The Insurance Industry Crisis

This post is by Sheryl Canter, an online writer and editorial manager at Environmental Defense Fund.

Climate change is already happening. If you don’t believe it, just ask anyone in the insurance industry, which has been bearing most of the costs. Insurance companies are scrambling to contain their exposure by hiking deductibles, limiting coverage, and often pulling out of risky markets altogether (see my previous post, "Insurance Coverage Crumbles in Coastal States").

This week, ClimateWire reporter John Fialka published a report on how climate change may shrink the insurance industry, and the "seismic economic shock" this would deliver to homeowners and businesses. He says that one solution under discussion is for the federal government to act as a backstop, shielding the private insurance industry from risk.

But that’s a bad idea – for two reasons.

1. The cost of underwriting climate change would be astronomical.

     The House has already passed bills that would make the federal
     government the insurer of last resort, and expand the federal flood
     insurance in program ways that would quadruple its risk. But this de facto
     adaptation funding is utterly unsustainable. The federal government can’t
     afford to underwrite climate change impacts. The flood insurance program
     is already near bankruptcy due to costs from Katrina and other huge
     storms.

2. Federal funds should be used to reduce risks, not insurance rates.

     Subsidized, federally-backed insurance would keep rates artificially
     low, thus encouraging people to continue building in high-risk coastal
     areas. This is not an effective use of government resources. Government’s
     focus shouldn’t be on reducing insurance rates, but rather reducing the
     risk to people and their homes from climate change. The way to do
     this is through a mandatory cap on greenhouse gas emissions.

Evan Mills, a scientist and insurance industry expert at the Department of Energy, thinks the insurance industry itself could force meaningful action, just as it "reacted to past calamities by forcing governments to create the first fire departments, the first building codes and the first auto safety testing protocols."

The insurance industry is the largest industry in the world. Imagine if it joined in the call for national climate change legislation. It’s certainly in their interest.