Escalating coastal risk due to climate change is likely to continue to stress property insurance markets in the coming years and may make some areas uninsurable by the private sector. Insurance, though, is critical to financial recovery. There have already been myriad interventions in disaster insurance markets due to the challenges of insuring catastrophic risks. Thus, the key public policy question is: What public policies or public-private partnerships could guarantee that disaster insurance is widely available and affordable for those who need it while simultaneously not creating perverse incentives for excessively risky development? Four policy actions could help coastal communities achieve this goal:
- a means-tested disaster insurance affordability program,
- better linking insurance with climate adaptation,
- new insurance models to close insurance gaps, and
- placing insurance in a broader culture of risk management.
One critical barrier to more widespread disaster insurance is cost: disaster insurance is necessarily expensive, and some families cannot afford it. However, it is those least able to afford insurance who need it the most, since they likely do not have enough savings to fund their recovery and may not qualify for any loans. One policy response that has been suggested by scholars and by the Federal Emergency Management Agency is a federal means-tested assistance program to help low- and middle-income families with the costs of disaster insurance. Such a program would provide a sliding scale of financial support to those most in need to cover all or part of their insurance premium. This would provide families with the necessary safety net to prevent them from falling into financial insecurity post-disaster.
Second, in the coming years, we will need more investments in home hardening and changes in land use to lower the costs of coastal disasters and sea level rise. Insurance can play a role in lowering risk and better adapting coastal households and communities to changing extreme events. One way this can be done is through extra payouts when homes are damaged to pay for risk-reducing investments. Something similar to this already exists in law and ordinance coverage in homeowners policies and in Increased Cost of Compliance coverage in the National Flood Insurance Program. Both of these coverages give claimants more funds to rebuild their home in order to come into compliance with stronger building codes (building codes rarely apply to existing construction). Such a policy could be expanded to also pay for upgrades that go beyond code or in areas where local governments have yet to adopt the best building codes for storm risks. This could pay for home improvements such as reinforcing roofs, installing hurricane shutters or storm vents, or moving mechanical equipment to higher floors. For instance, the private flood insurance firm The Flood Insurance Agency has an add-on coverage that would provide consumers extra funds for this type of investment when they file a claim.
Public insurance programs could even go further, since promoting risk reduction is often an additional public policy goal that is embraced by public insurance programs. At least one state wind pool provides an example of a program that may be worth emulating: the North Carolina Insurance Underwriting Association provides policyholders in certain risky areas with extra funds after they have sustained substantial roof damage in order to upgrade to a FORTIFIED roof, which is much better able to withstand high winds, and thus decrease future damages and future claims. If more insurance pools and even private firms adopted such programs, it could help strengthen coastal building stock. Recovery can be a time to build back stronger with structures better suited to future risk conditions, and insurance can be harnessed to help finance those upgrades.
Third, new insurance models are being tested and implemented around the world that have the potential to expand the number of people with disaster coverage, lower costs, and provide funds for previously uninsured losses. One example is parametric insurance, which provides payment, not based on an assessment of actual damages, but based on some independent measure of the disaster itself. Parametric policies can be less expensive since they do not require loss adjusters to visit every property, but they also introduce a risk to the consumer that actual losses could be more or less than the damage. As such, some firms are suggesting using them to cover losses that are not typically covered by standard homeowners policies, such as evacuation costs or below deductible expenses. In Florida, for example, a company called StormPeace offers $10,000 when a certain hurricane hits where the consumer lives. Payment is made within days and can be used for any need of the household.
As new technologies and big data have exploded, insurance companies are also exploring so-called “insurtech” options that can improve the consumer experience or expand affordable coverage for uninsured segments of the population, such as renters. Trov, for example, is an insurtech firm that offers renters insurance that can be purchased from your phone at low price points. Firms are also using satellite data, drone data, and mining of large datasets to facilitate loss assessments or product placement. These new tools have the potential to expand the use of insurance and to make it more affordable.
Finally, insurance has to be part of a broad culture of risk management. While insurance is critical to recovery, and can help facilitate investments in risk reduction, it is only one part of creating a resilient community. Insurance needs to be supported by strong risk communication and public investments in climate adaptation. To start, risk communication programs that inform residents about changing risks in their communities are needed. Currently, many states have disclosure laws that aim to provide information to new buyers of property about existing risks, such as whether the property is in a FEMA-mapped 100-year floodplain, but none of these discuss how risk may change over the course of occupancy or over the life of the structure. Outreach efforts also need to present risk information in ways that are easy to understand and discuss possible financial impacts and what residents can do in response. Risk communication must also be directed not just to property owners but also to those individuals who assist residents in decisions that should be informed by risk, such as insurance agents and real estate agents. These types of professionals should be informed—and incentivized—to be risk ambassadors to their clients.
