Among the many facets of the economy being challenged and changed by warming global temperatures is the insurance industry.

Damaging extreme events such as wildfires, hurricanes, and floods are happening with greater frequency and intensity, which leaves insurance companies facing larger financial risks and paying out more in claims — and it also leaves policy holders paying higher prices to insure their homes and businesses.

As risks and premiums climb, insurance may become too expensive for some people to afford, and certain properties may be at such high risk of damage or destruction that insurance companies become unwilling to insure them at all.

At the same time, more people are living in harm’s way, with about 40 percent of the U.S. population now residing in a coastal county, noted Vox senior correspondent Umair Irfan, who moderated a recent Climate Conversations webinar that explored how climate change is affecting property insurance.

“There’s a lot of people and property that we have to worry about here,” said Irfan. “And that brings up the looming question: How do we pay for the damages that do occur and distribute the risk? This is a huge concern for the insurance industry in particular, and it’s already forcing a reckoning in the U.S. and around the world.”

Irfan was joined in the discussion by Carolyn Kousky, associate vice president for economics and policy at Environmental Defense Fund, and Nidia Martínez, director of climate risk analytics at the insurance broker and consultancy company WTW.

New approaches to insurance

Climate change is already prompting new types and applications of insurance. Martínez offered an example of how insurance is being used to protect not a home or a business but a coral reef.

Located off the coast of Belize, the reef plays an important role in protecting people living in coastal communities, but it is increasingly vulnerable to damage as hurricanes become more intense, said Martínez. It’s insured using “parametric” insurance, which means that whenever an event occurs that meets certain parameters — such as a hurricane that reaches a certain intensity — a payment is made to the government, which sends workers to clean up the reef.

“There’s been lots of really interesting innovation happening in this space,” said Kousky, but she noted some barriers, including regulatory and policy frameworks that often lag behind new approaches, and the basic economics of trying to develop affordable insurance products in a high-risk environment.

“One of the biggest challenges is designing insurance products that can be profitably offered by the private sector against potentially catastrophic risks — they’re dealing with real risks of bankruptcy — that can be offered at a price point that people can afford and are willing to pay for,” she said. “And that’s a real challenge, especially because we know that the people who need the financial protection of insurance the most are the least able to afford it.”

Collaboration will be key to meeting that challenge, she said. “A really important piece of it, and a piece that’s sometimes hard, is developing new partnerships across sectors. So can we get the public and private sector working together to solve these problems?”

Governments routinely intervene in disaster insurance markets, she explained, given how challenging disaster risks can be for industry. Losses from the severe wildfires that swept through California in 2017 and 2018 wiped out — more than twice over — 30 years of profits for property insurers in the state.

“That’s just not a financial model that’s going to work for the private sector, which is why you see the public sector get involved,” she said. A growing amount of wildfire insurance in California is being provided through the state’s FAIR program, which offers insurance to properties that aren’t insurable on the private market.

Governments have also stepped in when rebuilding becomes too risky, she noted later. Some federal buyout programs will purchase repeatedly flooded areas and protect the land from future development, so that other people don’t move in and face the same risk, said Kousky. However, money for such programs is very limited and very slow to reach people after a disaster — sometimes on the scale of years.

Another possible approach would be for private insurers to allow people to collect claims and use that money to relocate somewhere safer — but this would require a shift from how things are currently done, she said; lenders usually have to sign off on the claim, and they often want people to rebuild.

Building resiliency, and educating about risk

Another way to keep insurance sustainable is to invest in measures that can reduce damage and losses, said Martínez. “Part of the solution is resiliency,” she said. “[When the] same events happen in the same areas — what can we do so we don’t incur the same losses?” For example, eco-forestry management approaches and “hardening” homes could help reduce risks from wildfires and storms.

She later stressed that the problem of climate change is not going to be solved with shortcuts, such as particular products. “What the Earth is doing to us, and what we are doing to it … they are huge, complex issues,” she said. “For starters, we have to teach [about climate change] in school … We will be able to manage this, but we have to be transparent and we have to take this seriously, and it will take a huge change in mentality.”

Kousky agreed. “Education is so important about climate change as an issue — and also specifically for households — about the specific risks they’re facing, and how they’re changing over time,” she said. “And, unfortunately, that’s hard for households to do on their own, and we need to help them. We need public policies and tools that can make that easier.”

She added a bit of practical advice for homeowners: “Ask your agent about the details of your insurance policy. You don’t want to get stuck after a disaster realizing you have a bunch of sub-limits and high deductibles and don’t have the dollars you need.”

• Watch the webinar