in California and other fire-prone regions. Areas vulnerable to flooding find themselves with similar challenges, as we recently saw in Kentucky. The recurrence of catastrophic natural disasters is pricing out many at-risk markets from any meaningful coverage.

Still, some experts see this dilemma as an opportunity: Insurance can be a powerful tool to shape human behavior and the economy. Some even think that new forms of insurance, built on technological advances in data collection and machine learning, could be one of the most effective ways to protect the planet and make communities more resilient to climate change.

On Tuesday, September 27, at 9 a.m. Pacific/12 p.m. Eastern, join Annual Reviews, Knowable Magazine and Future Tense for a conversation that will change the way you think about insurance.

In this free online event, attendees will learn:

  • Why disaster insurance is more important than ever for individuals and communities
  • The risks that climate change poses to disaster insurance as it currently exists
  • How new, reinvented forms of insurance could be a positive force for climate resilience and adaptation, helping us to not only recover from natural disasters, but prevent them.

 

Speakers

Alice Hill

Alice Hill

Senior Fellow for Climate Change Policy, Council on Foreign Relations

Alice Hill studies the risks, consequences and responses associated with climate change. During President Obama’s administration, she led the development of national policy to prepare for catastrophic risks, including climate change. She has written two books: Building a Resilient Tomorrow and The Fight for Climate After COVID-19.

Carolyn Kousky

Carolyn Kousky

Associate Vice President for Economics and Policy, Environmental Defense Fund

Carolyn Kousky studies disaster insurance markets, disaster finance, climate risk management and policy approaches for increasing resilience. She previously directed the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania. Her latest book, Understanding Disaster Insurance: New Tools for a More Resilient Future, will be published in October.

Moderator

Emily Underwood

Emily Underwood

Science Content Producer, Knowable Magazine

Emily Underwood has been covering science for over a decade, including as a staff neuroscience reporter for Science. She has a master’s degree in science writing from Johns Hopkins University, and her reporting has won national awards, including a 2018 National Academies Keck Futures Initiatives Communication Award for magazine writing.

About

This event is part of an ongoing series of live events and science journalism from Knowable Magazine and Annual Reviews, a nonprofit publisher dedicated to synthesizing and integrating knowledge for the progress of science and the benefit of society. This series is supported by a grant from the Gordon and Betty Moore Foundation. 

Future Tense is a partnership of Slate, New America and Arizona State University that examines emerging technologies, public policy and society. Sign up for Future Tense’s newsletter: https://slate.com/sign-up-for-the-future-tense-newsletter.

Resources

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Related Annual Review articles

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Transcript

Emily Underwood: “Hi, everyone, welcome to ‘Insuring our uncertain future.’ I’m your host, Emily Underwood. Today’s event is brought to you by Annual Reviews, Knowable Magazine and Future Tense.

“This is a new thing for us: Part One of a three-part series on climate adaptation that we are doing in collaboration with Future Tense, which is a partnership of Slate, New America and Arizona State University that examines emerging technologies, public policy and society.

“So we have an October event on urban heat and how to deal with it in cities, and you can sign up for that already, and then we’ll have an ... event [in December] on climate finance. So we’re really excited to launch this new series with Future Tense. Make sure to sign up for Future Tense’s newsletter — they publish wonderful stuff. And of course you should sign up for Knowable’s newsletter too if you haven’t already. It’s full of goodies.

“So today we’re going to talk about something a lot of us avoid thinking about until something bad happens, and that is insurance — specifically, disaster insurance. Personally, I’ve been thinking a lot about disaster insurance lately because my family and friends and a lot of people in my community had to evacuate from the Mosquito Fire, along with about 11,000 other people. So we’re home now, but we’re going to talk a lot about wildfire and insurance with our guests today.

“If you’re like me, you may tend to go a little cross-eyed when you hear insurance jargon like ‘deductible’ and ‘copay.’ But if that’s you, don’t worry, you’re in the right place. There are experts in this audience, but there’s also a lot of people who just want information to bring back to their homeowners’ association, their neighbors. I think there might even be a high school student in the audience. So if you’re out there, high school student, well done — way to get a head start on adulting.

“OK, so over the next hour we are going to learn what is disaster insurance? How is it different from other kinds of insurance like car insurance? Why are some people saying that disaster insurance is in crisis? And what does that mean? Finally, and to me this is the most exciting and surprising part of this topic, is why are some experts actually excited about disaster insurance as a tool for adapting to climate change and even protecting the planet, protecting ecosystems, protecting biodiversity? ...

“Welcome to all of our audience and to our guests. Please welcome first Carolyn Kousky. Can we bring Carolyn onto the stage?

“Hi, Carolyn. Carolyn Kousky is an economist who recently joined the Environmental Defense Fund as associate vice president for economics and policy. Before that, she was executive director at the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania, all of which sounds fun and interesting and complicated. So she’s got a new book coming out in October: Understanding Disaster Insurance. So be sure to check that out.

“Now I would like to welcome Alice Hill to the stage. Alice is a senior fellow for energy and the environment at the Council on Foreign Relations. She worked in the Obama administration, leading the development of national policy to prepare for catastrophic risks, including climate change. She’s the author of two books: Building a Resilient Tomorrow and The Fight for Climate After COVID-19. She asked me to add a quick disclaimer: She’s on the board of directors and audit committees of the US subsidiaries of the Munich Reinsurance Company. And I bet, if we ask her nicely, she will explain to us what reinsurance is and why it plays a role in how we cope with climate change. So first, let’s get to some basics.

“Welcome to both of you. So glad to have both of you here. Let’s just go with what is disaster insurance and why do some people need it? Carolyn, can you just give us a quick overview?”

