Insurance and the Shifting Boundaries of Climate Risk

Insurance is one of the quiet pillars of the modern economy. It underpins where we build, how we invest, and whether communities can recover after disaster. In many ways, it defines what risks we’re willing, and able, to live with.

But that foundation is under strain. Across the United States, rising losses from wildfires, floods, and other extreme events are driving up insurance costs and pushing insurers out of some markets. In states like California and Florida, homeowners are finding it harder, and more expensive, to secure coverage. When insurance becomes unavailable, the consequences extend beyond individual households, affecting housing markets, local economies, and community stability.

Carolyn Kousky, founder of Insurance for Good and a senior fellow at the Kleinman Center for Energy Policy, explores how climate change is reshaping insurance markets and what that means for the future of risk, investment, and resilience. She explains how insurance doesn’t just respond to risk, but can also influence it by shaping investment in resilient infrastructure, guiding development decisions, and affecting the flow of capital into cleaner energy systems.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast, from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. Insurance is one of the quiet pillars of the modern economy. It underpins where we build, how we invest, and whether communities can recover after disaster. In many ways, it defines what risks we’re willing and able to live with. But the insurance industry’s foundation is showing signs of strain across the United States. Rising losses from wildfires, floods, and other extreme events are driving up insurance costs, and in some cases, pushing insurers out of entire markets. In states like California and Florida, homeowners are finding it harder and more expensive to secure coverage. And when insurance becomes unavailable, the consequences spread outward, affecting housing markets, local economies, and the financial stability of communities.

These challenges raise a deeper question. If insurance sets the boundaries of acceptable risk, what happens when those boundaries begin to shift? And what does that mean for where and how we live in a changing climate? At the same time, a growing number of researchers and policymakers are asking whether insurance can play a more active role, not just in responding to risk, but helping to reduce it. That includes shaping investment in more resilient infrastructure, guiding development away from high-risk areas, and potentially even supporting the transition to cleaner energy systems.

Today’s guest is deeply versed in these issues. Carolyn Kousky is a Senior Fellow with the Kleinman Center, and the founder of Insurance for Good, a nonprofit focused on rethinking how insurance and the transfer of risk can support climate resilience and long-term economic stability. Carolyn, welcome back to the podcast.

Carolyn Kousky: Thanks for having me. I’m excited to be here with you.

Stone: So, you were last on about six years ago, when we talked about insurance risk and climate once before. Is the world pretty much the—

Kousky: Has it been that long?

Stone: [Laughter] It’s been that long. Has the world changed much? Or, you know, just curious, your general view as we get started here.

Kousky: Well, that’s a good question. I mean, I think all of these issues were playing out to some degree back then. But they’ve certainly  escalated, and I think more and more people are entering the conversation about what’s happening to insurance, in a way that they really haven’t before.

Stone: Okay. So, you have been working at the intersection of climate risk and insurance for a number of years. I want to ask you, what led you most recently to launch Insurance for Good? Tell us what it is, and what is the gap you’re trying to fill with that?

Kousky: Insurance, fundamentally, should be about helping people recover from disaster, undertake risky activities that could be really beneficial, and it should be able to play this really positive role in our society. But when you talk to lots of people about insurance, especially disaster survivors, you often hear a very different story. You hear stories about people who are frustrated or angry that insurance hasn’t worked the way they need it to. You hear concern about its inability to deliver on the types of solutions we need right now, as risks are growing. And I think there’s this gap between the role insurance could play, and that we need it to play, and the one it’s playing right now.

And so Insurance for Good was launched with the idea of trying to help communities really harness risk transfer solutions in ways that support their social and environmental goals. So to help them make this a positive force in achieving what they want to be achieving.

Stone: So insurance is to be a positive force. But the reality is that we’re seeing insurers pull back from certain markets. We’re seeing premiums rise, particularly in certain areas, and policies not being renewed. Generally, what’s driving that shift right now?

Kousky: Yeah. We’ve seen premiums nationwide increase quite substantially over, say, the last five-plus years. There’s a number of things driving those increases, and I think those increases are part of what’s created a lot of attention on the challenges in insurance. Because the cost of insurance are fundamentally about the cost of home ownership, and whether that’s affordable for people or not.

