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EP40 Carolyn Kousky On Building Resilience Through Insurance (March 18, 2025)
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EP40 Carolyn Kousky On Building Resilience Through Insurance (March 18, 2025)

Speakers

Outline

Dr. Carolyn Kousky’s Background and Motivation for Insurance for Good

Involvement and Impact of Insurance for Good

Protection Gaps and Insurance for Climate Risk

Post-Disaster Response and Behavioral Economics

Lessons from the LA Wildfires and Insurance for Good's Role

 Insurance Safety Nets and Risk Distribution

Parametric Insurance and Equity Concerns

Managed Retreat and Alternative Resilience Financing Mechanisms

Future Focus of Insurance for Good

Full Transcript

*Note: This is an AI-generated transcript and has not been reformatted. Please check against the audio podcast for accuracy*

Louie Woodall: Hi Carolyn, where are you calling from today and what do you do?

Carolyn Kousky: I'm calling from Philadelphia, Pennsylvania, and I think about insurance in a number of capacities. I'm the [00:02:00] founder of Insurance for Good, and I'm also the Associate Vice President for Economics and Policy at the Environmental Defense Fund.

Louie: Those are both weighty jobs you have doing the work of two full time employees, it sounds, by taking the mantle of these two projects. And I want to talk today about Insurance for Good. Can you explain what it's all about and why you felt driven to help set up such an organization?

Carolyn: Yeah, sure. I think some of the reasons we created Insurance for Good are some of the broad trends a lot of your other guests and listeners are aware of and have talked about, the world is getting riskier. Record breaking is now the new normal, and that's true across scales from households and businesses to entire sectors and communities and regions.

We're also facing unprecedented global challenges, right? So that's not only climate change, but rising inequality and biodiversity loss. And these require strong and rapid action across sectors. And part of the concept behind [00:03:00] insurance for good is a belief that insurance can play a positive role in addressing those challenges.

Insurance underpins economic activity. It enables investments that can lead us to a cleaner and more just future. At least that's our vision. And then finally, we need insurance in some ways more than ever as these risks are growing, and yet that's also putting a lot of strain on markets and insurance is becoming more difficult to provide best practices for engagement on these challenges remain uncertain and as the stress In insurance markets unfold, it spills over into impacting household recovery, local economies, housing and mortgage markets.

And so we saw a lot of broad need, but we also saw some key gaps when it came to addressing some of these. This included the fact that information, resources and tools needed for solutions were sometimes non-existent or scattered. We saw a lack of capacity to engage in solution [00:04:00] development, as well as own or advance the partnerships that we believe are really required to solve some of these challenges.

And while we see lots of talk about innovation when it comes to insurance and risk transfer. The number of new approaches on the ground is still pretty limited, given concerns about profit potential and durability and difficulties establishing those partnerships we think are needed. And then finally, the community of practice has been fractured and we wanted to create a hub to bring all those people together.

So that was the background kind of motivation and we think we can fill in some of those gaps that we saw. We are involved in kind of four big buckets of activities under Our broad mission of supporting communities and the public sector in harnessing risk transfer to support their social and environmental goals.

Louie: I would like to know who's involved [00:05:00] in Insurance for Good, right? So you're this convening space, this community of practice. What sort of moves and shakers are you getting under the umbrella of Insurance for Good?

Carolyn: Yeah, we believe this takes a coalition and requires lots of partnerships and we're doing that at different scales. The organization is really focused on helping. local governments, NGOs, and public sector with risk transfer solutions. And we do that through providing shared resources to them, curating trusted content, providing education and capacity building trainings and engagements of different types.

But then we also do work through what we call our solutions catalyst on helping get to those new solutions. And there, we're also partnering with the private sector and with regulators and others to help develop those types of solutions. And then finally, we think there are places where we need some policy and regulatory reform in order to create the institutional structure needed to harness insurance in these positive ways.

And so we have engaged in partnerships with a wide range of [00:06:00] different stakeholder groups in order to get to policy solutions that can really have broad support across a range of, sectors and get to best practice. The organization has two different advisory groups, one made up of community members and nonprofits and the other of private sector representatives to help find those solutions that work on both sides.