Carolyn Kousky: “Yeah, sure. And thank you for having me on today. I’m really excited to be part of this conversation. So insurance is a type of financial protection. You pay a small amount in the good years when bad things aren’t happening to you, so that you can be guaranteed of a payout when something bad like a big disaster does and you really need those funds. So insurance is especially important for times when you could have very large financial costs. It would be difficult to handle without insurance, and that can be many types of things, right? We have health insurance to deal with very large medical expenses, but it’s really important for disasters, because disasters can be what we like to think of as large financial shocks for households.

“There are times when all of a sudden there’s a lot of expenditures, and it’s not just repairing and rebuilding your property — which can be thousands, tens of thousands, hundreds of thousands of dollars depending on the level of damage — but also things like evacuation expenses and debris cleanup and temporary housing. And if the power’s out, it’s generators and fuel. So there are all these costs that get put on households, and sometimes there are also times when income goes down at the same time because business can be interrupted and it’s very hard for households to pay for all those costs without insurance.

“Most people just don’t have enough liquid funds in the bank to cover such huge expenses. Some people can take out loans to help with those costs, but for many families, taking on additional debt would be hard, and they might even be locked out of credit. And our federal aid programs after disasters, while important, are really insufficient and can sometimes take too long. So that’s why insurance is really important for households recovering from these types of events.”

Emily Underwood: “Thanks. I’d like to get later into what makes disaster insurance different from things like car insurance, medical insurance. But first, let’s just stay focused on the basics. Are disasters part of everyone’s homeowner’s insurance? Alice, can you explain why or why not?”

Alice Hill: “Well, in the United States, our system of insurance is that you essentially pay for what might happen to you. In the space of your home, it’s defined by perils — what hazards you have. And certain perils will be covered by insurance — typically, homeowner’s insurance — say wind, but other hazards like flood are in all likelihood excluded. And that reflects the history of how insurance has developed in the United States.

“And sometimes after particularly big catastrophes, we see private insurance companies essentially saying, ‘This is too big for us. We’re getting out of the business of offering flood insurance.’ And that’s what’s happened. So now the federal government ... is the primary flood insurer for homeowners. And we see, in California that ... typically the homeowner’s insurance has wildfire, but we see some insurers don’t want to insure anymore for wildfire. So it gets complex and that puts the burden on the person purchasing the insurance to make sure they understand what their coverage is.

“Unfortunately, for many Americans, this is just viewed as a lot of fine print. You hope you never have to use that insurance policy, but if you do have to use it, there sometimes are some very unpleasant surprises, that the flooding that occurred as a result of a hurricane, depending on what caused it, may not be covered in your homeowner’s. Really important to have a better understanding of what’s in and out of that policy.

“In other countries, they just cover everything. So it’s a lot simpler. In New Zealand, it’s a lot simpler. Pretty much everything is covered and they have higher protection — what we call protection rates, which is more people have the benefit of insurance, therefore they’re protected from the financial losses, and that’s called protection. But in the United States, we have a larger protection gap. Very good compared to the rest of the globe, but still a challenge for us because a lot of people don’t have enough insurance or any insurance for these big disasters.”

Emily Underwood: “I’m curious, how did we get to this situation where there’s this big gap and why is the US different from other countries? Was that a choice that was made at some point? How did we end up here?”

Alice Hill: “Well, it all just reflects our history. Insurance has been around since the 1600s. Lloyd’s of London, you might have heard. And it began, and Carolyn has a lot of this in her book, but it began from basically insuring ships. And then over time it has evolved to what risk are we going to insure? Insurance companies will insure any risk. There are stories of actresses’ legs being insured, for example. But for homeowner’s, it’s insuring against that disaster that really damages the place you live in, your residence.

“And for most Americans, their home is their primary asset. So if it’s struck by a hurricane or a wildfire or some other calamity, that is a big loss. And so we have private insurance companies in the United States building off that Lloyd’s of London model starting to offer policies. But in the 1960s, we had a couple of serious flood events that were river flooding, and basically private insurance companies — and they are for profit — said, ‘This risk is not one we’re interested in insuring.’

“And that’s when the federal government stepped in and created this National Flood Insurance Program, which unfortunately is essentially bankrupt. It’s been a very troubled program from the beginning. We’re seeing withdrawals of companies during this threat from wildfire. And there have been calls for the creation of a National Wildfire Program. That hasn’t occurred yet. And if you looked at what happened with flood, it might be a warning that that’s a dangerous path to go down. But other countries — Morocco comes to mind — just have decided, you know, we want to have a basic protection for everyone no matter how much money they have. And so they put in place broader protections. That isn’t a choice that the United States has made.”

Emily Underwood: “Interesting. Carolyn, you got your start studying flood insurance and the National Flood Insurance Program. Do you want to talk a little bit about what it is about natural disasters that makes them sort of prone to turn the private industry upside down, and how we got here?”

Carolyn Kousky: “Yeah, sure. Thanks, Emily. So insuring disasters is a little bit harder for the private sector than for other types of risks that we use insurance for. You mentioned earlier like car insurance, for example. And that’s because the fundamental model of insurance — what Alice was talking about back in the 1600s and 1700s — is this idea of putting a bunch of risks together, pooling them. So everyone makes a contribution to a fund, say, and when something bad happens to someone, they get to use that money to cover their losses.

“And that works really well when people’s losses are random and don’t happen at the same time. And so every year some people get in car accidents, but when I get in a car accident, it doesn’t mean all my neighbors got into a car accident at the same time. And so auto insurers are able to really accurately assess how much money they’re going to need to cover car accident costs year to year. And that those costs year to year are pretty stable. It’s different people crashing every year, but the costs are pretty much the same.

“But disasters aren’t like that at all, right? When I suffer disaster damage, whether it’s flooding or a hurricane or wildfire, chances are my entire community has also suffered those damages at the same time. Which means that for a disaster insurance company, instead of having fairly stable losses year to year, they have some good years where there’s no disaster and they have hardly any losses, and then a disaster hits and they have enormous costs they have to pay because they need to pay everyone at the same time.

