The Real Price of Risk
Insurance as a Force for Resiliency
Link to the conversation on LinkedIn
The devastating LA fires have pushed climate disasters and property insurance to front-page news and to the top of our national consciousness, and with good reason: tens of thousands of structures are destroyed, tens of billions in losses have been incurred, and more than two dozen people are dead. The impact is staggering, and tragic.
With fires still raging, it goes without saying that there are more immediate concerns for victims in LA than the trajectory of insurance premiums. But given my interest in insurance, I have naturally paid particular attention to news coverage and thought pieces about the industry. Much of this coverage talks about the impact to the insurance industry from natural catastrophes. For example, op-eds might (accurately) describe how the industry will respond to this disaster (for example: with higher rates or more carrier departures from California). These impacts are likely to be significant for homeowners and local governments, and the conversation about these upcoming challenges is important.
However, I believe much of this narrative misses an exploration of how insurance is not only affected by, but also affects, climate resiliency.
Insurance, and the pricing of risk more broadly, plays a critical role in shaping the incentives and tradeoffs society must navigate amid spiraling climate losses. Resiliency directly influences insurability and premiums, but the relationship is bidirectional: how insurers evolve to face climate risks also shapes how society adopts and applies resiliency.
Regulatory Challenges & Conflicting Priorities
In all 50 states, insurance is overseen by state regulators, which sets the stage for a complex web of policies. While disaster relief initiatives (like FEMA) and flood insurance (via NFIP) are provisioned federally, homeowners insurance is regulated by state commissioners. Fractured state policies, in the absence of urgency to adapt to the climate crisis, tend to be dramatically over-accommodative to their constituents.
The result has been an effective subsidization and “distortion” of premiums. Insurers, forced to keep rates artificially low in high-risk regions, offset their losses by increasing rates in lower-risk, less-regulated states. And in states like California and Florida, where huge losses over the past decade compelled private insurers to reduce or pause business, state regulators stepped in with public insurance carriers, which provided subsidized, last-resort coverage to properties the private market deems non-viable. Reliance on such public “last-resort” plans is hardly just for edge cases: in California, public plan exposures tripled since 2020 to more than $450B.
The impulse for regulators to maintain insurability is logical: insurance is a non-discretionary utility, and lack of access to it destabilizes homeowners and businesses. Imagine, for example, if an entire town were deemed uninsurable; this would have hugely negative consequences for the local economy, and moreover, these impacts (lower property values; lower tax revenues; uninsured property loss) would be heavily concentrated among individual and local communities. The scenario would be neither politically viable nor even fair for the people left holding the bag. Therefore, the high-level state policy goal of maintaining affordable and accessible insurance coverage (and thereby distorting market prices) was politically sensical, if not actuarially problematic. Still, some states have been particularly egregious (in California, for example, until just months ago carriers could not pass on their reinsurance costs nor use forward looking catastrophe models; this is crazy when you know the future is unlikely to look like the past!), further misaligning prices with real risks. Now, regulators face the unenviable task of balancing economic viability against political necessities, and seem to continue to favor the latter.
The result is that the system is ill-equipped to handle a world with rapidly worsening natural catastrophe losses. When climate resiliency is not rewarded, or when risk-taking is subsidized, incremental dollars flow inefficiently and irresponsibly. Over the past two decades, for example, there has been significant net migration to areas of high climate risk (including Southern California and the Gulf Coast of Florida), a trend that has further accelerated post-Covid. As a society, our housing stock is growing riskier, even as all indicators are flashing red.
Emerging Models & the Path Forward
There is no silver bullet to address all of these challenges. It is neither palatable nor appropriate for high risk areas to suddenly have zero insurance availability or for all consumer protections to evaporate overnight. The extent to which individuals vs. states vs. the federal government should bear this cost is certainly not a clearcut answer.
I am heartened by (and excited about) emerging models that leverage more data to price risks and implement active risk management – like Stand, which uses physics driven insights and makes specific mitigation recommendations to help make properties insurable. This approach is our best bet for incentivizing high-ROI resiliency tactics, and will enable access to coverage for homeowners who may otherwise be deemed uninsurable. It represents a huge step in the right direction to address the growing coverage gap, and is infinitely more sustainable compared to simply subsidizing coverage.
Still, a recent NYT article about the rise of homeowners cancelations and non-renewals underscores how much of a political and cultural reckoning we still have ahead of us to grapple with the enormity of climate change and equitable risk transfer. As policy cancelations surge, the US Treasury (which has called out homeowners insurance as a systemic risk) requested claims and non-renewal data from state regulators, in an effort to quantify the impact of climate change on the market. But a handful of regulators sabotaged the data collection, leading to material gaps in the analysis, and now lobbyists are calling on DOGE to kill the initiative altogether. A Treasury official quoted in the article noted, “Nature does not care whether people are living in a blue state or a red state…,” and yet we as a society seem unable to even acknowledge the gravity or complexity of the problem, let alone to align on solutions.
Adaptation of the property insurance industry in a future punctuated by more and worse climate disasters requires innovation, as well as collaboration among private and public stakeholders. It requires a paradigm shift in how we think about insurability, how risk is measured, how it is managed, and who ultimately pays for it. At Equal, we believe strongly that the path towards a sustainable future requires “bending the risk curve,” or reducing claims by aligning underwriting profits with the safety and wellbeing of insureds. Insurance can play a pivotal role in our response to the climate crisis by incentivizing resiliency and risk mitigation, but as an industry is not yet delivering on that promise.
The fires in LA are devastating in so many ways and must serve as a call to action for us to identify and accelerate productive solutions that incentivize risk mitigation. The safety and financial stability of countless Americans depends on it.