So as we’ve seen prices go up, I think one of the first things to recognize is that a primary driver of that actually has to do with macroeconomic conditions. So when it costs more to build, to put houses back, then premiums go up. And what we saw after Covid was that period of high inflation, the labor market and supply chain disruptions, all of that made it more costly to build. And so you can see, for example, the construction costs go up quite substantially coming out of Covid. And that’s what insurance really tracks. And so premiums had to go up to reflect those increasing costs.

Now, you know, the inflation kind of settled. Those disruptions worked through. And so that should be improving in insurance markets. There’s several years of lag time between when things are happening in the macroeconomy, and when you really see them playing out in insurance markets. But there’s ongoing concern, right, about other macroeconomic things now. Are we going to see greater inflation again, given the turmoil right now, for example? So that’s always a concern, and I think has been part of what’s going on.

But also, we know that weather-related extreme events are getting worse. More frequent, more severe. They’re showing up in new places. In different ways, those mass distributions are really changing, and that’s also stressing insurance markets. And so you’re seeing the biggest impacts in the areas where those risks are highest. So, in the wildfire-prone areas of California. In Florida and the Gulf Coast. But this isn’t just a hurricane and fire problem. We’re also seeing challenges throughout the Midwest, where we’re seeing hail and severe convective storms creating more losses than ever before. And those also are influencing insurance markets.

Stone: This has been in the news quite a lot, all of these different natural events, and the impacts on communities. To what extent are these impacts— and I guess the impact on the insurance industry— to what extent are they actually limiting the ability for continuity in these communities after disasters? We’ve heard a lot about it. We know insurance companies are pulling back. But what does the reality look like on the ground, in terms of people being able to rebuild and continue?

Kousky: So, what you’re seeing, actually, is quite different in different geographies. And, you know, even if you look just within the state of California, for example, there were large parts of the state where insurance is still operating quite will. Where the market is pretty healthy. But if you look in some of the highest fire-prone areas, that’s a very different story. And those areas, the last five to ten years, have seen a lot of insurer withdrawal. You see them cancelling policies, and people having to shift over into the state program. And so even within a state, you can see very different insurance market outcomes based on what that underlying risk looks like. So it’s hard to generalize. But in these high-risk areas is where we’re seeing the problems.

Now, post-disaster, if you’ve had your insurance policy in place, then you should be able to get the resources you need to rebuild. What some of the concerning trends that we’re seeing, however, are that people often don’t have enough insurance coverage to fully rebuild. And they don’t know that until the disaster hits. And when you’re going to rebuild, and you find out you don’t have enough coverage, that’s a really bad time to find that out, right? And so there’s a number of different things going on here. And again, it kind of varies by geography.

As risks are increasing, we’ve heard a lot of anecdotal evidence that insurance to better manage that risk, insurers are putting in place what are referred to as sublimits. They’re putting in restrictions on the payouts for different types of things. So, for example, you might purchase enough coverage to, say, fully rebuild your home. But it turns out that in the fine print, if the damage was from hail on your roof, or a burst pipe or something else, they might only give you $10,000, even if it costs two or three times that to repair the damage. And so if you’re not aware of these sublimits, you might not realize that you won’t have enough coverage to necessarily make yourself whole and do all the repairs that you need.

Another big concern that we’ve seen coming out of the fires in LA, for example, is that many people are really under-insured, which means they don’t have enough coverage to rebuild after a complete loss, like a total loss of their home. And this, again, can be for a number of reasons. One reason seems to be that the estimates of replacement cost that the industry uses tend to be really too low. And so people just fundamentally don’t have enough coverage. Also, though, people might pick lower coverages to try to save money. They might make upgrades to their home and not revise their insurance upward. So, there are a number of causes. But, you know, in LA, we’re seeing people hundreds of thousands of dollars underinsured, which makes it extremely difficult to come back after a disaster.

Stone: To what extent, though, are we seeing communities not rebuild, at this point?

Kousky: At this point, that’s still not very common. What you see in most places post-disaster is an urge to try to get back to what it was as soon as possible. We’ve been trying to work with communities to try to use disaster as an opportunity to build back for our climate future. We know that risks are getting worse, that risk is growing year on year, and that the way we built in the past is not right for the types of risks we’re seeing in the future. And for a lot of these perils, we know how to build better and stronger. We know how to build homes that are better able to stand the high winds of a hurricane, that are less likely to burn. And so at the time of disaster is often a very cost-effective time to incorporate those upgrades into the building stock.

