Could insurance save the world?

LF105 | Climate change is already making places uninhabitable. A new more collaborative, impact-focused insurance industry might help fix this.

The insurance industry is an unlikely savior of modernity. However, the industry plays a crucial role in undergirding today’s society so if insurance markets fail, large tracts of the world will become uninhabitable. The good news is that we’re starting to see a more mission-driven, proactive, service-based and customer-aligned model of insurance emerge. Applying this more expansive approach to the climate crisis could possibly reverse the ‘doom-loop’.

Insurance: boring, but vital

The insurance industry is not the sexiest. In fact, it seems to revel in its boringness, predictability and unavoidability. It’s often seen as a grudge purchase, mostly due to the fact that people often don’t feel they get much back in return for the cover, and when they need it, can find it painful to claim. Plus, bad actors don’t do the reputation of the industry any favors (disclosure, my own employer has hit the news recently).

Despite its normalcy, it is in fact a bedrock for a functioning society, allowing people to safely own valuable things and make long-term plans, without being wiped out by an unfortunate event. However, things in insurance land are changing, fast.

As temperatures rise, so are premiums

If you’ve tried to renew your house car insurance recently recently, you may have got a shock. Prices have been rising around the world, driven in large part by climate change. According to a 2023 report by SwissRe, insured losses in the first half of last year were ‘almost twice as high in a six-month period as the annual average of the last ten years'. The prices they’re paying to offload insurance to re-insurers have risen dramatically too; property reinsurance rates went up 37% in 2023.

Insurance deserts

Given that in many markets, premium rises are strictly regulated, insurance companies are starting to give up on certain markets. For example, State Farm and Allstate have stopped offering new homeowners insurance policies in California, and premiums in Florida and Louisiana have skyrocketed, leaving many without insurance. More worryingly, one quarter of all homes in the USA have climate risks that are not yet reflected in their premiums.

This is not just a US story. In Australia, 1 in 7 properties in ‘high risk’ areas (a list that includes Brisbane, its third largest city) will soon be uninsurable. In Nicholls in Victoria, 27% of properties will be uninsurable by 2030. Meanwhile, Africa is losing 15% of its GDP growth to climate change. The current trajectory is grim.

The dangers of an insurance ‘doom-loop’

There are a depressing number of ‘doom loops’ in climate change; for example, as the polar ice melts, the resulting darker water absorbs more sunlight than the reflective ice, accelerating the process.

We are marching steadily towards an uninsurable future in a number of places across the United States,” - Dave Jones, director of the Climate Risk Initiative at the University of California in Berkeley - The Economist, Sept 21, 2023, “Parts of America are becoming uninsurable.”

Without insurance, you can’t really have modernity. “Uninsurability is the first stage of uninhabitability”, according to Michael Mann. As markets fragment, for example California and Florida are no longer part of the picture, less premiums are paid by fewer policy holders, and the remaining policy holders face unattractive price hikes, and they too leave the market.

Insurance already knows about prevention

Some parts of the industry already knows how to shape behavior for better outcomes; aligning their customers’ goals with their own. For example, Hippo home insurance comes with leak sensors and fire alarms to keep you (and your home) safe. In health insurance, Vitality has created a global franchise offering a bundle of related products and services that nudge you to make healthy choices.

Smart insurance avoid the need for insurance

More broadly, “insurance that adds value” is the direction that many of the more innovative new insurtech startups are taking as well as using new tools such as AI to be more accurate and efficient.

A new form of prevention

It’s not a big leap from reducing fires inside the home to reducing wildfires outside of it, but will require a new mindset and approach to collaboration with other partners and government.

The need for collaboration to address society’s greatest challenges has gone from left wing agitation to main street. For example, mission-driven innovation is a new focus for the OECD:

Mission-oriented innovation refers to any new or improved technological, social, or organisational solution (product, process, or service) that aims to respond to one or several objectives tackling grand societal challenges (missions) and create public value to society (e.g., climate mitigation, clean oceans, sustainable economic growth, and well-being). 

