Is insurance doomed?
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Karen Clark says she wasn't that nervous when she walked into the Lloyd's of London offices, one of the oldest and, at the time, most powerful insurance marketplaces in the world. She was there to tell over 100 well-dressed, very polite British men that they were doing their job all wrong. And I was seven months pregnant.

So I waddle into the room and I make this presentation and there was just silence in the room. I think they must have thought, you know, where's the punchline? Karen was using newfangled 1980s computers to model the worst case scenario.

a devastating climate catastrophe. And her model said a disaster like a direct hurricane hit on Miami would cost the insurance industry $60 billion, nearly 10 times more than these experts thought possible. They had their tried and true methods of assessing risk. And they

They had been making a lot of money, so they felt that they had everything all figured out.

Risk is a combination of two things. First, the hazard. So in this case, the hurricanes. It's not really enough to know what-if scenarios. So for example, what if a Category 4 hurricane hits New York City? Or what if a Category 5 hits Miami? That's very interesting information, but what is the probability of that? And the second part of risk is the exposure.

In other words, what are the things, buildings, bridges, property that are in the path of the hurricane? People were moving to coastal areas and particularly Florida in droves. So insurance companies were not tracking the values of the homes that they were insuring. But it didn't take long before Karen's catastrophe models were put to the test.

A hurricane watch is now in effect for South Florida. So Hurricane Andrew, I remember like it was yesterday, made landfall at 5 a.m. on August 24, 1992. It is starting to rock and roll out here. Raging storm surges and treacherous winds battered Florida's southern coast. We have no Miami radar, so we can forget the Miami radar. It fell off the building.

Karen and her team ran the numbers again and again, trying to get a sense of just how much devastation Andrew would bring. I never doubted myself until an hour before we were about to release this fax that the losses, industry losses, could exceed $13 billion. Honestly, even I was thinking, "Wow, that's a big loss. What does that look like? Could that be real? Could that be right?"

Well, I will tell you, Meredith, the phone started ringing off the hook. Nobody believed it. They thought we were crazy. I remember the quotes today. A few mobile homes in an Air Force base. How much can it be?

But as the storm passed, the destructive power of Andrew was clear. It looks like the aftermath of nuclear war in many places. At the time, this was 1992, Andrew was one of the strongest and most expensive storms to have hit the country.

with insurance claims coming in over $15 billion. Is there enough insurance money out there to rebuild these communities? In the aftermath, nearly a dozen insurance companies went bankrupt. The whole industry was in shock.

and Andrew had just missed downtown Miami. Right there, it sure saw that, oh, had Andrew struck 50 miles north, the losses would have been about $60 billion. All of a sudden, Karen's fringe models seemed prophetic. The world really changed, I would say, after Andrew. It was really a wake-up call

Hurricane Andrew was a risk reckoning, rippling out from southern Florida to the whole world as global insurance markets completely transformed their perspective on the risk of climate disaster. And now, more than 30 years later, after Katrina and Harvey, after Irene and Maria and Helene,

We're in the midst of another risk reckoning, this time for climate change. I'm Meredith Hodnot, and this is Unexplainable. ♪

Insurance is where the rubber meets the road when it comes to climate change. This is sort of the first place where we start to see the effects manifest in our economy. Umair Irfan is a correspondent at Vox, reporting on all things climate and science. Even before you see some sort of damage from an extreme event or anything like that,

The first impact most people are likely to experience related to climate change is a higher insurance rate. Umair is the one in the newsroom tracking every major storm and putting everything in context. I mean, insurance has always been kind of on the margins of a lot of the disaster reporting that I've been doing. So every time a hurricane comes through, you know, you talk about the wind speed, you talk about how much flooding there is. And then in the aftermath, you talk about the damages, you talk about the dollar amount.

So from there, I started looking at, well, how do insurance companies start reckoning with climate change? How are they reckoning with some of this extreme weather? As someone in the insurance industry, intellectually, I understand it. As a homeowner, it's awful. It really sucks. I talked to Joe Scuba, and Joe is actually an executive at an insurance company.

This is his bread and butter. And here he is struggling to get insurance on his own home. As I talk to friends, they're like, oh my God, you know, you're in insurance. Have you seen this? Are they raking me over the coals? Am I getting taken advantage of? Like, no, man. I mean, it's been a lot. Joe lives in New Orleans, and he bought his house a few years ago at the start of the pandemic.