But even that is difficult. We see a lot of pushback, and some mistaken belief among political leaders that incorporating these really critical resilience upgrades are going to cost too much or slow down recovery. But there’s not a lot of evidence that that’s the case. Most of these measures have been shown to be extremely cost-effective. They pay back over time. And also, even if they do cost a little bit more, if they keep your property insurable and at a lower cost of insurance, that’s about long-term affordability, which is what we really need to be thinking about, not just the up front construction costs. So we’re missing some of these opportunities to take in climate resilience.

In terms of completely relocating, that’s not very common. But of course, especially in sea level rise areas, that’s going to have to become an increasing necessity. There are parts of this country that are going to be underwater in the future.

Stone: Well, it’s interesting what you mentioned about these upgrades to properties to make them more resilient to risks. And that gets to a central issue I’d like to dive into with you here a little bit, and that’s the idea or the concept that insurance really does help define the risks that we can live with. And it sounds like the boundaries of that risk are shifting today. I wonder if you could tell me a little bit about that.

Kousky: Yeah. I think that’s a really helpful way to think about it. Because essentially, being able to purchase insurance, which is essentially transferring your risk to the insurance company that’s better able to handle it, allows you to undertake things and do things that otherwise would be too risky. So, you know, if we’re thinking about households, you need insurance to get a loan. Because the banks not going to lend you all that money to buy your house if it could burn down and you’re not able to repay them. And so insurance is really fundamental to a lot of economic transactions.

But insurance starts to break at the edges. And I think the two that are most relevant now in the context of climate change is first around frequent events. So, when natural disasters start to happen frequently, insurance becomes an ineffective tool. And you can think about it like this, right? If an insurance company knows that you’re going to flood every year, they’re going to demand the full cost of the risk. Because they’re going to have to pay it to you every year. So there’s no benefit to insurance anymore, right? And so frequent risks can’t be insured.

And so to come back to this issue that we were just talking about related to relocation and sea level rise, in coastal communities where tidal flooding, sunny day flooding, is becoming this incredibly common occurrence, that is not a risk that can be insured any more. That’s a risk that fundamentally has to be addressed or moved away from. So that’s frequent risks that are a challenge.

The other end of the spectrum is really big disaster. And those are also really hard for insurance companies, for a different reason. When a lot of people all suffer losses at the same time, that can stress the ability of an insurance company to cover all of the claims. And so that’s— again, coming back to the LA fires, that is a perfect example of that.

And what we’re also seeing is that it’s not just that risks are changing in frequency or severity. But the fundamental nature of those risks is changing. For example, let’s stay on this theme of fire in California. You know, the LA fires happened in January. If you look at number of structures burned by month in California, structures burned in the summer and fall. That’s why people used to say there were fire seasons. And then all these homes burn in January. So the timing of these risks is changing. And there had been a long focus also in the last wildland fires, right? Communities in what’s called the wildland-urban interface, that were living among the trees, and that puts you at risk. Well, this was dense development in LA. When wildland fires enter built environments, it becomes an urban conflagration, where homes start burning each other, and homes are the fuel. And that, again, is a different type of risk. So we’re seeing a lot of the fundamentals of the risk really changing, which then stresses insurance markets, but also all of risk management and our understanding of the threats, as well.

Stone: Well, it sounds to me like the issue here is, you’ve got magnitude. You’ve got these bigger events. But you also have correlation, right? So when you’ve got a community that’s at risk of wildfire damage, there’s correlation. It’s not just one house. That is a bigger issue. But correlation has always been sort of a part of the equation here. When you’ve got a fire in the area, it can obviously affect more houses, or whatever you may have. But that correlation risk is also getting bigger, if I’m understanding correctly?

Kousky: Yeah. Exactly. Right. So, this has long been a challenge, exactly as you note, for providing insurance against disasters. Because entire communities can be hit at the same time. That kind of breaks the annoying mathematics of insurance, which are based on assuming that risks are independent. And when one thing can happen to someone, but it doesn’t happen to everyone, that’s what allows for these really powerful benefits of pooling risks together. But those benefits don’t materialize when everybody can be hit at the same time. And so that’s made disaster insurance much more difficult to provide than, say, auto insurance, where every year some people get in a car accident, but the number of people in a car accident, barring other external factors, is pretty constant year to year. So it’s very easy for an insurer to plan what their potential payouts might be, and to price appropriately.

