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Climate Change Risks And Insurance Policies


Over the past week, people living everywhere from the Gulf Coast to the Northeast experienced the flooding and destruction brought by Hurricane Ida and its remnants. In the West, massive wildfires continue to burn, affecting thousands of people and their property. Many homeowners who've had their properties damaged or destroyed by these events are relying on their insurance policies to help finance their recovery. But as anybody who's ever dealt with insurance companies can tell you, the process of filing claims can be complex and frustrating.

Last week, President Biden scolded insurers after reports surfaced that some providers would not cover the claims of people who chose to evacuate ahead of the storm but were not mandated to do so. The companies changed their tune, but only after being called out by the president. Meanwhile, in California, some property owners are reporting being dropped by their insurance as companies expand the areas they consider too vulnerable to wildfires.

We wanted to hear more about the role of insurance companies not just in the aftermath of disasters, but also rebuilding and planning ahead to a future when wildfires and storms grow more frequent and more intense because of climate change. We called Howard Kunreuther for this. He is a professor at the University of Pennsylvania, where he co-directs the Wharton Risk Management and Decision Process Center.

Professor, Kunreuther, thank you so much for joining us.

HOWARD KUNREUTHER: Well, it's a pleasure to be with you, Michel.

MARTIN: So this past week, the remnants of Hurricane Ida caused heavy damage in areas that don't normally experience that type of extreme weather. I'm thinking like Philadelphia and New York, for example. With events like this likely to become more frequent, how is the insurance industry adapting, if at all?

KUNREUTHER: Well, they are definitely likely to become more frequent, as you alluded to. Climate change has really been a factor here. And if these events are going to become more severe in the future, both because they're more likely or - and they may cause more damage, we're going to have a real challenge here because the insurance companies are going to say, we will have to charge a higher premium. And that can cause a problem.

And I think that Hurricane Ida is a very good example of that. They were talking about this as a 1-in-500-year of a hurricane. But they said it might be as frequent as 1 in 50. Now, if it happens to be a 1-in-50-year hurricane and it doesn't actually cause any more damage than it did right now, you would have 10 times the premium because the chances of that event occurring would be 10 times as likely as it had been in the past.

MARTIN: So I'm going to ask a question which I know is going to be uncomfortable for a lot of people, particularly people who have just experienced a devastating loss and are still dealing with all that that entails, both, you know, emotionally and financially. But I still have to ask - which is, is there a way in which insurance companies help perpetuate unsustainable practices in the face of climate change? I mean, is there a way in which our system basically allows people to keep doing the same things that they've been doing, even if those practices are no longer viable?

KUNREUTHER: Well, this is an excellent question. And it's not an easy one to answer when you look at just the private sector alone. What you're really raising is, do we need public-private partnerships to deal with these problems? Because there are many people in these areas, as we're very aware of, who are low-income people. And if they were going to have to pay a premium that would reflect their risk, they would say, I can't afford it - rightly so, because the premium is going to be much higher.

So you have to have work that is done. And the Federal Emergency Management Agency and other groups - and certainly our Wharton Risk Center - have been focusing on the issue of affordability. And one of the factor - one of the things that we have been arguing with - and FEMA, the Federal Emergency Management Agency, has also been pushing - is the notion that maybe you will need some kind of means - a voucher, you know, a means-tested voucher, something that will relate to how high your income would be and - like a food stamp. And that would be given to people who were low-income.

But a condition that we would like to see happen would be that if a person is given that, they're also - are told they can mitigate their house and make it safer and give them a low-interest loan, a long-term loan so they can afford to mitigate. And in the process, you will have the premium coming down. You'll have the federal government paying less for the coverage. And you'll have people protected against the disasters that will be coming in the future.

MARTIN: Is this one of those situations where you feel like you've been kind of shouting in the wilderness? Because this is not exactly a new problem. It's a relatively new problem from the standpoint of the visibility and the number of people that it's been affecting. But I can imagine that you've been actually sounding this alarm for quite some time. And I just wonder, do you feel like - is this a situation where you feel like you've been kind of, you know, sounding the alarm and, like, nobody's listening? I guess that the question is, are people listening to you now?

KUNREUTHER: (Laughter) Well, I think what has happened now today is with these disasters, everyone is paying more attention. We know that. And I think that now we have to put the issue of affordability on the table in a way that we haven't done it before because so many people are living in these high-risk areas, and they are of low income.

MARTIN: As we know, California is still in the middle of its wildfire season. Some people are saying wildfire season is all year now. But already, more than 1 million acres and more than 3,000 structures have burned. What should people be thinking about if they live in one of these areas that is deemed high risk?

KUNREUTHER: Well, this is very, very important. And I think there are two things that I would say. One is that people have to realize that by taking action to make their house safer, they will be helping everyone else in the community avoid the wildfire. The risk is not just from an outside source, like a forest. It's the spreading of the wildfire within the community itself. And so there's a real opportunity here for people to recognize the importance of that, for communities to enforce - well enforce building codes and land use regulations to avoid some of these losses.

And there are communities in California that have done this. I'll mention just one. Montecito, Calif., has actually taken steps to really reduce the risks of wildfire. When they had a recent wildfire, there was much less damage than they had in the past because they had actually gotten their community to actually take those measures. So that, I think, is the way one has to do - deal with it. And I think that people are paying attention to this. It's not the end of wildfires, but it certainly is likely to reduce the damages in the future.

MARTIN: That was Howard Kunreuther. He is a professor at the University of Pennsylvania. Professor Kunreuther, thank you so much for talking with us today.

KUNREUTHER: Well, thank you, Michel, for giving me the opportunity. I very much appreciated and enjoyed our conversation. Transcript provided by NPR, Copyright NPR.