Reimagining Homeowners Insurance, with Carolyn Kousky
In a recent episode of Resources Radio, host Margaret Walls sat down with Dr. Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund, to discuss the current state of homeowners insurance. Their conversation explored the challenges facing the market, particularly in states heavily impacted by extreme weather, and the innovative solutions being developed to address these issues.
Walls began the discussion by highlighting the core issues: the increasing instability of the homeowners insurance market, especially in regions prone to extreme weather. Kousky explained that this instability stems from a combination of factors, including the rising frequency and severity of climate-related events, the subsequent increase in insurance costs, and the strain placed on insurance providers to cover substantial claims.
The Drivers of Instability
Kousky identified several key drivers of the current instability.
“We’re seeing risks go up year on year on year, and that’s making insurability more difficult … We’re seeing places where events are becoming really frequent—think coastal tidal flooding—and events that happen many times a year. You can’t pay to insure those … On the other hand, we’re also seeing extreme events get even more extreme—record-breaking at the other end of the distribution, and that also is making it harder to provide insurance.” (15:25)
One significant factor is the escalating impact of climate change. As the climate warms, the frequency and intensity of extreme weather events, such as hurricanes, wildfires, and floods, are increasing. This trend leads to higher insurance payouts, forcing insurers to reassess their coverage and raise premiums. In some areas, the risk has become so high that traditional insurance models are struggling to remain viable. Coastal flooding, for instance, is becoming a frequent occurrence in some areas, making it nearly impossible to offer affordable insurance.
Another contributing factor is the rising cost of construction and rebuilding. Following major disasters, the costs associated with repairing or replacing damaged property have surged, driven by factors such as supply chain disruptions and increasing labor costs. These inflated costs translate into higher premiums for homeowners.
Insurance for Good: Bridging the Gap
Kousky introduced her nonprofit, Insurance for Good, an organization dedicated to bridging the gap between research and practice in the areas of affordability, equity, and resilience within the insurance sector. Insurance for Good aims to facilitate collaboration among various stakeholders and leverage risk-transfer mechanisms to support social and environmental goals. These goals include:
- Improving equity in disaster recovery.
- Driving investments in resilience.
- Accelerating the clean energy transition.
- Supporting nature-based solutions.
Through shared resources, education, capacity building, open-source innovation, and policy and regulatory reform, Insurance for Good seeks to build these goals. The organization is creating a community of practice and offering resources, education, and training to stakeholders.
The Role of Insurers in Building Resilience
Kousky emphasized the potential for insurers to play a vital role in fostering climate resilience. She highlighted how disasters can also present opportunities to rebuild communities more sustainably.
“Disasters are this huge tragedy, and yet, they’re also a time when our building stock gets turned over. And so, it seems to me that they also need to be considered a really important opportunity to build differently … With over 90 percent of American households having homeowners insurance, insurers have a natural role of providing better information to people about what measures they need to take, what changes they need to make, and potentially give them extra dollars to do those retrofits at the time of rebuilding.” (21:23)
Insurers can provide better information to people about what measures they need to take, what changes they need to make, as well as potentially giving them extra dollars to do those retrofits at the time of rebuilding. She envisions a future where insurance policies incentivize and support proactive measures to reduce risk and make communities more resilient to future disasters.
Public Policies and Long-Term Benefits
Kousky also noted the importance of public policies that support resilience and offer long-term benefits, dispelling the notion that building back safer is a time-consuming and expensive endeavor.
“There’s this mistaken idea that building back safer means it’s going to take a really long time and a ton of money. I think we need to change that mentality and make sure that that’s not true—make sure that you can do it on the same timetable and that everyone understands that that’s lowering future losses and keeping people safer.” (23:35)
By prioritizing resilience measures, communities can enhance their ability to withstand future events and reduce the overall costs associated with disasters.
In conclusion, the discussion with Dr. Carolyn Kousky provided valuable insights into the challenges and opportunities facing the homeowners insurance market in the face of climate change. The conversation underscored the need for innovative approaches, proactive risk management, and collaboration among various stakeholders to create a more sustainable and equitable insurance landscape that can effectively protect homeowners and communities in the years to come.