Whereas disasters are really different. You can have years where there are no payouts, and then these huge payouts. And so it’s a very different type of thing that insurers have to manage. And they make use of tools like global reinsurance to diversify risk around the world, other types of risk transfer instruments that can put that risk into the financial markets. But it’s also led to a lot of government intervention with these markets as well. Because all of those things also make disaster insurance cost more than, say, your auto insurance policy.

Stone: Also confounding this is the fact, I would imagine, that past models of climate and the risks that are associated with that aren’t really working when we look into the future. That would, I would imagine, double the risk, and double the caution of insurers to take on risk.

Kousky: Yeah. So insurers really can’t look at historic losses any more, for weather-related extremes. So they have to rely on modeling. These are often referred to as cat models, catastrophe models, that are these large simulation-based models of the hazard that can incorporate some of what we understand from climate science on how these risks are changing over time, to get a better estimate of what the potential losses might be. But we’re also learning all the time, and the risks are changing pretty rapidly. And so staying ahead of that is really difficult. And I think it’s also added to some of the consumer stress and struggle here, because it’s introducing greater volatility into the insurance market, where you’re seeing more dramatic assessments and changes sometimes.

Coming back again to California, in 2017 and ’18, there are these really severe fires, the worse fires predating the LA ones. And that led to a fundamental reassessment of risk by the industry in the state. And, you know, when you couple that with some regulatory challenges that they faced at the time, that led a lot of them, like we talked about, to stop writing in a lot of these high-risk areas. And that came as a shock to consumer that just one day get told, “Nope. We’re not renewing your insurance policy.” There’s not a lot of warning for those types of things, which can be hard. Some regulators are trying to help stem that a little bit by, say, passing laws that insurers have to give so much notice to consumers, so that they have time to plan and adjust. But it’s one of the challenges of living in this climate-fueled world that we’re in right now, that are making it difficult.

Stone: So, climate is a driver here. But I also want to note that, on your web site for Insurance for Good, it notes that there’s an intersection between insurance and the energy transition. And I want to ask you about that. So, is access to insurance starting to influence decisions on infrastructure directly? And what is the impact, positive or negative, when we’re looking at clean energy and related infrastructure?

Kousky: Yeah. So, I think there’s a number of roles that insurance can play around thinking about decarbonization, and clean energy and clean tech. And it comes back to, again, what we were noting at the top, of how important insurance is to a lot of economic activity, right? So, we can’t build new energy infrastructure. We can’t deploy new first-of-a-kind technology, or help scale clean tech, without insurance for those operations. And that’s a bunch of different kinds of insurance. That’s property insurance, like we were talking about for households. But that’s also things like liability coverage and performance risk. Maybe political risk, if we’re talking about deploying energy infrastructure in countries that are less politically stable, and so on.

Stone: Let me ask you a question. Isn’t that true for any type of infrastructure, though? Fossil—

Kousky: Oh, absolutely.

Stone: Oh, okay.

Kousky: Yeah, absolutely. Yes. No, it’s true for any infrastructure. Yes, exactly. And so because insurance is fundamental to that, then there’s been a lot of conversation of, “Can we use that as a lever to put our thumb on the scale for clean energy and clean tech?” Right? And I think the answer to that is, yes and no. Insurance prices risk and is there to provide coverage whenever there’s a willing client. So we haven’t seen a lot of insurers be willing to do things like stop insuring fossil fuels, although activist groups have been trying to get them to do that. It’s still profitable to insure fossil fuels, and you still see insurers out there doing that.

But what we have seen is insurers try to lean in more to providing support for clean energy and clean technology. And this can take a number of forms. It can be coupling insurance with advisory services, in a way. So, helping new startups and new firms and new technologies better understand their risk, undertake best practice to mitigate that risk, and then provide really bespoke types of coverages to help launch those new technologies from piloting through scale.