He loved the neighborhood. It's not far from the Mardi Gras parade routes. And he loved how much space he had to raise his now 10-year-old triplets. Got a nice little yard. It's nothing huge, but it's there and there's room to go play outside. And a nice place to live, I think. Most importantly, it was above sea level. Something to really consider in New Orleans. You know, we've lived through Katrina and had families whose houses were underwater for weeks before.

And trying to stay out of that danger zone was certainly key for us. That first year, Joe's home insurance premiums weren't that bad. And then each year after that, things got a little tighter and a little, oh, well, you know, we're raising rates a little bit. We're raising rates a little bit. It wasn't like we moved in and it was such a stretch that, boy, if my mortgage goes up by a dollar, I'm in trouble. Right. There was margin there. But boy, that margin is eroding pretty darn quickly.

Even as Joe's premium skyrocketed, his job in the insurance industry gave him a unique perspective. If the prices are going up and the options are going down, it's not because there's, you know, a sinister greed behind all of it. It's because somewhere a math equation was done that said, if we keep doing that, there won't be enough money for all of the other people that we're trying to insure.

So what is causing insurance prices across the country, not just Joe's, to explode in just the last few years? The climate is changing, and this is the really fundamental thing. This is the ground that is shaking beneath everybody's feet. But of course, climate change isn't anything new.

We've had warming since 1900, so the models have to capture everything that's happened so far. And then we also need to give our clients insurers future views. Karen Clark's company has been modeling catastrophe for decades.

And she says right now, we're at an inflection point for the industry. There is systemic underestimation in the insurance industry again today, like at the time of Hurricane Andrew, but it's not for hurricanes. Extremes like those big named storms aren't the only ones that cause a lot of damage.

It's the smaller storms, the local storms, the ones that don't necessarily make the national news, that are the hidden arm of climate risk right now.

So severe convective storms, these are the thunderstorms that generate hail, tornadoes that, you know, we see almost every day, more extreme wildfires. And winter storms, the Arctic air outbreak we had in February of 2021, where all the damage in Texas, with all the pipes burst and the freeze,

Record-breaking hailstorms, tornadoes ripping through small towns, hyper-local torrential floods, wildfires blazing through remote counties. These are the new generation of smaller disasters that are driving up insurance losses and driving up insurance premiums. These local disasters aren't going to bankrupt insurance companies.

they're happening everywhere and they're reaching greater and greater extremes. And as these disasters, big and small, add up, local insurance companies turn to the global system of reinsurance to make sure that they can cover the claims without going bankrupt. This insurance for insurance comes from just a handful of companies that hold a lot of power over the industry worldwide.

You can have a situation where if you have one year where you have a whole bunch of disaster losses in different parts of the world, you have typhoons in the Philippines, you have an earthquake in California, wildfires in Brazil. Lots of different insurance companies are going to be making claims against the reinsurance company, and then the reinsurance company is very likely going to raise the rates for everyone.

So even if I'm here in the middle of Illinois and I managed to avoid all the wildfires and hurricanes, my insurance rate is going to go up partially as a consequence of all these other disasters. So every disaster in the world in a tiny way is trickling down into my insurance policy.

Then there's the other side of climate risk, not the hazards, the disasters themselves, but the exposure, the things and people and property that's in the way. And while climate change is having an impact on most weather-related perils, the primary driver of increasing losses over the past few decades have been increasing property values.

A lot of home insurance policies in the U.S. are for indemnity insurance.

Meaning that if your home is damaged or destroyed, then the insurance company is mostly on the hook to pay, you know, after a deductible, whatever it takes to replace and restore it completely. So if the cost to replace your home has gone up by 50%, your insurance premium needs to go up by 50%, even if there's no change in the rate.

That's because it costs a lot to build anything right now, with supply chain shortages and inflation driving up construction costs. So particularly in places like coastal areas, you know, where you have expensive beachfront condos and houses and mansions. But it's not just luxury vacation homes that are driving up risk.

In California, for instance, they're dealing with a housing crisis. The big cities are really expensive, and so you see people moving further into rural areas into this place called the wildland-urban interface, where urban development meets nature. And at that interface, that's where you actually see some of the highest wildfire risk.

