How The Climate Crisis Is Creating Gaps In Coverage

How The Climate Crisis Is Creating Gaps In Coverage

Sharing risk fills gaps in coverage; best path forward for net zero climate impact

Insurance companies are feeling the pain of the climate crisis; from 2010 to 2020, insurance payouts averaged $31 billion a year, up to $12 billion from $19 billion annually the decade before. Risk-sharing—rather than risk-transferring—may be the way forward for a just and equitable transition to net-zero climate impacts, as one report out of the UK indicates. 

climate crisis affect insurance

The report from the University of Cambridge Institute for Sustainability Leadership (CISL), entitled “Risk Sharing in the Climate Emergency: Financial regulation for a resilient, net-zero, just transition,” recommends expanding risk-sharing systems, emphasizing that for risks to be managed, they have to be shared.

Informal community networks, what we call the “social safety net” and the insurance industry are all examples of modern risk-sharing systems; together they cover almost one-third of global GDP. But they are distributed inequitably and unevenly and don’t necessarily take climate risk into account, even though they each have a crucial role in addressing the impacts of the climate crisis.

Where You Live Can Create Gaps in Coverage

If insurance companies play a bigger role in shaping human behavior, it’s unlikely that homebuyers would be able to purchase a house in uninsurable areas. For example, homeowners in Colorado have been denied coverage by insurance companies that say their homes are at risk for wildfire damage. 

In California, homeowners face unaffordable coverage among the limited options available if their property is built in an area that is highly susceptible to wildfires. As insurers lean into the use of geospatial data, homeowners will flock to areas that are safer from a climate perspective. Already, California’s insurance regulator has endorsed halting new home construction in fire-prone areas.

Who Foots the Bill?

As insurance companies become more stringent about where they will offer coverage, and as the climate crisis prompts a mass migration, safe places may become increasingly unaffordable, which means a further division of the impacts of climate change along class lines. 

For example, as insurance companies retreat from areas identified at risk of losses resulting from hurricanes, wildfires, and other natural disasters – such as large areas of Florida, Texas, and California – homeowners must rely on struggling subsidized state programs. Simultaneously, homebuyers are purchasing in high-risk areas, taking riskier loans from mortgage lenders, who sell them on to Fannie Mae and Freddie Mac, federally backed home mortgage companies that pool the mortgages into financial assets. 

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The Bottomline: Climate Change and Insurance Gaps

As we saw in 2008’s spectacular crash, if government-backed insurance programs and mortgages fail, it paves the way for taxpayers to foot the bill in billions of dollars of bailouts. Sharing the risk can reduce the impact on both the insurance industry and the federal insurance programs.