Creating mission-driven innovation is not necessarily in the lexicon of most insurance companies, who focus more on the financial markets than the impact markets, but that is going to need to change.

A modern Marshall plan to save our communities

With the Marshall Plan, America invested around $140bn (in today’s money) to rebuild Europe after World War II. Not just a humanitarian necessity, it was in America’s interest to develop a strong trading partner and avoid the continent slipping back into conflict.

Our challenge today is more global and more existential. As such, we should be thinking an order of magnitude bigger - trillions not millions - to change the course of climate change and arrest its impacts on the places we live.

And like after WW2, this isn’t money wasted; it’s money for building. It would be improving the environmental and social infrastructure of the places we live to ensure our economy and society continues to function.

A wishlist

A few thoughts on ways that this shift in role, substance and magnitude for the insurance industry could come about:

1. Stop supporting fossil fuels

To avoid the doom loop, it would make sense for insurance companies as major asset-owning corporations to reassess their relationships with the fossil fuel industry that is driving us off the cliff.

2. Identify projects that save communities

Rather than just abandon places with wildfires or flood risk, instead figure out how to mitigate those bad outcomes. For example:

• Ecological forestry reduces fires. A 2021 report by Willis Towers Watson and the Nature Conservancy found that managing forestry radically reduces fire damage in California, and could reduce insurance premiums by 40% .

• Coastal wetlands reduces flooding. In the Northeastern USA, coastal wetlands have been estimated to reduce flood damages by an average of 27%, translating to nearly US $430 million in savings for New Jersey alone during events like Hurricane Sandy. In Saskatchewan, drainage of wetlands increased the 2011 flood peak by 78%. In developed areas average flood claims rise by up to $8,000 per hectare of wetland destroyed.

• ‘Social infrastructure’ reduces deaths. In the 1995 Chicago heat wave, deaths were reduced in areas with robust ‘social infrastructure’ (e.g. well-maintained sidewalks, safe parks, community centers and libraries).

• Biophilic cities improve… everything. Bringing greenery into cities - biophilic cities - has a range of beneficial effects on health and the environment. As just one example, people raised in green neighborhoods are 55% less likely to develop mental health issues.

3. Build new collaborations with mission-aligned partners

All these efforts are likely uncomfortable for most of today’s insurance execs who don’t see their job being to cut trees down. It will take a new set of collaboration with data-driven researchers who know what works, stakeholders who share the same goals (governments and other corporates who have a vested interest in maintaining functioning markets) and community groups who can help implement, and pay their premiums.

4. Develop novel funding mechanisms

How to get insurance companies to pay for what is in essence a public good - a large infrastructure project that benefits a whole place? A few promising examples:

• Funding bond payments via lower insurance premiums. The report cited about on ‘ecological forestry’ was able to show a reduction in insurance premiums by 41%. “The report explores how the insurance savings from ecological forestry could be captured and applied to pay debt service on bonds which would be issued to pay for ecological forest treatment. In this way, the insurance savings can contribute to funding or financing the ecological forest treatment, creating a “virtuous circle”. “

• Funding investment via land value increases. Dark Matter Labs found that the popular Highline Park in New York delivered a $3.4bn uplift in value for nearby properties. In a simlar way, property owners benefitting from climate infrastructure could pledge future property value increases (or lack of decline) against the bond payments.

• Retroactive funding of public goods. Ethereum inventor Vitalik Buterin has suggested a way in which blockchain can be used to retroactively fund public goods. “Retroactive Public Goods Funding is decentralized voting based on deciding what to fund after the project has already shown value.” [This one will need to be fleshed out further, by those more tech savvy than me.]

Inviting insurance companies inside the tent

There are any number of ways that a bold infrastructure plan to avoid impending desertification could be funded, and insurance companies have a stake in this investment going ahead.

My hope and ambition is that insurance companies engage fully in a collaborative, mission-driven exercise to address these doom loops, keep their businesses viable and keep the world habitable.