And so as these economic forces and social forces are pushing people into these high-risk areas, we're seeing a greater amount of exposure. We are still the biggest driver of increasing losses, not Mother Nature, not the environment, because we're continuing to build very expensive properties so that when there's a hurricane or when there's a flood, there's just more property to destroy. The cost to bring my house back to new or back to what it is

Joe spent the last few years watching his insurance premiums get more and more expensive. And then two years ago, he just couldn't find insurance at all.

Myself and all of my neighbors and all of my friends and all the people that live around here, no one can get insurance. You know, maybe the insurance industry paints the region with one broad brush and one color and it just says, red, avoid. This left Joe and a lot of other homeowners in Louisiana in a pretty tricky situation. If you live in a house, odds are if you don't own the house outright, you have a mortgage.

And in order to get a mortgage, in order to get a loan from a bank, you need to have insurance. And if you lose insurance coverage for that house, the bank is going to require that you buy insurance in order to stay in that house. There's a breaking point coming. What does that look like? What does it mean? I don't know, but I'm part of this insurance industry. I know kind of that bigger picture and how and why it works and

Maybe all that helps me do is be angry at the right people. I don't know that it matters much in the end. I think part of the whole thing of New Orleans is there's so much culture and charm and awesome stuff here that people don't want to leave. But boy, it's getting harder and harder to stay. So what does it mean if the future is uninsurable?

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Risk is invisible. People don't see risk until something bad's happening, unless you're the person running the models and doing the assessments. Carolyn Kuski works for the Environmental Defense Fund. And I look at the economic impacts of climate change. In particular, she's spent a lot of time studying disaster insurance and Mayer's main question. How doomed is the insurance industry?

That's a good question. And I think how doomed the industry is depends a lot on policy interventions and what we do in the next few years. Rising insurance rates have been a confluence of things. And it is definitely the case that because of our prior period of high inflation, supply chain disruptions, labor shortages, that is part of what's driving up higher insurance costs.

Absolutely. What we also see, though, is that rates are going up even more in the areas of high climate risk. And where insurers are pulling out of markets, it's areas of high climate risk. And as risks go up, you can increase the cost of insurance to still keep it viable, but then you're making it harder and harder for low- and middle-income Americans to afford the coverage they need. That is now front and center for lots of people.

The increasing rates, the declining availability have really started to hit households in a way that's really making clear the economic impacts of climate change. And so I think we're at a window where we know we need solutions. We can't keep letting this spiral out of control.

And if we are not careful in those, though, we could lock in policy change that doesn't lower our risk going forward and essentially makes insurance a luxury of the affluent. And so I think we need to think really carefully about our policy interventions at this moment and make sure they're getting us the long-term objectives that we want. How do insurance companies then determine where to set your deductible and where to set the premiums?

Yeah. So that's the rise of what are called catastrophe models. These are big models that insurance use to decide where to offer policies and how much to charge for them. And

That's been really important for a number of reasons. One is the historical record is too short if you're talking about rare events. You can't just look at a few decades even of data to estimate very rare events. But more importantly right now, these risks are changing and quite a bit because of climate. And with climate change, we now need models to understand because our future risk doesn't look like our past risk anymore.

Is anyone besides insurance companies using these models? Yeah, I think this is a really important conversation to be having right now because as climate risks are escalating,

All sorts of groups are needing better information on their risk and how it's changing. Everything from a household deciding where to move to local governments deciding about land use and zoning and citing infrastructure to big companies trying to figure out where to put their buildings. And so we've seen huge increasing demand from many types of players for climate risk information.

Unfortunately, many of those players don't understand how that climate risk information is produced.

And that's creating challenges because there are some models that are frankly a lot worse than others or that have very problematic assumptions or that might be good but are just not fit for your purpose. But without that understanding, it can be very difficult for users to know what type of risk information they should be drawing from. So it's a very live issue to figure out how to give people the guidance that they need. And there's been many groups calling for

open source, transparent models that people can have a lot of faith in. Well, then what happens if all the math, all the models don't work out and the insurance companies just decide it's not worth the risk? Yeah. What would it mean for the future to be uninsurable? I think there are concerns about the private market leaving high risk areas. But what we have seen happens then is that the government provides insurance.