And so by providing extra help for them, that can maybe help support some of that sector more. I think that said, insurance is a private business model that’s out there to make a profit. They’re not going to subsidize clean energy and clean technology, right? And so there is a question about where we still need a lot of government support. And there are some risks that might be too expensive to insure, even for insurers who want to be helping new technologies. And that’s where we really need government programs to help bear some of that risk. So, you know, we don’t have that with this administration. But hopefully with the next one, we can get back to a better public-private partnership model around managing the risks of deploying the clean energy and technology that we need.

Stone: Well, what it sounds like to me is, we are definitely at a point in time where a lot of new energy infrastructure needs to be build. We’ve talked on this podcast in the past about the AI boom and the need for new infrastructure to deal with that. So it sounds to me like anything that can be done to mitigate the risks to make any new infrastructure project as insurable as possible is a way to grease the wheels for getting more infrastructure built more quickly, I would imagine.

Kousky: I think that’s absolutely correct.

Stone: You mentioned before private insurers pulling back, and I want to move back to the residential ecosystem here for a moment. But if it applies to the infrastructure we’ve just been talking about as well, that’s great to include that in the conversation. But you mentioned that when the private insurers pull back, the state-backed insurers step in. I want to ask, is that model fundamentally sustainable? Because the risks are very high. The payouts could be very, very high. If this is put onto a public or quasi-public insurance agency, the underlying economics don’t change. And I would imagine those risks would fall to taxpayers. But I want to get your thought. Again, is that state-run last resort insurance model, is that sustainable?

Kousky: I think that is a fundamental policy question right now. And some states are now starting to have to grapple with that. I’m thinking California, Florida, Louisiana. The idea of these programs really originated to fill a rather small need. That is, households that couldn’t find coverage in the private market. And the number of those people was relative low, previously. And it might be because they were very high risk. We have these wing pools, they’re sometimes referred to, that were created throughout the Southeast states for those very high-risk coastal homes that couldn’t find coverage in the private market. We also have these FAIR plans that were created to provide coverage in urban areas, where insurers were withdrawing due to concerns about civil unrest, and also a history of redlining. And both of those populations remained small, compared to the entire state market.

And what we’re seeing now is that in some places, the share of households having to be in those programs is growing. So in Florida, their state-created insurance program for many years has been the largest insurer in the state, for example. In California, overall, its market share has been growing dramatically in the last five years, since the 2017-18 fires. That is less than 10 percent of the overall market, but in some of the high-fire-risked areas, it could be over half the people are in the state program. And so that’s also concerning, because all of those people in the program are the highest risk people, right? So we’ve just concentrated all of the risk in one program, which is difficult.

And these programs are set up to really nothing fully collect all the money they need to be sustaining ahead of time through premiums, the way the private market does. And instead, they’re given assessment authority, which means they can typically— like in Florida and Louisiana, if they face a really large loss, they borrow. They issue bonds. They take on debt to pay those claims. And then they pay back those loans by assessing all policyholders throughout the state for however long it takes to repay them. So, this happened after Katrina. Louisiana had to do assessments. Florida has had to do assessments multiple times. The California FAIR Plan just had to do assessments after the LA fires. And in California, they assess not policyholders directly. They assess insurers, who can pass off that cost on the policyholders. So there is this kind of fiscal risk that right now, states are spreading across all policyholders.

But as risk in those programs grow, how to sustainably finance that is a very difficult question. We can’t change the cost of the risk, unless we do aggressive risk reduction, which I absolutely think we need, and has to be the first solution. But absent that, we can move around who’s paying. But somebody’s got to pay, at the end of the day. And so I think a lot of the policy debates we have are actually debates about who should pay. And often, who should pay is really hidden, and is not very clear to people.

So, insurers need to be able to pay claims when a bad event happens, right? And so a big question for insurers is, well, how bad of an event? If an event happens that they don’t have enough money to pay the claims, they go insolvent. That’s really bad for them. It’s bad for consumers. But they can’t have enough money for anything that could ever theoretically happen. That’s just way too much capital to hold on hand. So there’s this delicate balance that insurers strike, of how much capital they need to hold. How severe of an event?

And that’s determined by regulation. One of the biggest roles of state regulators is to regulate solvency risk and make sure that insurers have access to enough capital to pay claims in bad years. It’s also regulated by rating agencies, who determine the financial health of insurance companies, based on their claims-paying capacity.

