First-of-its-kind insurance report confronts climate risk

As many of us are witnessing across the globe this summer, the impacts of climate change are already upon us: the increasing severity of wildfires, more frequent and widespread extreme heat events, and the looming risk of floods and sea level rise even during a drought.

This is especially true for California, where wildfires fueled by a historic drought have already scorched three times as much land as they did in the same period of last year’s record-breaking season.

These climate impacts are not evenly distributed. They fall disproportionately on people with lower incomes, people of color, older adults, children and people with chronic health conditions.


Building community resilience to fire and heat is an immediate imperative. Read more: Heat, fire, smoke and blackouts: How to live with our new reality.

As the destruction wrought by climate change continues to accelerate, state leaders and the insurance industry are exploring ways to make communities more resilient, especially the residents who are most vulnerable to climate impacts.

The role of insurance in addressing climate risk

Insurance coverage helps renters and homeowners recover more quickly from acute climate risks like increasingly severe storms and wildfires, but it can also be an important tool to support decisions that mitigate chronic climate risks, such as those associated with prolonged drought and extreme heat, for both individual residents and for larger communities.

The Climate Insurance Working Group, convened by California Insurance Commissioner Ricardo Lara, has published a set of 40 recommendations for the state’s Department of Insurance, local and state policy-makers, and the insurance industry regarding the role of insurance in addressing risks from climate-fueled wildfires, floods and extreme heat.

As the destruction wrought by climate change continues to accelerate, state leaders and the insurance industry are exploring ways to make communities more resilient. Click To Tweet

These recommendations are the first of their kind in the nation and cover many potential roles for insurance in addressing some of the challenges associated with climate risk — including how to support nature-based climate solutions and build community resilience. Across all recommendations is also a focus on how to mitigate the disproportionate risk to people who are the most vulnerable to climate disasters.

Nature-based climate solutions to reduce climate risk

Healthy forest management, wetland restoration and urban greening can all help reduce the long-term risks from wildfires, floods and extreme heat. These solutions require long-term investment to reduce climate threats to communities over time — investments that could ultimately help keep insurance more affordable.

One recommendation is for insurance commissioners to coordinate with federal and state agencies to develop a Climate Pre-Disaster Mitigation Vision, which could include strategies to accelerate urban greening, prescribed burning, sand dune restoration and other natural risk-reduction strategies. Engaging local communities in this process will help to meet local needs while also educating residents about their specific climate risks and resilience solutions.

Insurance companies should also consider ways the industry can directly invest in nature-based solutions to reduce their liability. This could be through assessing a fee on policies to invest in nature-based risk reduction strategies, or even through investing profits in resilience bonds to support the development of natural infrastructure.

Employing nature to help reduce climate risk benefits communities by making them safer and also benefits the insurance industry by reducing their payouts. There are also myriad co-benefits to air and water quality, carbon sequestration and biodiversity.

Policymakers and insurers should work together to swiftly accelerate deployment of nature-based climate solutions to achieve these win-wins.

Climate resilience in housing

California is in the midst of a housing affordability crisis. As a result, many residents are being pushed into regions that are at higher risk of climate disasters, and many renters and homeowners are unaware of these increased climate risks, or cannot afford to insure their homes or belongings, making this transition neither a safe nor affordable housing solution.

To address this, local planning decisions should incorporate climate risk, as well as nature-based climate solutions to reduce that risk. For example, land-use plans should include protection or restoration of wetlands to defend neighborhoods against floods, or preservation of mature trees to maintain a tree canopy to reduce urban heat.

Additionally, climate risk disclosures should be made available early in the home-buying process to ensure that homeowners know the risks associated with a property before purchasing. At a community or regional level, this also means developing more comprehensive climate hazard maps and making sure those maps are updated regularly and are easy to access and understand.

This insurance industry can also take steps to close the protection gap — the difference between total damage and insured loss — to make households more resilient in the face of risk and better able to recover from disasters. Taking steps to ensure that insurance stays affordable, particularly for low-income households, is critical. This could include subsidizing insurance premiums for existing, low-income households in areas where insurance uptake is especially low and risk is high.

Finally, the California Legislature should consider updating the state’s FAIR Plan, an insurance pool that provides basic coverage to homeowners when private insurance companies will not, to promote more responsible land use. This means that, while remaining the “insurer of last resort” for existing homeowners, the FAIR Plan should cease to provide coverage for building new high-risk developments that increase both the public and private insurers’ risk of substantial loss.

To avoid exacerbating the shortage of affordable housing, policy changes that create disincentives to develop in the highest risk areas should be coupled with measures to accelerate the development of safer, more sustainable housing options.

There is an urgent need to tackle the mounting disproportionate threats from climate fueled disasters, and insurance is an essential tool to creating safer and more resilient communities. These recommendations are just the beginning of the transformational change needed to address climate risk, for all.

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