The government provided flood insurance. These state programs are providing insurance. So when things become uninsurable, it really means we have the public sector pick it up. And that's still a tension that we're seeing right now because what's happened in the last few years is that many insurance companies have raised rates or exited these high-risk areas, forcing consumers into these state programs.

So California, Louisiana, Florida have all seen dramatic increases in the number of residents who have to find coverage through the state program. And so that's raising these questions of who should pay for the cost of disasters. In the case of Joe, the insurance executive who was struggling to find insurance on his own home, he was forced to go to his state's public insurance program.

Louisiana citizens. Well, it's not an exaggeration to say that everyone I've spoken to has to be with citizens. Just everyone below I-10. The state-run insurance companies, they function basically as what they call an insurer of last resort. But

the coverage that they provide is just frankly not very good. And that's by design. It's very expensive policies that have very high deductibles and that don't cover very much because again, it's just meant to be an emergency backstop. The trouble is with all these private insurers pulling out, there are a number of people in a lot of states who are finding out that they have no option other than these state-run insurance companies. So the last line of defense becomes the only option.

If another Katrina, God forbid, occurs and the city has just overwhelming losses or the state in general, right? I mean, the money has to come from somewhere. And at the end of the day, it's coming from taxpayers. So Joe is stuck paying premiums he can barely afford in a house he doesn't know if he'll be able to sell.

In a state that's on the hook for footing the bill, in a world where the risk of climate disaster just keeps ratcheting up. You know, in 10 years, will I have waterfront property? Will I be underwater? Will it be pretty much exactly the same as it is right now? I can't answer that, but it absolutely is something that

is being brought to the forefront in terms of risks. So my wife and I have conversations from time to time about, well, where would we go? This isn't just a Louisiana issue. This isn't just a New Orleans issue. If it's hurricanes here, it's flooding there, it's wildfires there. It's not just one city. It's not just one state. And here's where it gets doomsday, right? We're all used to hearing the hottest year on record, hottest month on record,

If you flip that and say, that means this summer was the coolest you might see in your lifetime, that I think starts to drive home what we're dealing with. There's really no way around it. If you're going to be facing more sea level rise, more flooding, more wildfires, you really need to find a way to reduce those overall risks. And the insurance industry might be in a unique position to do just that.

It may seem like our current insurance crisis is locked in. The inevitable outcome of math equations and catastrophe models. But the insurance industry has leverage to reduce our overall climate risk. They're very powerful players because they're sitting on giant piles of money. Trillions of dollars of capital, essentially, is running through these companies. So, like, insurance companies are a lot like banks in that regard. Like, they don't just...

put your premium money in a vault and save it for a literal rainy day, they do invest it. Reinsurance companies are especially investing in clean energy companies. Like, they are trying to promote investments in businesses and in practices that they think are going to reduce risks over the long term. In the short term, though, climate disasters, from big-name hurricanes to local hailstorms, are going to be a bigger and bigger part of our lives.

But there's also real opportunity here for insurance companies to help us lower our exposure to these disasters. There's a really big opportunity for insurers to lean in and helping their policyholders after a loss to rebuild in a way that's more resilient. To say, "Okay, now you need to repair, but let's do it in a way that is making your home safe for the future and the future risks that you're going to face."

And maybe by putting all these pieces together, we can get out of this crisis, look risk in the eye, and stabilize the insurance market right when we need it the most. There's not a silver bullet answer. There's not a perfect program to implement or product that's going to solve everything. There's not some new standard to design to because risk is going to keep changing. What we need is a shared culture of risk management.

which means bringing people into the insurance conversation that are new to it. This episode was reported by Omera Fahn, produced by me, Meredith Hodnot, and edited by Matt Collette, with help from Jorge Just and Noam Hassenfeld. Sound design and mixing from Christian Ayala, music from Noam, and fact-checking from Anouk Douceau. Bird Pinkerton dove deep.

Past a school of clownfish, past a great barracuda, past a whole bunch of sea turtles. And then, almost a thousand feet below the surface, she saw it. The capital of the pufferfish metropolis, Buffalo. And as always, thank you to Brian Resnick for co-founding our show.

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