Louie: Yes, and it's quite the collection of luminaries on both of those advisory groups I've noted. And maybe we'll talk about them a little bit later. I'm interested to know Insurance for Good is covering a lot of ground. It sounds and I'm interested to know with your I'm interested to know given where we are in the U.S. Politically and how the economy is unfolding in response to the administration and how insurance markets are responding to increasing risks where you think you can have the most effect at this moment in time at this particular political moment as particular risk moment.

Carolyn: Yeah, it's a really good question. I think on the one hand, this risk moment is one of [00:07:00] rapidly accelerating climate impacts that are drawing a lot of attention to the need to better manage these extreme events. And we see that is a very universal concern when people have gone through climate disasters and experienced that suffering, the imperative to reduce that risk is quite clear and is not a political one.

That said, the moment in the U. S. right now at the federal level is incredibly hostile to all sorts of supportive federal policy on both sides of climate, both reducing our emissions to keep these risks lower into the future and the adaptation and risk reduction that's needed. That is presenting a challenge.

One of the challenges. The biggest drivers of instability in insurance markets is when the risk of payouts gets really high. It's almost impossible to provide widespread and affordable insurance in an environment of extreme risk. And so that's going to require a lot of investments in loss [00:08:00] reduction, and that's going to require strong federal leadership and federal dollars, which, unfortunately, both of which are lacking under the current administration. That said, insurance in the U.S. is regulated at a state level, and a lot of the important regulatory frameworks are state by state, and we see states doing a lot of incredibly good work around trying to keep the financial protection of insurance available to their residents, and protect them from the losses in the first place.

So I'm optimistic that really good state and local work is going to continue.

Louie: Yes, I've been hearing that from numerous sources, the hope that states and localities will take up the mantle of some of the federal work that was happening under the previous administration, although they are more resource constrained, right? And they have less ability to leverage the national resources and to gain partners than the federal government.

So I'm personally a bit worried about the loss of capacity and the loss of expertise that was seen at the federal level. believing it [00:09:00] can't really be replicated at the state level. But I believe that groups like Insurance for Good can help to provide a place, a gathering place, at least a place where information could be shared and where maybe expertise can be built up.

And on that point I'm interested in this area of protection gaps, right? This is something that the National Association of Insurance Commission has been talking about. We hear politicians talking about it all the time. The gap between people who need insurance and actually access to insurance. I know this is one of your focuses.

And I'm interested in what you think the biggest blind spots are in how insurance is currently used for covering climate risk.

Carolyn: Yeah, that's a really good question. And we have this now growing body of research that insurance is really critical to providing financial protection to households, to small businesses, to communities. And without it, we see really troublesome short and long term impacts post disaster. And so it really is necessary to provide that widespread financial protection. Some of the gaps that we've been thinking about in particular one is [00:10:00] around non-property related economic costs from disasters. Most of our current insurance. approaches in the United States help with property losses. So your home is damaged, your contents are damaged, helping repair or replace that property.

But we see that disasters also create a whole range of non-property losses. Things like evacuation expenses and temporary housing, cleaning up debris, paying for fuel and generators and that type of thing when you lose. power, paying higher rents post disaster. We see a big impact is that housing supply goes down and demand goes up.

So prices rise. We see a sizable share of households also experience lost income at the time of a disaster. So it makes it a double financial whammy. It's not only the expenses, it's also lower income. And so all of those losses are not being well met by our current models. of insurance. And so that's one type of gap we're interested in. Another one, of course, is just that the households that need [00:11:00] the financial protection of insurance the most because they don't have large savings to draw on, they can struggle with access to credit or lower income households. And we see that they're also the least likely to be insured. So that's another important gap that we're thinking about.

And maybe to your broader point about blind spots, it's not quite a protection gap, but it, but I do think it is a blind spot, which is how do we use insurance? Risk transfer tools to support loss reduction and resilience, both pre and post disaster. And there's some interesting models out there on that.

But I think it needs some more investigating and figuring out which types of models are really impactful and can scale.

Louie: Yes, I come back to this issue all the time about the connectivity between insurers, policyholders and other stakeholders, right? There needs to be channels of communication, channels of information from insurance to insurers to policyholders are back again so that insurers can understand what measures households [00:12:00] and businesses are taking to lower their risk and insurers can respond to that by providing financial incentives like Discounts on in pre insurance premiums, and I know there are a number of U.S. States who also try to provide incentives for households of businesses to take adaptive measures and benefit from it in lower insurance premiums. But I feel like the connective tissue isn't quite there yet. And that's another question I had for you, which is where you see the role of climate risk and insurance tech startups fitting in with your work insurance for good and helping to create that connective tissue.

