Historically, the insurance industry has focused on long-term strategies for climate risk mitigation and recovery planning. But that alone no longer works.
The situation is grim. In 2024, the U.S. experienced 27 weather and climate disasters that incurred over $1 billion in losses each, and economic losses reached nearly $218 billion – an 85% increase compared with 2023. Globally, economic losses totaled $368 billion. Extreme weather is also becoming more frequent. From 2000 to 2019, there were 6,681 climate-related disaster events, while the previous 20 years only recorded 3,656. With losses this devastating and disasters becoming more common, consumers and policyholders cannot wait weeks, or even months, for insurance payouts.
This is a challenge for homeowners and business owners alike. According to FEMA, 43% of small businesses affected by a disaster never reopen, and a further 29% go out of business within two years of the disaster. Consumers may also not be able to pay for the work that needs to be done to repair their properties if an insurance check is being held by a bank or mortgage servicer. Electrical blackouts could also lead to overdrawn accounts, and the stress of rebuilding and returning to normalcy could result in missed bills and ballooning credit card debt.
These challenges clearly illustrate the need to pivot. A comprehensive resilience and recovery plan must reflect the current risk environment and should include a healthy mix of both long- and short-term insurance solutions to effectively support consumers, fill in the insurance protection gap, and create a financial safety net that is broad and inclusive.
Before creating the solutions, we need to acknowledge the issues preventing the industry from resolving key policyholder pain points.
Despite the clear evidence demonstrating how climate perils are related, long-term insurance pricing and solutions don't reflect that correlation. While the wildfires in Los Angeles have been extinguished, Angelenos aren't in the clear yet. Following the fires, they were inundated with rain, causing mudslides and debris flows that shut down one of their major highways and swept cars into the ocean. This was not a coincidence. Extreme heat can serve as a catalyst for wildfire by creating drier conditions, making vegetation more flammable and accelerating the spread of fire. But it can also alter rainfall patterns, often leading to more intense rainstorms following a wildfire.
Extreme heat's ability to act as a driver for both wildfire severity and increased precipitation is a prime example of the ways climate risks are innately connected, illustrating the need for insurance to factor the relationship into modeling and insurance products. While accurately forecasting these related climate risks is difficult, it is possible. Farmers have long paid attention to these longer-term cycles. Insurance should look to do so, as well. The industry must create a solution that supports policyholders and provides proper protection from natural disasters and climate perils.
Long-term insurance policies have been the industry standard for centuries, but too often the claims and payout processes can feel never-ending. It can take four to eight weeks before a standard flood claim is finalized and paid. Without any complications (although there typically are many), home insurance claims could take anywhere from a few weeks to several months to settle. Both situations force policyholders to rely on their savings to rebuild after the devastation.
Just one inch of water in a home can cost up to $25,000 in damages. Meanwhile, the average American family only has $62,410 in liquid savings, and insurance rarely accounts for the other economic damages that can be rendered post-disaster. Policyholders don't just have to replace their physical assets, they also need to allocate funding for short-term accommodations, emergency childcare, and potential medical expenses not covered by health insurance. Rebuilding may also require policyholders to miss work, increasing the financial burden. Others may not even have a workplace to return to if it was destroyed.
Insurance coverage also isn't available in the markets that need it the most. States like California, Louisiana, and Florida have borne the brunt of recent natural catastrophes, while simultaneously experiencing the departure of multiple carriers from their markets. This combination of factors has exposed millions to economic losses and potential financial devastation.
This is where parametric insurance can help.
Incorporating parametric products as a complement to traditional insurance is an effective way to rapidly infuse capital into communities after disasters. This helps to ensure that policyholders' immediate needs are met while providing space for long-term capital to deploy. The two products working in tandem provide a comprehensive resilience solution.
Parametric insurance products have already been successfully deployed in the Pacific, Colombia, and India, among other markets, and in other branches of the insurance industry, such as travel insurance and event delay insurance. However, the U.S. hasn't seen a deep proliferation of the model in catastrophe or property insurance yet. To date, there have only been a handful of pilot programs, as seen in Mississippi and California.
This is partially because insurance is regulated at the state level. If carriers wanted to add parametric coverage to existing insurance products, it would require teams of people to do so and a drawn-out regulatory process. The natural solution, then, is for carriers to turn to managing general agents (MGAs) to help address the market's parametric needs.
MGAs have flexibility that enables carriers to reach new markets and customer bases without having to add additional personnel or execute complicated paperwork. The technology-focused aspect of many MGAs can also help carriers streamline the claims and product creation process, thus constructing insurance products that meet policyholder needs.
A multi-faceted resilience strategy is the key to short- and long-term recovery.
The insurance industry has the technology and models to provide capital faster than traditional catastrophe and property insurance policies. What it hasn't been able to figure out is the human element of decreasing the timeline for claims processing after an event, even for some of the larger policyholders. But parametric insurance helps fix that problem.
The parametric model's ability to pay out a claim as soon as a specific criterion is met helps eliminate some of the embedded bureaucracy that causes frustration for the policyholder and for the carriers themselves. This is especially important during a time when public perception of the insurance industry is at an all-time low.
To provide true resilience and recovery in the face of mounting climate risks and worsening perils, the insurance industry needs to provide both short- and long-term insurance solutions that work in tandem to support consumers after a disaster. Neither strategy will work in isolation.
