Climate Change Is About to Remake the Insurance Industry

Most businesses know that eventually, they could be profoundly affected by climate change.  What’s surprising is how quickly the shifts, threats, and costs are materializing.

Take the insurance industry, which might be expected to profit as people seek to ward off losses.  But instead, it’s thrown into disarray when those losses are no longer possibilities, but inevitabilities.  At a certain point, as the likelihood of extreme weather events increases, insurance companies are “not selling a risk aversion remedy to people,” says Dan Kahan, a professor at Yale Law School who specializes in risk perception.  “[They’re] getting taken to the cleaners.”

A recent industry study found that last year there were 750 major “loss events” like earthquakes, storms, and heat waves, well above the 10-year annual average of 590. Analytics firm CoreLogic has found that 6.9 million homes along the Atlantic and Gulf coasts are at risk of damage from hurricane storm surge that could cost more than $1.5 trillion.

What’s more, flood insurance was not a lucrative business to begin with. Congress set up the National Flood Insurance Program in 1968 as it became clear that private companies couldn’t profitably provide coverage. Now, nearly half a century later, the program is—ahem—under water by $24.6 billion. As a result, there’s a push to move flood insurance toward the private market. That could mean less building in flood-prone areas, as they become effectively uninsurable thanks to sky-high rates. Says Morningstar’s Brett Horn: “Frankly, that’s not a bad outcome.”

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