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Proposed California Insurance Plan Could Mitigate Climate Risk, Equalize Coverage

As insurance systems fail to adequately protect climate disaster survivors, the California Department of Insurance is proposing a pilot program to encourage long-term risk reduction and close the wealth-driven gap in coverage.

“We know it can take families years to recover from the effects of wildfire disasters and floods made worse by climate change, while communities of colour and our urban residents and outdoor workers labour under intensifying heat waves with fewer insurance protections,” said Commissioner Ricardo Lara of the Climate Insurance Working Group, in a release announcing its latest report. “There should be no gaps between the wealthiest and the rest of us on how quickly we can bounce back.”  

Through a list of 40 recommendations, the report [pdf] describes opportunities for long-term community mitigation strategies focused on “increasing investment in forests, sea grasses, and other natural systems that can lower either the probability of a disaster occurring or reduce losses when it does occur.” The working group notes the success of a similar approach to reducing flood damages in the northeastern U.S., resulting in savings of US$625 million following Superstorm Sandy.

The report identifies an existing insurance protection gap as a weak point in community resilience, reports Law360. To provide broader coverage, the working group recommends community-wide insurance policies to guarantee protection for all residents, using “parametric” insurance policies to improve resilience. (Parametric insurance policies, where payouts are determined by the measure of a disaster event rather than the degree of damage sustained, can provide faster and more flexible funds to disaster survivors, explains Wharton Risk Center.)

“Without greater investment in risk reduction and improved tools for financial resilience, communities are likely to enter a damaging feedback loop where escalating risks lead to increased losses, then financial backsliding, fewer insurance options, and diminished capacity for future resilience,” says the report.

State insurance regulators say the capability of insurers to both underwrite risk and make investment decisions uniquely positions companies “to support achieving better sustainability and combat climate change,” writes Law360. However, mitigating risks and building community resilience is a decades-long process. Essential first steps will include better climate risk disclosures and standardized analysis and metrics. 

“Insurance is one of the few consumer services that can connect climate risk to pocketbooks,” Personal Insurance Federation of California President Rex Frazier told Law360. “That connection can drive needed adaptation and resilience. However, if rules prevent insurers from accurately signalling climate risk to consumers, then adaptation and resilience efforts will be slowed.”