'Time to innovate' insurance amid climate emergency

"It’s time to innovate climate insurance solutions or miss out on market opportunities," according to Charlie Sidoti, Executive Director at InnSure.

In an open letter to the industry, Sidoti has written that insurers need to come up with "innovative and collaborative solutions" that protect policyholders and ensure the longevity of the industry.

It comes as, according to Swiss Re, only 45% of economic losses arising out of natural catastrophes were insured, leaving property and business owners potentially exposed to huge financial damage. This is only likely to increase in future, as climate change continues to increase both the severity and frequency of freak weather events.

The National Oceanic and Atmospheric Administration (NOAA) recently upgraded its prediction of activity during the ongoing Atlantic hurricane season from “near normal” to “above normal”, and Storm Idalia this week made landfall on the Florida coast.

Charlie Sidoti's open letter to the insurance industry

US$1.4tn worldwide fall into the insurance protection gap – a number that is rapidly expanding due to the increased frequency and severity of extreme weather patterns caused by climate change. In 2022, only 45% – or US$125bn – of global economic losses driven by natural catastrophes were insured, leaving millions of households and businesses vulnerable. In the US, residents of California, Louisiana and Florida have been calling for increased access to affordable insurance solutions to protect themselves and their livelihoods, but insurance carriers continue to exit those states and enact strategies focused on revamping other non-catastrophic lines of business. 

The current insurance picture is limited. The industry has a long history of de-risking change and establishing a foundation where one didn’t exist before – as it has previously done with electricity, aviation, and automobiles – but the prevailing insurance solutions related to natural catastrophes and severe weather aren’t sufficient for the rapidly changing meteorological conditions. Consumers are asking for new innovative solutions to address climate-related insurance challenges. 

Existing government-funded and -assisted programmes like the Federal Emergency Management Agency (FEMA) and the National Flood Insurance Program (NFIP) can help communities recover, but are limited in the populations they can reach, the amount of funding disbursed, and the disbursement period. These programmes often have cumbersome application processes and impractical evaluation criteria, leaving the most socially and economically disadvantaged folks unserved. The payout is also significantly lower than private insurance, perpetuating economic disparities while operating under the façade of helping people recover. When disaster strikes, the federal government often needs support from community leaders and local government to disburse funding and evaluate damage, meaning that monetary relief might not even reach citizens until years later. At that point, people may have moved away and businesses would have become unsalvageable. 

In the case of private insurance, it’s now appraised as a luxury good as many of the most vulnerable stakeholders are priced out, even though catastrophe-related insurance is portrayed as an “affordable” necessity. These private models offer the most competitive quotes to establishments that can afford regular upkeep and flood mitigation measures. In other words, the best prices are given to people who already have the economic means to reduce the effects of disaster and can hold out for government relief. While this makes sense considering that insurers don’t want to incur losses, this way of doing things doesn’t help the rest of the community and those with the most need. 

The protection gap doesn’t just cause damage to households and businesses, it negatively impacts entire communities and economies as it weakens their financial resilience and can make it nearly impossible for businesses to reopen and for families to recover. And that’s why, while there’s a business case for innovation, there’s also the human part of it – the desire and need to uplift and support entire communities who are negatively impacted by the effects of climate change and the resulting actions taken by insurance companies. 

The conclusion is simple: de-risking communities should no longer be left to the individuals who lack the resources needed to navigate through limiting insurance markets. They need support from their community to access new and innovative insurance products that help close the protection gap and push the world towards a climate-risk-resilient state. Community-embedded insurance (CEI) is an example of that.

With the CEI model, insurance coverage takes on a form of ‘soft’ infrastructure, which is composed of the vital services needed to sustain the economic and social well-being of a community. Instead of individuals purchasing their own policies, they can opt into a shared group policy and the joint benefits are distributed when disaster strikes. It’s integrated into a specific community or group through a third-party, like a local government entity or homeowner’s association, and offers additional holistic benefits beyond the expected payout for structural damage and physical losses. CEI solutions stabilise communities and get them back on their feet faster since the benefits, risks, and financial burdens are collectively spread across a larger group, resulting in more affordable and accessible insurance for all. In other words, it provides a new way to think about and address the problem.

CEI pilots are already being conducted in New York and Virginia, with additional pilots being considered in California and elsewhere soon. It’s too early to know the results of these pilot programs, but the enthusiastic uptake is promising. 

Admittedly, while we have a vision for how the CEI model could evolve, we know that how it actually develops will result from lots of bold experiments conducted by local communities, like those mentioned above, and others trying to find new ways to close the protection gap. 

Insurance can and must play a crucial role in tackling climate change, but to do so, we need to come up with innovative and collaborative solutions that protect policyholders and ensure the longevity of the industry. The question that remains: what is insurance going to do to help address the protection gap left by volatile weather risks? I believe that we can answer it together.

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