“And not only that, but the damages could be really big, so they aren’t small payouts to people. They have to be large payouts. And that kind of catastrophic nature of those types of risks means that in order for a private insurance company to not go bankrupt, they have to have access to some way to pay these huge claims in a disaster year.

“And they do that through a number of things. They have their equivalent of their own savings: There’s insurance for insurance companies. That’s what Alice can talk about. She’s on the board of one of those — that’s reinsurance. There’s financial instruments that they use. But the bottom line is that all of those mechanisms aren’t free, they’re not cheap, and those costs get passed on to the insurer, to the person purchasing the insurance policy.

“So that means disaster insurance kind of fundamentally is more expensive. And then that means that lots of times people can’t afford it when they need it. And that also means that there are times when insurance companies either are too worried about going bankrupt because the losses could be so high or they can’t offer it profitably at a price people can pay, and so the market breaks down.

“And that’s what Alice was talking about with the flood insurance program. Insurers were like, ‘We can’t handle this,’ and they left. So even before we think about how climate change is increasing all these perils, there’s already difficulty in insuring disasters. And so we already see governments intervening in a lot of ways in these markets.”

Emily Underwood: “Great, thank you. And I think this is something that a lot of us experience in a regional way. It’s really interesting to hear the big picture and how this is happening for different types of disasters. You hear that disaster insurance is in crisis or soon will be.

“Alice, can you maybe explain what’s meant by that, and focusing on California in particular — California and wildfire? I think it’s a good place to start.”

Alice Hill: “Sure. Well, I wouldn’t say California is in crisis yet. It’s certainly very stressed. A place that may be in crisis soon is Florida, if it’s not already. And one of the challenges is this reinsurance market that Carolyn has mentioned.

“So, reinsurers, they’re typically global. They insure risks around the planet. And that means, as Carolyn’s pointed out, that if one place gets hit, probably other places aren’t getting hit at the same time. So they’ve been profitable in one area, and even if it’s not so profitable in another area, they’re covered. And the types of insurance they offer is reinsurance.

“So your State Farm — your primary insurer that you as the homeowner or the renter, work with — goes out in the market and buys insurance from reinsurers. But a number of factors have been occurring in the market that have affected the prices of reinsurance. And one of those — it’s not the only one — but one of those is the worsening of losses from climate-fueled events.

“So interestingly, reinsurers were on to the risk of climate change at a very early stage. They have been warning of the dire consequences of greater losses from a wildfire that’s made hotter, bigger, and burns more acreage ... [due to]... human-caused emissions. Those are those greenhouse gas emissions that human activities are causing to form this blanket across around the globe that’s heating us up. And with more heat, our wildfires get worse.

“With more heat, as we’re seeing right now as Hurricane Ian approaches Florida, hurricanes intensify because of warmer waters and more heat, and they can carry more precipitation so that if they slow down, they just dump huge amounts of water in places that can’t handle it. Think of Hurricane Harvey with 60 inches of rain being dumped on pancake-flat Houston.

“So we see that these events are getting bigger and more costly, and that has raised the prices of reinsurance — it’s called the hardening of the market. And with more disasters, those prices gets higher. As Carolyn has said, those prices have to be passed on. Either they are paid by the person purchasing the insurance, but some people say the insurance is too costly. And in some cases in California, because insurance is highly regulated by the states, the California Department of Insurance has said to insurance companies who’ve looked at these wildfires, and by the way, they lost the profits for a 20-year period in 2017 and 2018. So 20 years’ worth of profits were lost in two years of wildfires for insurance companies. So some of them have said, ‘We don’t want to renew that policy for that home that’s in an area that’s close to or that was burned.’ And the commissioner has said, ‘No, you can’t leave, insurance company. At least for a year, you have to continue to offer insurance.’

“Now many people who hold these policies, I don’t think know that their policy was at risk and that the commissioner said, ‘You have to stay.’ So that’s causing stress on the market. And if there’s another big wildfire season, we may see more insurers say they’re leaving.

“California’s unique, it’s the sixth-largest insurance market in the world. So many private insurance companies want to continue to do business there because it’s a place with a lot of people who buy a lot of insurance. So I wouldn’t call it in crisis yet. I would say it’s highly stressed.”

Emily Underwood: “Yeah, it’s so interesting to me that something that affects me in rural Northern California is connected to a company, a big company in Munich or a big company in Switzerland. It’s interesting to sort of trace these big connections.”

Alice Hill: “And they have very long histories. That’s the interesting thing about these reinsurers, many of them. The Munich Re’s. The Swiss Re’s, yeah, they’ve been around a long time and they understand catastrophic risk.

”And I would just add one more point. One of the leaders of a French reinsurance company said several years ago, ‘If we have 3 to 4 degrees Celsius of heating, it’s an uninsurable world.’ And that should cause us all pause as we see temperatures climb as a result of human-caused greenhouse gas emissions.”

Emily Underwood: “Wow. Yeah. And I’m eager to get to the part where we talk about how maybe insurance could help prevent that 3-degree warming. But first, Carolyn, do you want to follow up on maybe some specific issues in Gulf Coast or Florida? I know Alice mentioned a couple of those, but is there anything you want to add to that, especially with Hurricane Ian bearing down on some of our guests in the audience today? I hope everybody’s OK.”

Carolyn Kousky: “Yeah, sure. As Alice mentioned, we’re seeing signs of stress around wildfire in California. And as she noted, we’re also seeing signs of stress in some of the most hurricane-prone regions of the country. As we were talking about before, there’s no such thing as hurricane insurance in the United States. There’s coverage for wind in your homeowner’s policy, and there’s coverage for flooding through a separate flood insurance policy. So to be covered for hurricanes, you have to have both policies — which is one, confusing, and two, expensive. So that’s a problem.

“But the wind part of it is still largely in the private market. But going back decades now, hurricanes have been getting harder for insurance companies. And so what you see, just like we have the federal flood insurance program, every state along the Gulf and up the East Coast prone to hurricanes, has state level programs that offer homeowner’s insurance with wind coverage to those in the state who can’t find a policy at all, or can’t find an affordable policy for wind coverage.