So the private market, private insurers, would typically be able to pay claims for a one in 250, one in 350 year event. I think the last time I checked, A investors are rating at a one in 350-year event to get the highest rating. That’s a pretty rare catastrophe that insurance are able to cover. Our state programs are covering not nearly at that level. Texas had been managed to be able to pay for a one in 100 year event, and that was costing too much money. And the reinsurance needed to do that was too expensive. And so the state legislature said, “No. You should only manage for a one in 50 year event.” That made the insurance look a lot cheaper. Consumers really liked that.

Stone: It’s like managing risk by inserting more risk.

Kousky: Yes. Because it didn’t make the risk go away. It just makes it more likely that the program’s going to go into assessments and have to force everybody else in the state to pay for it. But people don’t really understand what it means to change from a one in 100 to a one in 50, and what the risk actually is in assessments and so forth. So a lot of this, yeah, gets hidden in the technicalities of it, I think.

Stone: Insurance for Good is really designed to look for innovations, to handle all the challenges that we’ve been discussing so far. And there’s something that caught my eye. And it’s something called parametric insurance. I didn’t know what it was until I looked it up, and I still apparently know what it is. But I wonder if you could explain a little bit more. And is it a solution? And how?

Kousky: Parametric insurance has been getting a lot more attention as a potential climate solution here. It’s actually been around for quite some time. It’s a fundamentally different way to think about insurance. So, most insurance that, say, American consumers are familiars with, is what’s called indemnity coverage. And that’s really fundamental to our understanding. It came from a legal regime around insurance, which is that insurance compensates for a loss. And so what that means is, with your property, your homeowner’s insurance, or renter’s insurance or even your health insurance, your auto insurance— but let’s look at your homeowner’s insurance. If something happens, a tree falls on your roof, an assessor, a person, comes to your house and looks at the damage, estimates how much it’s going to cost. If you’re trying to rebuild, you have to get contractor estimates and all this stuff. And they only reimburse you for what it’s going to cost to repair or rebuild, subject to the terms and conditions of your policy.

Parametric insurance is very different. It’s based on a predefined amount being immediately released when what’s called a “trigger” occurs. And the type of trigger— it’s not the only type, but the type that’s getting a lot of interest lately, are triggers that are based on an observable metric of the hazard itself. So I think the easiest thing to wrap your head around is, wind speeds within so many miles of your house exceed some threshold, you automatically get a payout.

Stone: Regardless of damage?

Kousky: Regardless of damage. So this opens up a number of things, right? First, there’s benefits to this. One is, it’s very fast, because there’s no negotiation. You don’t need to wait for an adjuster to come. You don’t have to argue with— you just get the amount of money as soon as the trigger is reached. So it’s fast.

It’s flexible. You can use those dollars for whatever economic loss you face. So it’s been really useful for things like, consider a hotel on the West Coast of Florida. And  a big hurricane comes on the East Coast. And the hotel doesn’t sustain any property damage, so they don’t get any insurance payouts. But all the tourists stay away, and they lose all their bookings and their revenue drops substantially. They could have parametric insurance based on a cat 3, 4, 5 storm hitting anywhere in Southern Florida that automatically pays out, and so it can cover those lost revenues. So, it’s really good for non-property damage and other types of economic costs that aren’t well-captured by our traditional insurance policies, for example.

But it also doesn’t compensate for the damage. So it could be wildly not enough. Or too much. And the fact that it could be too much is what gets the concern of regulators. Because you can’t make a windfall off insurance. Insurance is not gambling. And so parametric insurance makes a lot of regulators uncomfortable. There’s ways around that for example, and the regulatory regimes around parametric in the US are very new and still under development. But some of the policies that have been issued, for example, might have a claw back provision, which is to say, you have to show that you used it for an economic loss. And if not, you have to return the money. Now, enforcing that can be difficult. So you can see all the challenges here.

It’s operated in many different scales. I talked about commercial uses like hotels. We’ve seen parametric operate at the level of countries. There are parametric insurance pools in the Caribbean, Africa, and the Pacific, where if different types of extreme weather events occur, the countries automatically get payouts to begin their recovery. We’ve seen it all the way at the other end, in something called micro insurance, which has been used in developing and emerging economies around the globe for payouts where people could really benefit from insurance coverage, but the dollars they need are small, and the costs to actually adjust that loss would far exceed the payouts. So, think a small pastoralist in Kenya, who might lose livestock in a drought. The time it’s going to take to pay an insurance adjuster to drive all the way out and figure out exactly how many livestock they lost? The cost to the company of doing that exceed the $200 that the person needs. And so it works really well in those cases. And so we’ve seen a lot of micro insurance developed on mobile platforms, where the $200 are just transferred to their phone right away. So there’s a range of applications. It’s not a replacement for our homeowner’s policy, but it’s a new tool in the toolbox.

