This summer, climate change hit home. Big insurance companies in Florida and California announced they would stop writing new home insurance policies due to soaring claims for fires, floods, and other natural catastrophes.
Massachusetts hasn’t yet faced an insurance market breakdown on that scale, but it might have if Hurricane Lee had shifted a few hundred miles west. In the past two years, average home insurance premiums in the Commonwealth have jumped by about 26 percent, propelled by construction costs, less competition within the insurance industry, and growing climate catastrophe risks. Not only are premiums rising, but nationally insurers are increasingly using deductibles and limitations to curb their exposure. Across the country, 40 percent of all economic losses caused by natural catastrophes last year were uninsured.
To save on expenses, some homeowners are electing to limit their coverage. Others without mortgages are giving up insurance altogether. Despite the growing threat of intense rainstorms and coastal flooding, less than 2 percent of homes in Massachusetts have flood insurance. Renters — who occupy more than one-third of the state’s 3 million homes — are especially vulnerable. An increasing burden is falling on low-income populations who lack a financial safety net if storms or flood damage force them to move out.
Last month, Massachusetts’ Climate Chief Melissa Hoffer released a 39-point climate plan, which acknowledges the insurance industry’s “critical role in the Commonwealth’s preparation for and response to climate change.” The plan proposes regulatory initiatives designed to reduce insurers’ climate exposure, primarily to help them stay in business. But this is only a first step — much more is needed to enhance protection against growing risk.
Seventeen years ago, Massachusetts pioneered a new approach to providing individual health insurance through the Connector — an innovative marketplace that met the needs of hundreds of thousands of residents who previously lacked health coverage. This reform enabled Massachusetts to achieve and maintain the highest rate of health insurance in the country.
Massachusetts can lead again by promoting a similarly bold approach to climate disaster insurance.
The insurance industry has unique risk management capabilities. In the past, it has played a crucial role in making automobiles, aviation, and electricity safe for widespread use. But today, it invests only 1.4 percent of its revenues in research and development. The insurance industry needs to recapture its creativity to meet the climate challenge.
How might community leaders work with insurance innovators to test new types of risk-transfer models? Property insurance, which is typically designed to compensate for specific damages, could be complemented with “parametric” insurance, which pays out a pre-set amount to all affected policyholders on the occurrence of a defined trigger event — such as flood water depth or wind speed. This avoids the costly and time-consuming process of loss adjustment and puts money in the hands of the affected community when it is needed most. Parametric products have already been successful in a number of countries, including Mexico and Australia, but are not common in the United States, partly due to regulatory barriers.
Additionally, municipalities could purchase small-scale (“micro”) insurance for residents as a group, similar to the way companies provide life and health insurance for their employees. Group procurement cuts marketing and administration costs for insurers and spreads risk across a broad pool of participants, keeping average premiums low. Benefits could be linked to flood, storm, or other natural disasters that affect the community.
Innovative solutions such as these protect families that are currently most exposed. They could reduce the burden on under-resourced government disaster-relief programs and unlock new business for the insurance industry — a major employer in Massachusetts. And they could incentivize community investments in climate resilience — such as flood barriers or better building construction — by offering premiums that better reflect the lower risk.
The state should support these efforts through flexible insurance regulation that enables new products to be safely pilot tested. Detailed data collection from the insurance industry would improve our understanding of where the coverage gaps are and what solutions work best. And the industry itself needs to invest significantly more in research and development. Climate change is no longer a distant threat but a present-day reality, and the insurance industry is on the front lines.
Jonathan Hakim is an advisor to InnSure, where Charlie Sidoti is executive director.