Why insurers should incentivize resilient rebuilding
In the wake of disasters like Helene and Milton, insurers should offer incentives for resilience-focused construction.
Climate change is here, and it’s taking a catastrophic toll on communities exposed to high hazards and ones that have low adaptive capacity.
In 2023, damages from weather and climate disasters totaled $280 billion globally. Worse, only $108 billion, or 38% of total global economic losses, were insured — leaving those who fell in the protection gap with the responsibility and financial burden of post-disaster recovery.
As reported by The New York Times, and as we’ve seen all too recently with storms like Hurricane Helene, the insurance crisis brought on by climate change is impacting many states, even those that are less well-known for climate disasters. But poor community insurability is a crisis in and of itself, even without a catastrophe.
When communities can’t access affordable insurance, it can affect the cost of homes, tank municipal bond ratings, and cripple the tax base — and this is only going to get worse if left unaddressed. At the same time, the lack of accessible coverage causes great reputational damage to the insurance industry; just look at how many headlines there have been this year about insurance being “broken.”
A common industry response when disaster strikes a community particularly hard is to reduce or eliminate coverage or astronomically raise rates — but that can’t and shouldn’t be the only solution. Instead, insurance needs to collaborate with community leaders to support a bold innovation agenda that reimagines the types of products offered, the way that they are distributed, and how public and private capital is organized to fund expected future loss costs.
Community leaders are in a unique position to work with insurers to drive local insurability.
For the most part, insurance is purchased by policyholders on an individual level. This model has historically made sense for many coverage lines, but it’s no longer the best option for catastrophe coverage. In today’s era of heightened climate-related risk, community investment that makes insurance more accessible and affordable can play a key role in enhancing communities’ resilience and providing additional opportunities to shape economic development.
Local elected officials and government staff generally have the most influence over land use (where people build), building codes (how people build) and infrastructure (which provides risk mitigating benefits) in the locales they serve.
Accordingly, they are in a strong position to help shape the insurance market by requiring or incentivizing resilient development and construction of homes and businesses. As representatives of the collective needs of many, they can help encourage climate-smart development that is stronger, safer, and therefore more attractive to insurers, as the investments can help reduce losses.
By working with community leaders to emphasize community economic development planning that promotes investments into adaptation, physical resilience, and smart risk transfer, insurers can help reshape local insurance markets, minimize the total cost of risk, and provide citizens’ the ability to access and afford insurance, which are key to financial stability and post-disaster recovery.
The three key levers of community resilience
The solution to creating and maintaining community insurability lies within building, modeling, and purchasing — all areas of community resilience that can be addressed through collaboration between the insurance industry and local elected officials, government staff, and other community leaders.
No. 1: Resilience-centered building and development
Community leaders and insurers must examine how new development, revitalization projects, and infrastructure work will affect a municipality’s ability to mitigate against potential weather-related disasters.
By incentivizing or mandating resilient development and investing in projects that increase a community’s resilience to extreme weather, insurers can reduce losses and bend the cost of catastrophes down.
Mandating prevention strategies or offering reduced rates when policyholders implement or partake in risk-reduction strategies isn’t new – many programs already exist in other P&C lines. If a driver takes a defensive driving course, they often receive a discount from their auto insurer.
On the cyber side, several carriers mandate that for a business to receive coverage, they must implement multi-factor authentication and maintain compliance throughout the policy period. The insurance industry has the opportunity to implement similar programs in catastrophe insurance to help cut down on losses and promote resilience strategies.
No. 2: Development of new modeling and analytics tools
While investing in community resilience projects can help protect against future natural disasters, much of the value of these projects is lost when they’re not captured and understood by the insurance industry.
By financially quantifying the benefits of specific community resilience projects, community leaders can determine which projects bring the most value to citizens and insurers, and regulators can better understand and more quickly recognize the value of those investments in pricing and offerings.
Many solution providers, consulting organizations, nonprofits, academic institutions, and government agencies are already developing analytic tools that support better planning decisions and faster, more comprehensive recognition of adaptation/resilience investments by insurance markets.
No. 3: New insurance distribution models and capital structures
More extreme weather patterns and fluctuating risks call for new insurance distribution models. One example would be group insurance, which can be designed to provide bespoke solutions tailored to the specific risks and economic ability of the local community.
Group purchase of catastrophe insurance by employers, municipalities, and/or other community-centered organizations creates new markets for the industry and provides community leaders a quick way to close protection gaps, which in turn makes communities more resilient.
One challenge of group purchase is the concentration of risk that inevitably comes with a locally purchased group catastrophe policy. These challenges can be overcome by reimaging how capital is organized to fund future losses. Captives, mutuals, and reciprocal exchanges can be used to maintain strong alignment of capital to local strategic priorities for managing risk.
These structures can also blend locally sourced capital from other sources such as traditional reinsurance, philanthropic funding, and insurance-linked securities as a way to pool and spread risk.
The time is now for insurance to take action.
Catastrophic damages caused by Hurricane Helene and Hurricane Milton have put insurance into the spotlight due to the large number of severely impacted homeowners and businesses who don’t have flood insurance and weren’t aware of policy exclusions or the rain-flood risks.
With all eyes on these challenges, it’s essential that insurance acts now. If the industry doesn’t lead with dramatic increases in innovation to address the current insurance crisis, regulators will likely step in with greater and more disruptive force.
Working with community leaders to improve community insurability offers a strong step forward. This isn’t just the right thing to do; it also unlocks numerous untapped potential markets that enable insurers to effectively spread their risk portfolio.
The value of working with communities and offering resilience and adaptation incentives, discounts, or credits is further supported by a new economic study conducted by Allstate, the U.S. Chamber of Commerce, and the U.S. Chamber of Commerce Foundation, which found that every $1 spent on climate resilience and preparedness ultimately saves communities $13 in economic impact, damages, and cleanup costs. There is a clear cost benefit to investment into community resilience and insurability.
Insurers are already paying for natural disasters, in more than one way. By innovating and collaborating with community leaders to develop insurance products that enable investments in insurability, resilience, adaptation, and smart development, insurers can create tangible benefits. both for their organizations’ bottom lines and for the communities and individuals that are impacted by these catastrophes.
Charlie Sidoti is the executive director of InnSure, , a nonprofit innovation hub catalyzing novel insurance solutions that address climate change risk. He’s worked in the insurance industry for over 35 years, and his experience includes senior leadership roles with P&C insurance carriers and 10-years leading insurance-adjacent, analytics-focused startups.
These opinions are the author’s own.
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