"Climate change will increase risks significantly in many areas of society, and also will render far less measurable many risks that were previously calculable. If our society is to survive climate change without significant human costs, we must develop robust institutions and practices to manage these risks. The insurance industry is our society's primary financial risk manager, and needs to play a leading role in developing these institutions and practices. But climate change poses an unprecedented challenge to the insurance industry, because factors such as increasing uncertainty and the potential for highly correlated losses will make it difficult to insure against climate change-related risks and will strain capital markets' ability to compensate those who are affected. If the industry rises to the challenge, it stands to profit while facilitating our most successful responses to climate change-related threats around the world. If not, insurers will suffer along with everyone else. A report issued recently by a major financial firm identified climate change as the number one 'strategic threat' facing the insurance industry, noting that it is a 'long-term issue with broad-reaching implications that will significantly affect the industry.' To date, however, there has been relatively little effort to examine what supply- and demand-side barriers may be impeding development of insurance products that address climate change risk effectively. In this context, this Article examines the incentives that insurance products provide to influence the climate change-mitigating and adaptive capacity-building behavior of policyholders and other actors. It also looks at the reasons that insurers might or might not choose to provide those products and the reasons individuals and businesses may or may not choose to purchase those products. Finally, it examines the extent to which the insurance industry's products are likely to play a significant and effective role in affecting private actors' responses to climate change. The Article concludes that although it is not yet clear whether and how the insurance industry will be able to address climate change in a way that systematically creates solutions, the industry's future - and perhaps the rest of ours as well - may rest on the success or failure of its adaptation to a world with a changing climate." —Abstract.
"This Policy Comment analyzes the connection between hurricane mitigation and insurance. As many people fail to purchase government-subsidized flood and earthquake insurance, some researchers argue that market failure explains the lack of mitigation. But empirical evidence shows that markets do value natural hazards risks, including hurricane mitigation, and thus the case for market failure has been overstated."—Abstract.
"Katrina demonstrated the growing vulnerability of the United States to major hurricanes. This paper analyzes the sources of growing hurricane vulnerability, due to the increasing number of people and property in the U.S. Atlantic and Gulf counties since 1950. The analysis specifically focuses on policy interventions in insurance markets, or states with "hurricane pool" residual market mechanisms. Regressions show that coastal county growth increased after establishment of a pool by 16,000 to 22,000 persons and 4,000 to 6,000 housing units per decade. But hurricane pools do not affect the percentage growth rates of population or housing units. Direct election of insurance commissioners may have contributed to growth as well, but this increase fails to attain statistical significance. Together these results indicate a possibly significant role for insurance subsidies as driving coastal population growth. A land-falling hurricane did not slow growth during a decade, but counties with greater hurricane risk also grew significantly faster, which may be evidence that people ignore hurricane risk in making location decisions."—Abstract.
"Losses from hurricane catastrophes have accelerated in recent years, with seven of the top nine hurricanes ranked by insured losses occurring during 2004 and 2005. Hurricane losses have affected the availability of insurance in coastal states and contributed to enormous growth in state residual wind markets. Of particular policy concern is the possibility that homeowners, businesses and insurance companies are not investing in the efficient amount of mitigation to reduce hurricane losses.
"This paper examines some of the potential barriers to the adoption of efficient mitigation and reviews specific state insurance regulation and legislation that impedes and encourages mitigation. Premium discounts and hurricane deductibles, which are waived if property owners invest in mitigation, provide incentives for mitigation, but mitigation discounts mandated by legislators potentially could represent disguised insurance subsidies. Irrationalities in decision-making such as low-probability event bias, myopia, and inertia might make it difficult for insurers to convince property owners to invest in mitigation. But this is not different in type from the problem entrepreneurs face in general in making consumers aware of the value of products. Restrictions on contractual mechanisms insurance companies can use to encourage mitigation, like requiring mitigation as a condition for renewal of coverage or funding mitigation after a disaster through long term loans or contracts, could prevent insurers from using effective incentives for mitigation, and could reduce the supply of insurance in coastal areas."—Abstract.