And I know on your board you have Jonathan Gonzalez of Raincoat, which is an insured tech startup. So it sounds like you've got certain people in place to help with this, but we're interested to hear about your strategy going forward in terms of engaging private insurers, private insurance tech startups and getting them to really help to create this more holistic idea of resilience.

Carolyn: Yeah, absolutely. I agree with you that the. First steps have been taken, but that connective tissue is not fully there yet. And so agree, that's an area that we need to [00:13:00] focus more attention. And I think some of it is closing that feedback loop you were talking about between investments and risk reduction and making sure that the insurance market can understand those underwrite accordingly.

There's some, like you said, some great work being done around certain perils in certain states around this. I'm thinking of Nancy Watkins and her work on trying to connect this with the wildfire data. We're also trying to figure out how to make that connection tighter in a post disaster context.

And I think the L.A. fires are a case in point. These disasters are huge tragedies, and they are also opportunities to build differently and build with our climate future in mind. And so how, and. 90 percent of people have homeowners insurance and are going to be dealing with their insurer when it comes to rebuilding.

And so how can we make insurance a better force to upgrade our building stock to better withstand the increasing risk? And I think that's not just about paying the little bit extra [00:14:00] to do that. But exactly as you were saying about the communication and the information flow and making sure people have the information they need to do that.

And frankly, much broader issues like that. There's a workforce to do that kind of building rapidly at scale when you have a massive disaster event. So I think that's another potential avenue where insurance could help create a more resilient future. But I hadn't didn't get to your question about insure tech startups.

And I think that this is actually a really good place for some like disruptive technology and new firms because some of the legacy models I don't think are achieving these goals that we really need to have as our climate future becomes upon us. And so Jonathan's been fantastic. He's such a leader when it comes to thinking about these works and in closing protection gaps.

But I think we have a lot of data on risk. We know how to build safer and better. And so it's about how do you connect that in an efficient and cost effective way to make sure it happens when it needs to?

Louie. What were you just what you were just saying on post disaster responses, I think is very important. We're just reading now that the L.A. Rebuild the rebuilding of L.A. is on the way, and there is obviously a political incentive, and I suppose a lot of personal a lot of individuals have incentive to rebuild as fast as possible and reclaim some normalcy, but that might actually put them at risk of future events.

And I keep thinking about how economic incentives like insurance are supposed to help direct, and I think that's really important, businesses and households to take certain actions, right to maybe avoid the most risky areas and go elsewhere and reap the benefits of cheaper insurance. But I'm wondering insurance, it also when it comes to extreme weather events and post disaster, there's also a lot of human behavioral aspects at play, psychology at play.

And I'm wondering, do you are you thinking about this as part of your work Insurance for Good? How you can actually provide messaging, effective communication strategies to businesses and [00:16:00] households so that they Their first instinct isn't just to rebuild where they lost their property, but to actually explore other options or explore other ways of building.

What other, what kind of communication and psychological tricks can we use to, to convince folks to be more resilient?

Carolyn: Yeah, it's a great question. While Insurance for Good does not have the current capacity to be doing a lot of one-on-one messaging post disaster. I think we are trying to contribute to the greater institutional context that makes that easier post-disaster. And I think you're exactly right that there's a lot to draw on from behavioral economics and psychology about how people think about risks or don't think about them as the case.

And we know from that work that motivating these types of protective investments on a sunny day when everything is fine is really hard. People don't like to think about bad things happening. They're overly optimistic. They're myopic. They [00:17:00] also have a million other things to do. And so we do see in that work that disasters can be this focusing event to create a window for change when people's attention is actually focused on that.

And I think it's important not to miss that opportunity as we've been talking about. But we also know that it has to be made very easy for people in a post-disaster context. They are struggling with so much. It is not a time for them. They don't have the time or the bandwidth to go research new building techniques or whatever even finding a trusted contractor, if there's not someone available that they can trust that can do the work that knows how to build safer.