“These are called wind pools or beach plans. And we’re seeing that as we see this kind of stress in the market in these places, the similar shift of risk into these public sector programs. So in Florida now, Alice mentioned a state that’s at very high risk and the insurance markets, really stressed there as well. We’ve seen insurance companies leave the market and now their state program, which is called Florida Citizens, is the largest insurer in the state with over a million policies.

“And so that’s just an example of how hard it is now for the private sector. And also what you see if you look at kind of market share in these places is that the kind of big homeowner’s companies are largely not insuring anymore in these very risky areas until you have smaller companies filling in. And some of those just can’t weather the types of severe events.

“So, for example, after Hurricane Ida, Louisiana saw six or more insurance companies go bankrupt because they couldn’t cover the losses from Ida. And so we’re seeing stress in the Louisiana market too.

“And so yeah, I think Alice is right, we’re maybe not in crisis yet, but there’s definitely signs that this is a problem area. And as she pointed to, as warming continues, it’s only going to get worse. And so now is the time where we need to get ahead of this because insurance policies are for one year.

“So when it gets not profitable or too difficult for insurance companies, they can stop writing. But people are still living there and are going to still be suffering. And so it’s important to figure out how to help stabilize that market and make sure people have the financial protection they need, which hopefully will get us into conversation later about actually reducing losses for people.”

Emily Underwood: “Right. So that’s just a perfect segue way into my question, which was like, what’s really at stake here and why should an ordinary person — I’m a renter, I don’t have a homeowner’s insurance, I hope to maybe someday — but why should someone like me, just an ordinary person on the street, care if the disaster insurance industry falls apart? And I’m wondering, especially when you talk about who’s going to pay for it, I think you mentioned public sector and let’s make sure we define what that means because that’s us, right? That’s taxpayers. Maybe, Alice, do you want to take that first or what’s at stake?”

Alice Hill: “Sure. Well, why each of us should care — and we should make sure that we check in with our insurer on an annual basis — is that insurance protects us from a catastrophic loss. If you’re renting, of losing all your property. So you’ve got to start over.

“And then if, it’s not just us, but if your community, if your neighbors can’t get affordable insurance or choose not to purchase insurance, it can have a devastating effect for the local economy, because those families will have to pay for the loss somehow, or they will move away. Businesses will close, schools will lose students, property taxes will go down because the houses are destroyed and people start defaulting on their loans, and you enter a cycle of economic decline that reverberates on those who are in the community because there aren’t as many opportunities, people don’t want to invest in it and they leave.

“So insurance is a linchpin to the health of the economy, and it’s a linchpin to the health of families so they don’t have to make drastic choices.

“One thing we see, I think, is sometimes an assumption by Americans that the federal government’s going to bail them out if a disaster strikes. And the reason for that is Congress has, after big events — Hurricane Katrina, Hurricane Sandy — moved in and poured a lot of money into the communities. But for the vast number of disasters, there isn’t a separate appropriation by Congress. Congress doesn’t say, ‘We’re going to give money to that state for that disaster.’ And so people are left, if they don’t have insurance, to just what FEMA gives them and is authorized to give them, which isn’t enough for most families to get back on their feet.

“And so I think there’s an assumption here that somehow the federal government is going to ride to the rescue and provide permanent housing and a lot of other benefits that really aren’t there. So people choose to save on insurance based on an inaccurate assumption. And there are other assumptions that guide our decision-making, like our optimism bias and other things that also affect the choices.

“But for each of us, it makes sense to purchase insurance. Of course, it has to be affordable, within our budget, and that’s going to be the challenge with climate change. The rates, insurers will want to increase the rates, and that will put pressure on the regulators to increase the rates.”

Emily Underwood: “Carolyn, you have found that people really overestimate how much aid they’re going to get from the government after a disaster. Can you talk a little bit about that? And then I’d like to talk about what’s really driving the risk because climate change is part of this, but there are some other factors driving the risk going up, right?”

Carolyn Kousky: “Yeah, absolutely. And what Alice said is exactly right. People often have misperceptions about how much aid they’re going to get, and the fact is that after a disaster event, as Alice noted for smaller events, there might not be any aid at all.

“You need a presidential disaster declaration that actually authorizes the FEMA program to individuals, which is only authorized about 40 to 50 percent of the time. And then those grants are capped, and most people only get maybe $5,000.

“So it’s important help, but it’s not going to get people back on their feet. It’s not going to bring you back to pre-disaster conditions. And what I think is misunderstood is that it’s not designed to. The whole idea was that people should rely on insurance, and the grants are really only to try to make people make their home safe and habitable again. And they might not even totally do that.

“I also want to stress another challenge with disaster aid, which is timing. And Alice alluded to this too, but it can take a long time for money to get to people. So the FEMA grants will tend to get there within a few months hopefully, but there can be a range there.

“But the big appropriations that Alice was talking about for the big events like those big hurricanes she mentioned — Harvey and so forth — those are often sending money to the Department of Housing or Urban Development, not FEMA. And it’s for a long-term reconstruction.

“So you see those billion dollars being appropriated and you might think, ‘Oh, that’s getting everybody back on their feet.’ But really a lot of that goes to rebuilding infrastructure and public sector buildings. And work by a colleague of ours found that those dollars take, on average, over two years to get spent on the ground. So we’re talking more than two years after the disaster is when that money is spent. So it is not helping people right away.”

Emily Underwood: “Right.”

Carolyn Kousky: “Yeah. And one of the biggest challenges is, especially for lower-income households, who just don’t have a way to bridge and cover expenses right away. And we see in some of our survey research that households, as Alice was mentioning, can turn to really devastating coping mechanisms when they don’t have access to funds. So things like falling behind on your bills and your mortgage, reducing spending on important things like health care and maybe, unfortunately, having to turn to things more like predatory lending with very real long-term consequences for households — which is why the research also shows that if you have insurance, you’re more likely to rebuild and recover better and faster. So just to emphasize all of that.”

