Insurance and Climate Change

California and Florida are in many ways diametrically opposite states. But they have something vital in common.

Both states are being hit particularly hard by climate change.

Hurricanes that had been “once a century” now every few years devastate Florida, if not the entire Southeastern United States.

The wildfires in Los Angles have done in excess of fifty billion dollars of damage. That makes the damage done by the riots after George Floyd’s murder look like chump change.

But the human cost is just as high, with tens of thousands of people losing their homes and businesses, not to mention the health care costs from the particulate matter.

Few industries are despised as much in America as insurance companies and for good reason. Often, they don’t cover what they are supposed to cover and are a nightmare for customers to deal with.

That being said, as an industry, they are correct about one sobering fact.

Certain parts of the United States are uninsurable because of climate change.

Not without increasing insurance premiums to levels most Americans would consider intolerable. Even then, that may not be enough.

As a whole, the insurance industry has entire departments dedicated to setting up actuaries to predict profits and losses. These professionals did the math and have determined that they cannot keep covering properties that are guaranteed to burn down or flood.

With full-fledged climate disasters, there are only bad options, and it’s about picking the best one.

So I will lay out the broad directions as I see them and let you decide which is the best bad option.

Option A: Let insurance companies increase prices as high as climate risk demands. Although this will protect homes and businesses while keeping taxpayers’ tabs to a minimum, it will also put services like homeowners insurance out of reach for many more people. We are starting to see this problem in Florida, where many residents cannot afford homeowners insurance because of the monthly premiums, all thanks to the more frequent and powerful hurricanes. But the biggest threat here is that the climate risks may drive monthly premiums so high that no one but the very wealthiest people and business entities can afford the insurance, rendering entire markets uninsurable anyway.

Option B: Subsidize moving entire populations out of these uninsurable areas. This would bring relief to both taxpayers and the insurance industry in the long run. However, this would have some steep upfront financial costs, not to mention the political costs of uprooting millions of people. I don’t know that the American political system at any level can handle those costs.

Option C: Have the government cover the costs. While this model is still somewhat in effect (President Biden just covered the cost of rebuilding much of Los Angeles), this method does have its limits. It offers perverse incentives for people and businesses to ignore climate risks because the risks are picked up by the taxpayer. More urgently, this model is also vulnerable to whomever is in the White House or is otherwise in charge, a risk that many Californians are aware of. I am somewhat guilty of this myself because I am in no mood as an American taxpayer to pay for some Trump welfare queen’s second home in Florida being underwater.

Option D: Have the residents and businesses cover all disaster expenses out of pocket. While this would provide short-term relief to taxpayers and the insurance industry, it would be catastrophic from an economic and social standpoint. Whole regions would fall apart, and that could have a cascading effect the country is not prepared for.

Option E: Zoning and infrastructure changes to keep population centers away from areas where fire and hurricanes are can do the least damage in conjunction with the insurance industry. This would perhaps be the most optimal from a financial and political standpoint. Not only would people be able to remain in their homes and prevent mass uprooting, it would strengthen America’s infrastructure overall. However, to get this done, local and state governments will have to act fast. The biggest problem in my analysis is the fact that it is easy to blow up new plans or at least delay them at the local and state levels, not to mention that many American cities and states struggle with state capacity. In this context, state capacity means the ability to do things directly and not having to outsource anything. While I consider this the best-case scenario, I also consider it the least likely.

None of the likely options are good.

So it’s about picking the best one.

You don’t have a better bad idea than these?