It's really hard. And we've seen this play out in a post-hurricane environment in other parts of the country where if you don't have all the supportive pieces, which is the information really easy and accessible. The builders who know how to do it, the sort of what I consider helpers, insurance agents, real estate agents, the other people [00:18:00] in the ecosystem, helping explain why this type of safer building is necessary.

It can be really hard to do. And yeah, like we were talking about earlier, putting those pieces together and messaging it, I think is important. And luckily, there's a lot of, good places to jump off from. The Institute of Building and Home Safety, for example, has hurricane standards and fire standards that make it really straightforward to know what to do to bring your home into yeah, a safer condition.

Louie: Wonderful. And I would be interested if you have any early lessons from the L.A. wildfires and the response of insurers, individuals and states to these sorts of risks. I know Insurance for Good was hosting a webinar on this and you've produced some resources on this. Any early lessons you'd like to share on this?

Carolyn: I think maybe one of the lessons is that doing the important resilience work post disaster requires a lot of pre-disaster readiness. It requires those [00:19:00] partners starting to engage with each other. It requires things like IBHS having already invested years in developing a wildfire safety standard so it's ready to go when the time of rebuilding comes.

It requires having building codes in place. To come back again to insurance, most homeowners insurance policies have a clause in them that will pay extra to bring your home up to the current building codes. If your current building code is really good, when it comes to disaster risk, you will be able to get the extra dollars to bring your home into that safer state, but if you're building codes, terrible, then it's going to be extra dollars out of your pocket if you want to build above code. And so having some of those pieces in place can make the post disaster work easier.

Louie: Yes, I feel there's still some moral hazard, right? When it comes to adaptation and resilience, because all the burdens on you to do the adaptation resilience work ahead of a disaster. And then usually after disaster, there is government aid emergency funding. [00:20:00] State, federal, local support and also mutual aid, right?

So there is a big influx of disaster response. And it's brilliant, but I do wonder whether that creates this kind of moral hazard at the business and also the local government level. Although that might be changing now if local governments don't feel they're going to get the support from the federal government.

Particularly from the Federal Emergency Management Agency, or FEMA, that they're used to. So I think that is, again, it comes back to behavior, it comes to psychology, and how humans react to disasters. But it does feel like, at the moment, the table is tilted towards, alright, it's all on you. For pre disaster, post disaster, there should be a wave of aid and help which can skew incentives, it seems to me.

Carolyn: Yeah, before the changes we've seen in the last 6 weeks with this administration, I would have said that I think that there are some incentive problems when it comes to the local government level, which can get historically enormous amounts of post disaster dollars to help them with rebuilding and long term reconstruction.

Now, [00:21:00] sometimes that money takes a long time to get there and there might be gaps in certain types of needs and in timing, but in general, you're right. We've seen pretty generous federal response to local governments that have been hit with big disasters at the household level. There might be a perception of that, but there really is not any federal program to bring households, to make them financially whole post-disaster. So the FEMA individual assistance is typically a few thousand dollars. If you've just had your entire home burned down, 5k isn't going to get you very far and that was done intentionally to not have aid replace insurance. It was done intentionally to create an incentive that people need to be using insurance to finance.

Now that does raise some equity questions about people who can't afford insurance and whether we need some type of program to assist them. And it also raises questions to the point, to your point about behavior, about whether people know that. Because if you actually are expecting that you're going to get a lot of aid, you'll behave very [00:22:00] differently than if you know that it's rather quite limited. Now, as you said, we might be entering an environment of very different federal spending post-disaster, and I think it's anyone's guess what that looks like in the coming years. And then, the ways that state and local governments and households respond to that changing landscape.

Louie: Staying on this dynamic between local, state and federal, we know that state-backed insurance safety nets are fraying because of worsening climate risks, and just recently we heard that California's FAIR Plan, which is the sort of backup insurance body for Californian households, they will be charging an assessment on insurers, which means private insurers will have to pay in to help that Fair Plan honor its claims, and that will result in policyholders throughout California and likely across the U.S. seeing their premiums go up, so it's a kind of socialization of losses in order to keep the California FAIR  plan from going under. I'm wondering, like the strain that [00:23:00] the fair plan has been put under puts a spotlight on statewide backup insurance plans altogether. And I'm wondering how can these safety nets be reinforced to handle future disasters on a par with the L.A. Wildfires or Hurricane Helene, etcetera?