Emily Underwood: “Yeah, no. So clearly this is a big problem. This all sounds bad, really bad. What are some of the solutions that are being proposed? And I’m curious to know where they’re coming from. Alice, do you want to take that first? An idea that you find inspiring or a big change you think needs to happen?”

Alice Hill: “Sure. Well, Carolyn and I serve on a task force that the California Department of Insurance Commissioner Lara has created to look at solutions to what we’re seeing. And of course in California they have all the different perils, but wildfire is first and foremost. So our task force issued a report with many recommendations, and I’m proud to say that a number of them have gotten traction.

“We can take heat, for example. Heat is one of our biggest killers. There’s really not typically insurance for heat, but looking at ways that we can make sure that people understand their threats. So California has just created legislation to categorize heat waves, so that people understand these heat waves are different than what we’ve experienced in the past. A climate-worsened heat wave tends to be longer and substantially hotter than what we’ve had in the past.

“The Department of Insurance in California’s also proposed that where homeowners take mitigation measures like replacing your roof so it’s less flammable, removing vegetation around your home so it doesn’t catch fire and other measures to make sure that it’s less likely that your home will catch fire in a wildfire, that you get the benefit of lower premiums.

“So we’re seeing thoughts about how we can do this better for individual homeowners. A challenge will be also in the case of wildfire; sometimes your neighbor, and this is true of flooding, development that occurs can change where waters go. So places that weren’t at risk previously are now at risk because of new development. And with wildfire, similarly, if your neighbor isn’t keeping the vegetation down, it could be a risk for your house. So looking at incentives to get communities to reduce their risks collectively, looking at incentives to — and I think the federal government could assist with this — greater incentives to have better building codes.

“We know that for every dollar spent on a building code, both a disaster-resistant building code and the enforcement of that building code, saves $11 in damages. So there’s individual action that can be taken and there’s collective action. And if we go down both of those paths, it will keep insurance more affordable in the long term.”

Emily Underwood: “As someone who really hates weed-whacking, this just hits really close to home. Clearing defensible space, it’s a chore. Carolyn, you mentioned speed of aid. Can you talk a little bit about how we could make insurance relief faster to people? And I think let’s talk a little bit about how other countries have looked at this in some more innovative models, but don’t look anything like what we’re used to.”

Carolyn Kousky: “Yeah, sure. Happy to. So one type of approach that’s getting increased attention as a way to help with some of these climate disasters in handling their financial impacts is something called parametric insurance. And the idea with parametric insurance is that the payout is related to an observable measure of the hazard itself.

“So for your homeowner’s policy, if something bad happens, like a tree falls on your roof, the insurance company sends a loss adjuster, a person to your house to assess the damage, and will pay you what they think it will cost to repair your house. Parametric insurance is different. You get a set amount predetermined based on some measurement by an independent third party. So wind speeds within so many miles of your house exceed a threshold, you automatically get a certain amount of money. A flood gauge exceeds some threshold. Again, you get a certain amount of money.

“Now, that type of policy can’t replace our standard homeowner’s policies where you actually need to be guaranteed of getting the full damage covered. But it does open up three things that are really helpful in solving other pieces of the kind of financial-recovery puzzle as it were. So one is it’s really fast, so to your point. Because you just look at this third-party measurement and then release the funds — people can get their payout in days, which is really unheard of for our standard indemnity insurance. So when you need money quickly, that’s important. So one model of this has been something called micro-insurance, which are very small coverage limits. The premiums are much, much lower. They’re often designed for lower-income populations to get money really quickly, as we were talking about, to kind of cover that timing gap. That’s been used throughout the globe, but not really in the US.

“Puerto Rico is the only US state or territory that has created the enabling regulations to have a microinsurance market, but it has started there. So that’s one approach. The other nice thing about parametric approaches though is that the dollars are really flexible. So they’re not just for property damage. And that’s nice because disasters, as we were talking about earlier, can cause so many types of impacts. And so you can use these parametric products to cover things like lost income or temporary housing or these other things that might not be in your standard property insurance. I will say that that raises some regulatory challenges for our system that are still being worked out.”

Emily Underwood: “So these all sound like adjustments and new things that could be created, but they don’t sound game-changing for the big picture. And we have about three minutes before we turn to audience questions. I’d like each of you to take a minute or so to talk about what you think is really the game-changing innovation we need to see or the focus that needs to happen, whether that’s climate-change mitigation or something within how we structure insurance. Alice, do you want to go first?”

Alice Hill: “Sure. Well, I think we have to change our model here. The emphasis has to shift from ‘What do we do after a disaster strikes?’ to ‘How do we prepare for disasters and benefit from the fact that a dollar spent on risk mitigation, whether it’s raising the home or doing prescribed burns and clearing out forests, saves on average $6?’ And we’ve talked about building codes, it’s an even higher savings. So we need to emphasize pre-disaster risk reduction versus really having a focus on post-disaster. And that’s what we’ve had so far. So these kinds of programs that give incentives to those who are working hard to reduce their risk in terms of lowering the insurance, offering different kinds of insurance are very exciting.

“In a world of climate change, where our climate no longer is the climate of the past, it’s basically that we’ve lost some of the stability of our climate, the other mitigation that has to occur is we have to cut our greenhouse gas emissions so that we don’t get into a world of 2 or 3 degrees Celsius. Right now, we’re at risk of being on that path.

“And so that means that emissions, it’s typically at the national level where goals are set, but we need to have, across particularly the developed world, the richer economies, they need to double down and make sure that we are keeping those emissions that form this blanket that just heats us up. It’s like when your mom used to throw a blanket on you when you were young and it was a cold night and then you’d wake up in the middle of the night, you’d be warmer. Well, that’s what that blanket of these greenhouse gases is doing to us right now, and we need to make that blanket less thick going forward by cutting human-caused emissions.”