"Building codes have been stressed as a measure to reduce vulnerability to hurricanes and other natural disasters. Almost all U.S. states have adopted a building code, but building codes do not enforce themselves. In this paper, Professor Sutter explores the determinants of building code enforcement across states using ratings from Insurance Services Office. Overall enforcement is not outstanding, as only five communities have the best rating of 1 and less than 7% have one of the three top ratings. Although proposed as a means to reduce damage from natural hazards, enforcement is not on average better in states vulnerable to hurricanes and earthquakes; enforcement is actually lower in states vulnerable to earthquakes. Enforcement generally improves with a larger state and local government, while political corruption reduces enforcement for personal insurance lines. Building codes are better enforced in more urban states, consistent with beneficial competition between local governments, although this result might be an effect of income. Greater inequality does not affect enforcement."—Abstract.
"Natural hazards adversely affect hundreds of thousands of people worldwide each
year and cause extensive property damage. In 2007, a year that was not considered
an exceptional one for natural hazards, natural hazards caused an estimated 14,600
deaths and $70 billion in property losses. For that year, the insurance industry
covered $23.3 billion in losses. In catastrophic loss years, such as 2005—the year that saw Hurricane Katrina—losses can be far greater. Scientific assessments indicate
that climate change is expected to alter the frequency and severity of natural hazard
events, and as a result, losses can be expected to climb. Given this scenario,
examining policies that are used in other countries to reduce the loss of life and
property caused by natural hazard events and examining insurance approaches that
provide coverage for natural hazard losses can help identify practices in both areas
that could benefit the United States. Similarly, given the ongoing challenges facing
the United States, international cooperative efforts may provide instructive examples
of risk management and disaster reduction."—Introductory Letter to Congressional Committee on Financial Services
"The number of federal flood insurance policies in force nationwide increased 36 percent from 1997 through 2006, but most homeowners at risk of flooding still lacked such insurance. While average insurance amounts (per policy) increased 78 percent from 1997 through 2006—consistent with rising home values—the average premium decreased 3 percent from 1997 through 2006, likely driven in part by the increase in policies sold in moderate- to low-risk areas. Conversely, loss amounts fluctuated by year, peaking at more than $17.7 billion in 2005. Seventy-nine percent of the funds paid out through NFIP from 1997 through 2006 were for hurricane-related claims, but the percentages in individual years varied widely (correlating with hurricane activity). Finally, the extent of claim payments attributed to repetitive loss properties (those with two or more claims in a rolling 10-year period) increased from 1997 through 2006, from $3.7 billion to nearly $8 billion, with the most significant increases resulting from the 2005 Gulf Coast hurricanes.
"Because of data limitations, GAO was not able to determine the actual number of properties acquired through FEMA mitigation programs, which are intended to minimize the damage and financial impact of floods. Information on completed mitigation projects (which encompass multiple properties) indicates that about one-third of properties approved for acquisition from 1997 to 2006 were acquired. However, these data are limited because they do not include a count of properties acquired in ongoing projects. Projects may take several years to complete, and FEMA does not report properties acquired until a project is complete. Further, FEMA collected property acquisition data (for completed projects) in an ad hoc manner because FEMA's grants management system lacks the capability to record acquisition data. As a result, FEMA cannot readily determine the extent to which flood-damaged and repetitive loss properties have been acquired through its mitigation programs.
"Lack of monitoring records, inconsistent application of procedures, and lack of coordination have diminished the effectiveness of FEMA monitoring of NFIP-related contracts. While federal internal control standards state that records should be properly maintained, FEMA did not consistently follow its monitoring procedures for preparing or maintaining monitoring reports and was unable to provide copies of the majority of monitoring reports GAO requested. Further, FEMA offices did not coordinate information and actions relating to contractor deficiencies and payments. In some cases, key officials were unaware of decisions on contractor performance. As a result, FEMA cannot consistently ensure adherence to contract requirements and lacks information critical for effective oversight of key contractors. Given the reliance of NFIP upon contractors, it is important that FEMA have in place adequate controls that are consistently applied to all contracts." — What GAO Found.
