How Insurers Can Support Climate Adaptation

October 26, 2021

Kelly Hereid

Kelly Hereid, PhD, CCRMP, is the director of catastrophe R&D at Liberty Mutual in the Corporate Enterprise Risk Management group. She specializes in climate change and emerging risks. She has a PhD in Geological Sciences from the University of Texas – Austin, focusing on climate science, and a BA in Geology and Biology from Carleton College in Minnesota.

Decarbonization of the economy must be paired with adaptation to prevent inevitable climate impacts. Insurers have a unique opportunity to take on a climate risk translation role that expands the concept of insurance beyond the single client/single year paradigm to drive reductions in climate impacts, protecting the long-term availability, affordability, and reliability of insurance.

System-level thinking

Historically, single-policyholder coverages have been key defensive resources for individual properties, but this strategy may not be optimal. The costs of elevating a single home may be worth the expense for reduced flood insurance premiums. But if every home in the community is at similar risk, it is more economical to invest in community defenses like levees to reduce risk for all at lower cost. Similarly, many costs of increasing climate hazards accrue directly to communities, such as increased costs to maintain defensive infrastructure, or impacts to local revenue, such as reduced property tax bases after disasters. Insurers may help identify economies of scale and provide financing through innovative risk transfer products and public-private partnerships that account for the broad spatial scale of climate hazards.

Risk advisory services

Buildings integrate climate risk over decades, so an acceptable risk today may be unacceptable in the future. While parts of the residential real estate sector attempt to provide forward-looking assessments through partnerships with external data providers, a lack of scientific climate risk translation leaves consumers confused with conflicting information on their future risk.

The insurance industry could build on its relationships as a trusted risk assessment partner and leverage its deep bench of catastrophe modeling and engineering expertise to translate climate risk to action. For example, risk engineers could advise industrial clients on which parts of a facility would be susceptible to future flood risk to prioritize mitigation. Or a prospective homeowner could not only get an insurance quote for today, but also see how risks change over the course of their mortgage. These risk advisory services could expand the meaning of insurance.

Insurance product innovation and risk advisory services at the community scale that account for future risk could provide crucial support for climate adaptation alongside decarbonization.