Our thinking

The rising tide of insurance

9 June, 2023

A recent article in The New York Times highlights the increasingly complex and challenging issues facing the insurance industry around providing coverage for areas exposed to climate-related risks, and the related emergence of unsustainably high insurance costs or uninsurable properties or areas. 

Case in point: State Farm, the largest provider of auto and home insurance in the US, said it would stop accepting applications for most types of new insurance policies in California because of inflation, a challenging reinsurance market and – crucially –  “rapidly growing catastrophe exposure.” 

Unfortunately, this isn’t a problem unique to California – other US states affected by flood and storm risks are facing the same issues. As with other aspects of climate change, the effects of rising insurance costs or uninsurable areas stand to impact the most vulnerable and underserved members of society the most. An integral feature of a ‘just transition’ to net zero needs to be ensuring that this doesn’t happen. So how do we do that? Should the responsibility be placed on the shoulders of insurers? After all, the whole point of insurance is to offer financial protection in moments it is needed most. 

However, bankrupted insurance firms won’t remedy the situation either. Collective action and government support in mitigating the unequal impact of climate change on society is required. 

FloodRe, a joint initiative between the UK Government and UK insurers, is a good example of how this functions in reality. By pooling flood risk across the country, it spreads the financial burden and ensures that the flood cover part of household insurance remains accessible to all. 

Initiatives such as this demonstrate that by implementing innovative and inclusive insurance schemes, governments can safeguard the most vulnerable members of our communities while promoting resilience and sustainable practice. We need more of these. 

By Budd Nicholson