Stone: It sounds like it’s a way for the insurers to manage their risks, or what they think is coming. Because a certain situation happens, you have an automatic payout. They can plan for that. You don’t have to actually think about what the actual damages are. It’s just a certain parameter, right? And you also mentioned that this would not replace indemnity insurance, but maybe be a complement to it. Just a final question, just so I understand a little bit more. On balance, would this be more expensive for property owners over time? I just want to get some read on that.

Kousky: It’s a little bit hard to say, because it’s a little bit of apples to oranges comparison. The pricing is based— in these examples we’ve been talking about, about just the hazard— would be based just on, say, wind speed. And so it wouldn’t take account of the interaction between that with the built environment to determine damages, which is how an indemnity policy might be priced. So, for example, there’s a lot of interest in trying to incentivize investments and loss reduction through insurance pricing. You put on a strong super roof, you get an insurance discount. Well, a parametric policy doesn’t care what kind of roof you have on, because they just pay when the wind is a certain speed, right? So it’s a very different type of pricing model.

I’ll give you another example that’s come up recently, to show where it might be helpful. I noticed some local governments have been thinking about purchasing parametric insurance for their own post-disaster liquidity. That had been talked about a little bit off and on. But now, with FEMA pulling back disaster aid, with this president not approving disaster declarations in blue states, largely, and with HUD, which used to deploy lots of dollars to communities post disaster— we’re not seeing those appropriations in the same way anymore— communities have been looking at whether this is actually a smart thing for the next couple of years, to make sure that they have the liquidity they need post-disaster, when they can’t rely on the federal government anymore.   

Stone: So we just focused some time on parametric insurance. But obviously, you’ve been looking at a lot of other innovations that could be put in place. So I want to ask you a very open question right here. What seems most likely— what excites you most, as you look at innovations that could address these risk challenges that we’re talking about?

Kousky: Yeah. Good question. I think there’s two things that I want to mention. The first one is, I really think, in a lot of cases, the challenges we’re seeing in insurance markets are fundamentally symptoms of a risk that’s getting too high. And so we really need to focus on doing the climate adaptation and the loss reduction work. That’s not always true. There’s regulatory issues, there’s other market issues, so it’s not exclusively true. But I think when we’re talking about climate-related peril, it’s often the case that what we need to be doing is doing that climate adaptation and risk reduction work. And so I’m really interested in ways that insurance can support that, and how those can work together.

So, for example, we’re working with some communities in California right now, thinking about how you can support detailed risk assessments that can help you cost-effectively identify the best wildfire mitigation measures at a household and community level, invest in that work, and then see improved insurance market outcomes in terms of greater availability and potentially also less expensive policies as well. So we’re working with a number of partners and an insurer to try to make that connection. These insurability retrofits, something that can be easier for communities and households to access. That’s one that I think is pretty exciting, because it’s also bending that loss curve.

And I think that’s happening, and will happen in the near term, and feels within reach. Another one that we’ve been talking about that I think is still quite a ways away, that is thinking about new types of insurance companies. So for example— and this has emerged out of our work in trying to think about how to help socially vulnerable communities that, arguably, need insurance the most, and yet are least able to afford it, and how to make models that can make a more inclusive insurance benefit. And we’ve seen in other aspects of finance, the emergence of institutions like community development finance institutions, or CDFIs, who are mission-driven financial institutions whose purpose is to make financing available, accessible, appropriate for underserved communities.

We don’t have anything right now like a community development insurer, that’s focused on helping frontline communities in a mission-driven way. And I think that there’s a lot of promise in thinking through how you could develop  an organization like that.