Emily Underwood: “So Carolyn, can you talk about maybe how insurance could help with that rather than just cleaning up the mess afterwards, both cutting emissions but also protecting ecosystems?”

Carolyn Kousky: “Yeah, no, that’s a great point. And Alice and I are in complete agreement on this. I think that is the pressing thing right now, is risk reduction on two fronts: lowering emissions and then the adaptation to be building better and differently in the face of these changes. And insurance companies have a lot of ways they could help with both of those goals.

“When it comes to reducing emissions, there’s been a growing activist pressure on insurance companies to not underwrite oil and gas anymore or heavy fossil fuel industries, to divest from those sectors just like other large holders of capital. And insurance companies, also, let’s face it, also can have political power and can use that to lobby and support strong climate policies.

“So I think that’s important, but none of those are actually the insurance mechanism itself, and the insurance mechanism can do some things too. So some is helping promote stronger rebuilding afterwards. When you get that payout, also making sure you can use it to build back more resiliently, and also incorporating efficiencies and renewable energy at the time of rebuilding. Unfortunately, our insurance policies and our federal disaster aid often prohibit that type of better building at exactly the time we need to be doubling down on it. So those are changes that really need to happen.

“And the last one I’ll mention is a model that’s just starting to emerge and isn’t going to be appropriate everywhere for all perils, but it’s sort of rethinking the type of insurance mechanism to help lower losses ahead of time. And I think the nicest example of this is not in the US but is a program that’s been underway in Kenya, where, so insurance would typically cover losses.

“So this is a program targeting pastoralists and their livestock, and typically after a drought insurance would compensate them for the lost livestock. And instead this program set up using advancements in satellite data to detect when a drought is coming and then ... [funnel] them the funds they need to secure additional feed to prevent the death of the livestock in the first place. And I think that’s such a neat idea that we could think of more creatively about how to do that more broadly about lowering our losses ahead of time. Just building on exactly what Alice said.”

Emily Underwood: “I think that’s been a nice ... uplifting note to move to audience questions on. I wish we could get to so much more, but I think we’ve covered some great stuff. Before we do that, I just want to reiterate, if you’re enjoying this and you want to join future events such as our event in October on urban heat and creative ways of dealing with it, please sign up for Knowable’s newsletter and Future Tense’s newsletter, follow us on Facebook and Twitter. Our next event is going to feature the mayor of Phoenix, Kate Gallego, and Angel Hsu, a climate scientist who tracks urban emissions in cities and urban heat. So please come. It’s going to be great.

“So let’s go ahead and start. I’m going to open up my question doc from the audience. Thanks to everybody who has put questions in here.

“I see a question from Jeff Ventrino. Hi, Jeff. Can you please speak to the interplay between liability and major disaster, e.g. PG&E in Paradise? Alice, do you want to take that sort of the role of liability?”

Alice Hill: “Sure, and I will say I was previously a federal prosecutor and then a judge in California. So when we look at what has happened with PG&E — and of course it had a huge judgment against it — I would note that there was a specific statute in California that essentially said if you started the wildfire, you’re responsible for all the damages from the wildfire. And that’s unusual in the law. Usually there’s some limiting factor. So that’s what made the damages for PG&E very high. I would also note that I just read yesterday that they’re facing possibility of another criminal charge for a more recent fire that their equipment allegedly caused.

“So there’s this concept that you owe a duty of care to people to prevent harm that’s foreseeable, and that’s essentially what PG&E is facing, is that there are allegations its equipment is very old. One of the sources for one of these fires was a hook that had been there for a hundred years, and it swayed in the wind with a wire on it and that swaying just caused the iron to just wear through and it broke, the wire broke through, and then fell and ignited a fire. So the theory is you need to go out and check the status of your hardware, of your equipment, to make sure that it’s not likely to cause a fire because it fails and that would be negligence if you didn’t do that. So we will see a lot more of these events going forward of lawsuits and lawsuits for the failure to prepare as well as lawsuits for taking action that was inadequate. It’s an area deserving of close attention.”

Emily Underwood: “Great. We are getting such wonderful questions. This one is from Nancy Watkin and she says there’s a tension between accepting that catastrophic risk is greater than before and keeping property insurance affordable, which drives many leaders to want to attack the science of risk measurement. Can you talk about ways we can address this challenge? And for me, if you could weave in how our methods of measuring risk are changing, that’d be extra sweet. So, Carolyn, you want to take that one first?”

Carolyn Kousky: “Sure. That’s a great question, and Nancy has a lot of insights on this herself. Yeah, we have a big challenge here and I think there’s a couple things to say on this. One is that some of the policy consensus that’s starting to emerge around these questions of affordability of disaster coverage are proposing designs where there’d be some sort of public sector support for lower-income households.

“As we’ve been talking about this hour, these disasters can be really damaging for households, and that’s sort of disproportionately true for lower-income households. And so the thought is to provide some type of means-tested assistance so that they can have the financial protection of insurance, but not to cut rates across the board, so that we preserve the kind of risk signal and incentives that risk-based pricing can provide, which is something that the US policy system around insurance believes in quite a bit.

“As Alice has noted, other countries take a very different view, but that’s sort of been the approach in the US, and I think one of the concerns about reducing insurance prices is that if it’s super-cheap insurance, you don’t have an incentive to invest in risk reduction and to kind of do the retrofits you need to your home or to maybe not build at all in some of the highest-risk areas.

“But I think when we limit those subsidies to lower-income groups, a lot of that concern goes away because a lot of these households are often trapped in high-risk areas because they can’t afford to be somewhere safer. So we’re not worried about some of these same moral hazard issues with this group.

