Good Luck Getting Insurance When Your Country is On Fire

Last year, I attended a town hall meeting in Colorado’s Boulder County for local residents displaced by the Marshall Fire. The blaze had swept through the community a few months prior destroying more than 1,000 buildings and causing more than $2 billion in damage.

For the displaced residents, insurance dominated the conversation. They described how insurance companies calculated payouts and the challenges of itemizing their lost property. “We’re going to soon have a PhD in fire insurance policies,” one resident quipped. But despite the understandable frustration, the residents had no doubt that insurance was essential.
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I was reminded of this story as news broke last week of the decision by two large firms—State Farm and Allstate—to stop writing new property insurance policies in California due to increasing climate-related risk. The move makes pretty obvious financial sense: the increased risk of wildfires in the state threatens the bottom line of insurance companies. But it’s not just California that has to worry about this. Hurricanes are forcing firms in Florida and Texas to rethink where they do business. And as Canadian wildfire smoke wafts across the border it’s surely top of East Coasters’ minds too.

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Given the essential role insurance plays—both on the ground for victims of climate-linked disasters and for the broader global economy—insurance companies, regulators, and elected officials need to find new ways of doing business that protect property owners without threatening bottom lines.

Indeed, the costs of wildfire damage in California have grown dramatically in recent years, and reports have estimated truly astonishing numbers for potential property at risk. Nearly $630 billion worth of property in the state is at high wildfire risk, according to data from real estate company Redfin.

Regulators in the state have taken notice and pursued a range of fixes to forestall the loss of coverage for residents. Last year, the state implemented a new policy that requires insurers to incorporate risk reduction measures like installation of a fire-resistant roof or vents into their policy pricing. In theory, the move should both keep homeowners safer and help protect insurers from losses.

Because insurance is truly essential, governments will step in to try to fill the gap left by insurers. In California, the state has operated the “FAIR” program since the 1960s to offer insurance to homeowners who can’t get it on the private market. And regulators sought to bolster the program as recently as last year, doubling the the coverage limit among other fixes. But programs like FAIR are intended as backstops.

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Many who watch the issue closely say there are changes that stakeholders are already starting to pursue to reinvent the insurance market in vulnerable places—but that those changes need to happen faster and and at a much greater scale than they are now. A 2020 report from McKinsey suggests that insurers act as “climate-risk experts in the private sector and partners in the public sector.” That means using their knowledge about climate risk to help customers adapt. For example, an insurance company can offer rebates to customers who implement climate-smart housing. In the public sector, companies can work with regulators to help craft guidelines that take climate risk into account.

These sorts of initiatives would turn the industry into a key, constructive player helping to advance climate adaption. Indeed, as climate risks expand across the globe, the McKinsey report warns that failing to think innovatively about these challenges poses a risk to insurers: “A lack of responsiveness can damage the industry’s reputation and its credibility as a global economic citizen.”

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