Stone: Well, one of the key points here is that the less economic resources a community or household has, the more important insurance becomes, and the more challenging the affordability of that insurance becomes. Taking a step back here just a moment. You talked about increasing resilience, let’s say, of communities, and if those communities are better prepared for any potential outcome, it would potentially lower the cost of insurance because those communities would be considered less of a risk. I want to ask you, how directly is the insurance industry itself involved in pushing for the up front resilience-related investments that would, again, make insurance more affordable, more accessible? How involved is it? And also, I would imagine there’s some political complications here. If you do not accept that climate change is real, there’s no way you’re going to invest in resilience measures to prevent damages. Interested in your comments here.

Kousky: There are things the sector and particular firms are doing that are really positive on pushing resilience. I’ll get to that in a second. But I think as a whole, they need to be doing a lot more. And the thing that I think could be most helpful that’s not happening a lot is exactly to your point— is using their political voice to support legislation that’s focused on stronger building, on funding and financing for loss reduction, on better land use and planning and stronger building codes. And most insurers don’t want and won’t engage in those political conversations, even though I think their expertise and voice could be really influential on them. And even though in private, they will all 100 percent stand behind the importance of investing in loss reduction and resilience. So I think more could definitely be done there.

You do see some insurers really leaning in. There’s a couple I’m thinking of in California that are really supporting resilience and communities, in a number of different ways, and trying to work directly with them to help drive those investments. Those are going to help bring the risk back to insurable levels. And I think that’s really exciting and promising. Most of the industry is not doing that. They haven’t been operating in a— I think having partnerships with communities is very new for the insurance industry. That was not something that they needed to do, or should have been doing, historically. And yet, as we’re navigating this changing risk— and insurers are some of the best— they do a lot of sophisticated risk assessment. They’re in a really good position to help communities understand that risk and manage it better. And that’s a new role. They’ve always done some advisory services like that for big commercial clients. But I think engaging with local government, different types of community organizations, like I said, is new, but important.

They also do work, though, in other ways, which is really important. For example, the insurance industry funds an organization, a nonprofit called the Insurance Institute for Business and Home Safety, IBHS. And IBHS basically develops the standards for disaster-resilient construction. So, they developed the standard that is really the gold star in home construction to withstand high winds. So, hurricanes, but also high winds from inland storms. And they have a certification model. They have evaluators. You get a certificate when your home meets that standard. You can give that certificate to your insurance company, and then insurers can reflect that in their pricing.

And across the Southeast, you see states either mandate that insurers give price discounts for it, or lots of them will also voluntarily do so, because there’s just such robust evidence on how much those types of construction techniques lower the costs of hurricane damage. And we’re seeing— IBHS now has a new standard around wildfire that’s starting to get a lot of traction on the West. So, the certification and evaluation role is something they’re supporting indirectly through IBHS, which is also, I think, really important for driving that kind of change.

Stone: I’ve talked about resilience in terms of the way homes may be built. But resilience is also about natural systems. Wetlands preservation, et cetera, that can protect the coastal areas. Obviously, investment can be made in those areas as well.

Kousky: Yes, absolutely. And that’s harder for insurers to reflect and take account of. But there’s efforts to try to do so.

Stone: Carolyn, I want to go back to one point, something we were talking about before. We were talking about the role of insurers in driving investment in resilience, in buildings, et cetera. But you’ve also mentioned that they can drive decarbonization of the building stock itself. Could you tell us a little bit more about that?

Kousky: Yeah. I think it’s another way that insurers can help support our broader decarbonization needs. We know that the building stock in the US, I think, is roughly 1/3 of total emissions. And so when we’re thinking about building for our climate future, those need to be resilient to withstand the changing extreme events. But we also need to decarbonize our buildings. And so similarly, I think insurers have a role to play in that process.

Because for a lot of people, when they go to rebuild, they are working with their insurer. And insurers can give them, you know— even if they don’t give them extra money to decarbonize, which I think they could and would be useful— we’ve done some work looking at a kind of climate-ready endorsement that would say, “We’ll give you an extra ten grand to invest in decarbonization measures when you rebuild.” But can also just help facilitate that, by giving people information, access to trusted contractors, lists of improvements they could make. Everything from, “Hey, let’s electrify your home now. Let’s replace that gas stove with an induction stove. Let’s make sure that you’re using the most efficient appliances.” And all of that could be wrapped into rebuilding as well. And I think insurers have an educational and capacity-building and financial role to play in that as well.

Stone: Carolyn, thank you very much for talking.

Kousky: Thanks so much for having me on. It’s been a pleasure.