“And I think it’s actually also to the point across perils, you see that people often don’t want to face risk, and that might get to some of the behavioral biases that Alice could say more about, but when you see a new flood-risk update or these new updates about your wildfire risk, instead of actually grappling with that risk and wanting to figure out how to build better and do things differently, most people just want to get a lower insurance cost, which I think is troubling.

“And on your last point about some of these risk-assessment methods, we have seen tremendous advances in data and technology to assess risk. And in some ways we have better understanding of risk than we’ve ever had. And some of these are very complicated models that model the physical hazard itself on through to the economic damages, and some of those are hard to understand and they look like black boxes from the outside, particularly if they’re proprietary models, which can be upsetting to consumers when they feel like they don’t fully get it, right?

“On the other hand, we have to be using models because as we’ve been talking about, risk is not the same. Looking backwards at historical losses is no longer sufficient for thinking about how risks are going to be going forward. So we have to rely on future-looking climate projections and there’s a number of tools that have been set up to make regulators and consumers and others more comfortable with them. For example, Florida has long used these better models for looking at hurricane risk and they set up a commission that actually reviews all of the models and make sure that they’re good and up to the job.”

Emily Underwood: “Thank you. So I’m seeing some questions that get into something really sticky and emotional and interesting about incentives at the policy and government level. Adrienne Underwood ... asks, ‘Axios published an article today that shows some of the cities where temperatures are rising fastest are also seeing the largest population growth. How do we incentivize growth in more resilient areas? And is that something we can and should do?’ And I’m going to tag on to this, which is there’s another question about what do we do for individuals that are highly vulnerable and how do we address this not just as an individual but a community level? Let’s see, Alice, you want to take it?”

Alice Hill: “Sure. I think it raises an excellent point. During the pandemic, we saw people moving across the country, but unfortunately many of them were moving to areas of greater risk. We’ve seen explosive population growth in what is called the wild land urban interface. It turns out we all want to live near forest, so that’s when people move right up next to a forest or in a forest. And with greater drought, more heat, those forests could be ignited, and we see much more wildfire risks.

“Similarly, we see people moving to our coastal regions. Forty percent of the population lives on the coast — we all want to be next to water. And that played out during the pandemic.

"We saw Phoenix see growth; Austin, very hot — places that will be geographically challenged by climate change. Just their geographies is going to make it a little harder for people there. And then, we have towns like Duluth that want people to move there, or Detroit, and they’ve lost populations, even though in the geographic lottery of climate change, they’re better off.

“The United States really hasn’t addressed this issue in a significant way, in my opinion, yet. And it’s an issue that is quickly becoming very important. As people lose their homes, they will have to move. And then we also will see people whose homes just get too soggy, they won’t want to move, and what do we do to help them? And we see that older people are less likely to want to move. Even when FEMA offers a buyout — they’ll buy their home — they just aren’t interested. It’s harder for them. They have greater ties to the community. So the thing that we need first, in my opinion, is a national adaptation plan. And we don’t have one.

“We’re becoming a bit of an outlier among other countries for the fact that we do not have a strategic view of how we’re going to handle the questions that have been raised here, including the question about lots of dislocation of people as a result of climate events.

“They say right now that with Ian on the way, 1 million homes — this is from Core Logic, a risk analytics firm — are at risk of being damaged in Florida this week. And that it could be close to $260 billion worth of damage. So some people aren’t going to be able to live in those homes if that’s what happens, and where do they go? How do we help them? And how do we plan to have services ready for them in the places that they move to?

“After Katrina, we saw a diaspora of people. It was chaotic. We could do a lot more to plan for the movement as a result of climate change. It’s an urgent, pressing issue, very difficult, politically wrought. A lot of people don’t want to talk about managed retreat. And one thing we have to remember is our homes, for homeowners, are typically the primary asset. So when you have disclosure that says, ‘Oh, by the way you value of your home is going down because it’s going to more likely to flood or more likely to be burned,’ we have seen across the nation’s homeowners say, ‘We don’t want that information disclosed. It’s going to hurt our property values.’

“So the question is, who’s going to be stuck with the loss? And we need to have some frank discussions about how that plays out to have a better future for everybody.”

Emily Underwood: “That’s a great transition to this question about taxpayer dollars. If the federal government holds the liability for the majority of flood insurance, does that mean that taxpayers end up paying for response to things like the hurricane headed towards Tampa? And related to that, is the federal government essentially funding the purchase of high-risk properties? Carolyn, you want to take that one?”

Carolyn Kousky: “Sure. The public sector covers a lot of disaster costs. So a lot of those are uninsured losses. They’re the assistance that FEMA provides both to individuals and the assistance to local governments and state governments with their repairs and rebuilding and cleanup. It’s the long-term reconstruction dollars, the billions of dollars of appropriations that Alice and I were talking about earlier, for all that long-term rebuilding that has to be done. So yeah, the public sector’s on the hook for a lot of disaster costs, which means taxpayers.

“When it comes to the insurance program in particular, this is a little bit of a trickier question, and it’s one that all the kind of public sector insurance programs struggle with. Like those state wind pools, we talked about the California FAIR Plan taking on more wildfire, also the Earthquake Authority in California, like all these state-level disaster programs, which is how much do you balance that cost of insurance with being financially independent and not needing taxpayer support?

“And what we’ve seen with the flood insurance program is that it wasn’t really designed to stand on its own. And after Katrina, it went deeply into debt. That debt only mounted after storms like Harvey, and it’s still in debt. Congress has forgiven some of it. After Harvey, there was $17 billion that was forgiven. And so that’s a direct taxpayer infusion into the program, but the policy prices themselves, the premiums, there’s no explicit subsidy anymore to individual policy holders. For a long time, there were lots of cross-subsidies in the program and they’ve recently redone pricing.

“But what I will say comes back to this issue of how disaster insurance is a little bit different from other insurance that we were talking about earlier, you have these big claim years, and a private company will manage itself so that it’s not likely to go bankrupt. That is, face claims it can’t pay with only a very small probability. Like one in a thousand times will they suffer a loss where they’d go bankrupt. But the flood insurance program only manages to a one-in-20-year event, which means it’s routinely going to face losses that exceed what it can pay, which again requires taxpayer dollars.”

