While the risks associated with climate change are getting bigger every year, research shows that America isn’t adequately investing in protecting itself. That’s where the insurance industry comes in.
According to Zillow research, $400 billion of real estate value could be at risk from climate change by 2100 – in Florida alone. But a new article in the
Harvard Business Review argues that private insurance companies could lead the way in helping society adapt to climate change risk.
Celebrate excellence in insurance. Nominate a worthy colleague for the Insurance Business Awards!
The insurance industry, in its quest to adapt its pricing strategies to account for climate change, could lead the way for society at large to adapt, according to the
Harvard Business Review. If it becomes more expensive to insure a house on the coast, for example, homeowners will have an incentive to live elsewhere. Likewise, insurers who offer discounts for climate-proofing homes will incentivize homeowners to do so.
However, if insurers want to lead the way in combating climate change risk, the
Review insisted, they will have to improve their use of data. The Review gave the example of a zip code where everyone was charged the same homeowners’ insurance premium.
“Given that zip codes can cover a lot of areas, such a pricing policy would implicitly subsidize those members of the zip code who live in the risky coastal part, at the expense of those who live further from the water,” the Review said.
Improvements in geospatial sciences open up the possibility of much more accurate price discrimination for insurers, the Review said. Differential pricing is the norm for other types of insurance; auto insurers base pricing on customers’ age, gender and accident history, for instance. But until recently, property insurers have been behind the curve on their use of data.
That’s starting to change, however. Aviva Insurance, for instance, uses topographical data to assess flood risks for individual houses.
“As insurers such as Aviva engage in price differentiation for property insurance, holdouts in the industry will face a choice: embrace individualized insurance or lose out on the low-risk insurance seekers,” the
Review said. “Low-risk customers will seek insurers that recognize their risk levels and lower their premiums. And as more and more insurers appropriately price climate risk using more fine-grained data, individuals will face clear incentives to consider those risks when deciding where to live.”
Related stories:
Flood costs set to multiply in coming decades - report
NFIP reauthorization and the future of flood insurance
