Some people don’t believe the climate is changing, but the insurance industry sure does.
By its nature, the insurance industry is averse to risk. However, as the climate changes and natural events such as floods, hurricanes, and fires increase in frequency and intensity, insuring residential and commercial structures in disaster-prone areas is a growing liability. Some providers are even opting to leave the market entirely due to the increased financial risk of providing protections in these areas.
For Washington state insurance commissioner Mike Kreidler, rising rates is just one challenge the industry faces in light of climate change. Since 2007, Kreidler has chaired the National Association of Insurance Commissioners’ climate change and global warming working group, advocating for insurers to disclose if, and how, they are preparing for the increased risks. Here, he discusses how regulators, policy providers, and architects can work together to prepare and protect the built environment.
Let’s set the record straight—is climate change impacting insurance policies?
I don’t think there’s any question that it’s having an impact on insurance rates, and certainly on insurance company behavior. There is a reluctance on the part of insurers to insure where they are going to face a significant amount of risk. They are interested in avoiding selling too many policies in an area where the risk is beyond their tolerances. We see that right now in the state of Washington with fire. There is a reluctance by at least one insurer to write more business in areas that are prone to wildfires. How many of the wildfires we experience are attributable to climate change? I’m not in a position to make that call. But this is a case where we are seeing a change in insurance company behavior as a result of the risk exposure that they experienced in that particular area.
Whether it’s tornadoes, hail, hurricanes, or flooding, you’re going to see this behavior by other insurers.
What does this mean for policyholders?
For homeowners, you could see higher rates, particularly if the insurer is concerned that their risk profile is higher than what they had originally subscribed to. Or, in the case of acquiring insurance, policyholders are going to find that there may be fewer insurers in that market.
I have been trying to discourage insurance companies from saying, “Oh, let’s just pull out of markets, let’s stop writing.” I would not be surprised if after this hurricane season insurers re-evaluate where they offer insurance, what they charge for insurance, and where they are marketing going forward.
How can the insurance industry both manage financial risks and provide policies?
I think insurance companies must pay attention to the building codes. It’s one thing to make it easy so contractors are warm and fuzzy. It is another to make sure that you have a structure that you want to insure.
Insurance associations are very sensitive to this and they are paying a great deal more attention right now than they were historically. They still have a long way to go to get as engaged as I think they should be. I am certainly encouraging the industry to be more imaginative and inventive in coming up with new types of insurance and I want to be encouraging and supportive of those kind of changes going forward, but I’m leaving it up to the industry. It is their money.
Is the industry making these changes?
You’re starting to see it from certain segments of the industry, such as the re-insurers [insurers of insurance companies]. They’re starting to realize that they could get hurt a great deal if they are not more responsive. Even the primary insurance companies are starting to push back, saying, “Hey, we’ve got to get a lot more engaged on this.” They recognize that down the road, liability might come back and haunt their industry.
What happens if companies opt to close shop and cease offering certain policies?
We’ve got constituents that are getting pretty angry about the prices they have to pay for insurance or the lack of availability of insurance. That kind of pressure on policymakers is one where ultimately policymakers can come back and say to an insurance company, “You want to do business in our state? Then you’re going to offer homeowners insurance in these coastal areas even though there’s a higher potential here for experiencing a loss.” And that is not a good practice. I don’t think you’d find a regulator who would endorse it because you wind up potentially compromising that insurer if they’re essentially being required to continue to offer products in an area that is prone to losses.
That is something that makes me very concerned as a regulator. We want to make sure that the financial viability of insurance companies is not compromised because policy lawmakers make arbitrary actions to satisfy their constituents.
Is there anything architects and designers can do?
Absolutely. The debate around climate change specific to the insurance industry is mitigation. Tactics for trying to mitigate against increased potential for loss include building codes, which has a direct correlation with architects, and land-use practices, which also has a direct impact on architects.
It’s in the insurer’s best interest and the architect’s best interest to make sure that changes in building codes are not arbitrary and capricious, but actually have the most impact on the resilience of these structures in a way that is compatible with both the insurance company and the building owner.
This interview was edited for length and clarity
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