Emily Underwood: “OK, let’s bring this home, which is really what we’re talking about, home and where we live and our communities. If we owned a house, I might feel differently, but we want to stay where we live because of the community, because of our family, because of the high school where my husband teaches — there’s those close connections. So let’s talk about the people who can’t move.

“Actually, I want to get a good question here from a homeowner: ‘Our property insurance costs doubled last year and are likely to go up again this year. It is my job to work on this issue and I’ve come to realize forest fire is likely the greatest risk that we face. I need to explore how we can be more strategic about insurance to reduce costs. In our case, foregoing insurance or creating a self-insurance fund is a possibility as well.’ I didn’t see a name with this and actually I think this may be about an organization, not a home, but the same questions apply, from this individual’s perspective, how could he or she be more strategic? And what is a self-insurance plan? Never heard of it.”

Alice Hill: “Well, self-insurance is basically you’re just going to absorb the loss. You’re going to save enough money that you can absorb the loss. I dare say that few Americans are going to be able to do that, particularly if they have a mortgage on their home, because the mortgage lender will still want the money if the house burns. That’s why they want you to have insurance.

“These are very tough issues and I think they’re going to get harder as we go forward. There are some places there where the land’s simply going to disappear, or it will be just too soggy from repeated floodings, or it’s going to burn over and over again. And there need to be questions about how much development we are doing.

“Land use is critical in reducing losses, as is how we build, where and how we build. Most of those decisions are made on the local state, local level, but it’s the federal government who does the bailouts. So unfortunately, because we have created a system where the payouts occur after the event, we have a moral hazard for state and local governments that continue to permit in areas that we know are at risk, and that will make insurance very difficult to obtain over the long-term haul. So that’s a discussion we need to have.”

Emily Underwood: “What does that phrase mean? Moral hazard?”

Alice Hill: “Moral hazard is that people are tempted to do something because it’s in their immediate interest, but it might not be in the greater interest for everybody else. I would say there’s a moral hazard with climate change. All of us can continue to emit, and countries can continue to emit, with the hopes that somebody else is going to solve the problem. And so that’s just a buzzword — I suppose it comes from the policy — or buzz term that comes from the policy world, but it’s something that’s recognized, that we have created incentives for local communities to build up their tax base because they get high taxes from these multi-multimillion-dollar homes that are at high risk of being destroyed. So they have little incentive to say, ‘No, we don’t want to allow development right up next to a beach that’s going to eventually be taken over by sea level rise.’”

Emily Underwood: “OK, we’re just about out of time, but I’m just going to ask sort of one final question, which is, I would like to think that we’re at some sort of transition point as a society, the US — we’re starting to plan ahead better and mature into a more thoughtful way of planning for the future. Is that just wishful thinking on my part? Do you see signs of hope in that area? Carolyn, can you just briefly speak to that, and then Alice?”

Carolyn Kousky: “Yeah, sure. I hope you’re right. I think certainly, it’s sort of a sad fact, but as we see more and more extreme events, more and more people are becoming aware of the need to change the way we’re handling them. So I think that there is a little bit of a tide turning when it comes to that. But we need to harness that to go the extra step, as Alice said, a national adaptation plan.

“We need strategies that we can begin implementing with sort of long-term goals in mind because, as you said, it is not easy and it’s going to be very difficult to face some of these relocation issues, migration questions. And so we need to be thinking ahead, which is something we’re not very good at doing. And part of that is also making sure that people have better understanding of risk, not just today, which we’re not very good about, but where it’s going in the future. And too many people are moving into homes not even understanding the risks that the home faces today, let alone where it’s going in the future. Until we can sort of make sure everyone has all that information, we’re also not going to see better decision-making.”

Emily Underwood: “Alice?”

Alice Hill: “I see hope. We are certainly, if you compare to when I started working on climate change in 2009 to today, I can’t keep up with the reporting with the news, with the studies, [and the] far greater understanding and interest.

“But I’ll tell you what gives me hope, and this would be something that I hope would be meaningful for your audience. Working on climate change gives me a lot of meaning and purpose in my life. I wake up every day knowing that this matters. And I think climate change is far scarier if you are sitting back watching it and you’re not engaging in what could be the solutions here to have a better future.

“So it’s really exciting to me when I see people getting involved and then I see particularly young people who are determined to make sure that they understand what’s happening and they understand what choices can be made. So I find hope in that, and I find it [often is] surprising to people that I find joy in my work. Even though I know that the risks are increasing and that the challenge is growing as I speak. But if we engage, we will have a better future. And that is hopeful to me.”

Emily Underwood: “Well, thank you both so much for your time. We’ve just scratched the surface in this conversation, so we will post additional resources and links and recommended reading along with the replay of this event. It’ll take a little bit for it to post, but we will do that. And just as I mentioned earlier, I just want to put another plug in for our next event. October 26th — oh, look, we’re going to see an outro slide. Look at that. OK, that’s what it’s going to look like. You could register now. You could sign up today. There’s already a registration link. I hope everybody here will join us.

“We’re building on this theme for this event, the second event, and then we’ll be doing our third event on climate finance, which is very interconnected with what we’ve talked about today.

“For those of you who stuck with us for this hour and asked such great questions, thank you. Thank you for your support of Knowable Magazine and Future Tense. Thanks to the Gordon and Betty Moore Foundation for their support of these events and Knowable Magazine. And I think that’s all for now. I’m so glad we got to have this time together. Thank you once again, Carolyn and Alice, and I hope everybody has a wonderful day, whether it’s morning or evening or nighttime, where you are. We have a big international audience, so thanks.”

Carolyn Kousky: “Thanks, Emily.”

Alice Hill: “Thank you.”