Insurance

Recent coverage of insurance markets has highlighted the industry’s involvement in the so-called “climate risk doom loop”: looming climate risks and worse disasters are raising the price of insurance for real estate and infrastructure assets, exacerbating their owners’ vulnerability to future disasters and feeding into higher insurance prices in the future―or the withdrawal of insurance coverage altogether.

Rising insurance prices and the credible threat of insurer divestment from higher-risk areas will constrain investment in both homes and businesses across vulnerable communities. Yet more people are moving into higher-risk areas, and some politicians fear backlash if they let insurance companies deny these communities coverage. In response, state leaders in California and Florida have sought to prevent divestment by directing their insurance commissioners to adjust pricing regulations, invite competition in insurance markets, or derisk insurers by imposing disaster-risk fees on all insurance purchasers regardless of risk.

Private investors, meanwhile, believe the insurance industry should follow price signals: if firms can identify the climate risks an assets could face, and investors price those risks into building and maintaining costs, then market actors will invest prudently.

I argue that insurance is a woefully inadequate financial tool for coping with the impacts of climate change. Improving insurance markets does little to address the fact that the core drivers of the “climate risk doom loop” rest in the design of capital markets, which are structured to direct investment away from vulnerable communities when they most need it.