Carolyn: Yeah, I think that is a really excellent question right now. These are sometimes called markets of last resort or residual markets. They're created by states. They generally are not state-backed and that there's no state guarantee or automatic infusion from public budgets into them. But there are these assessment mechanisms, which you just mentioned, and they were designed very intentionally, like you said, to socialize the cost in order to keep the premiums in high risk areas lower. There's a lot of political pressure in all disaster-prone states to have cheaper insurance. Nobody, no matter your political ideology, likes to pay high insurance rates.

But if the risk is high, that cost of risk has to land somewhere. And so these residual [00:24:00] markets to not charge all of that up front to high risk areas have these different assessment mechanisms built in so you can look at Florida where this has also happened and their residual market called Florida citizens when it faces a loss that it can't pay out of its current surplus and so on.

It has authority to assess first its own policyholders and then almost every insurance policyholder in the state. across almost all lines of insurance with the exception of like medical malpractice. So that means that, someone in north central Florida with an auto policy is going to be assessed to pay for the damages when the big one hits Miami. And that is designed very intentionally to spread the costs over future policy holders and low risk policy holders. Similarly in California. It was designed the same way, only they put their assessment directly onto insurance companies and then some percentage of that can be passed on to policyholders.

But this is a [00:25:00] universal approach, which is, like I said, to keep the loss lower today, have people in the future and lower risk people pay it. And I think the increasing severity of the disasters we're facing raises this really important policy question of who is going to pay those costs. And do we want to keep this kind of cross-subsidization going, or do we want to target that differently, right now it's the cross subsidization that exists in most states is from low risk future policyholders to current high risk policyholders who are suffering losses, right?

That's the current one, but you could do that differently. You could have the cross-subsidization, be about income and wealth from higher, more affluent people to lower income. You could have everyone be paying the same amount. And so I think we really need to have an honest conversation. And there's going to be a lot of conflicting values about how you distribute that cost.

But it's also why to come back to like our earlier conversation, why it's so critical to be doing the loss reduction work, because that's the only way to actually lower. The cost for [00:26:00] everybody.

Louie: Absolutely. And I keep going back to this idea of how risk can never be eliminated per se. It can just be moved around and distributed. And it feels to me like these state FAIR plans and the way we socialize the losses from massive extreme weather events and climate related events right now, it's like a roundabout way to get risk sensitive pricing and insurance, right?

Because yes, maybe low-risk policyholders were paying a certain level of premium, but now that premium is going to go up in order to reflect the higher amount of risk in the aggregate. So actually, we maybe get a bit more risk sense of the pricing, but it seems an ineffective mechanism to go through this value chain of policy holder to FAIR  plan then to private insurers and then back to the policy holder. It feels like there is a different mechanism that could be done to chieve that. But again, it comes down to nobody wants to get blamed for higher prices. So if the private insurers can blame the fair plan and the fair plan can blame the insurers, then maybe that gives them all the cover they need to continue [00:27:00] operating.

Carolyn: Yeah, I think that's right. There's not a desire by anyone in this space, right? To be very honest about risk levels and where they're going into the future to come back to something you raised earlier about sort of information and communication. A big gap that I see is that. No one's communicating to people about how their risk is going to be changing and what that means for changing insurance prices.

So no insurance company or state program wants to tell you, hey, we're going to be raising your rate year on year. And yet that's really important information to know if your risk is changing and your cost of occupancy are going to be changing. And it's important information to have before you choose where to live. And right now, I think there's a bit of an information gap there.

Louie: When it comes to the extent of the risk, there was an interesting hearing featuring Federal Reserve Chair Jerome Powell where he said it may be impossible to get a mortgage in parts of the U.S. in the near future because of climate risks and the pullback of insurance because if you can't get home insurance, [00:28:00] then a mortgage provider might not offer you a mortgage or they'll only offer you a mortgage at punitive rates, so he was pointing to the idea that there could be these insurance deserts and therefore these Mortgage deserts as well.

And I'm wondering, how are you thinking about what the U.S. economy and financial sector writ large, beyond just insurance, could look like in a world where vast, productive regions of the U.S. are rendered uninsurable? Does it just become oasis for very wealthy people, or areas where there has to be special government districts that are providing massive adaptation resilience, or implicit or explicit insurance coverage?

What sort of world do you see?

Carolyn: Yeah, that's a great question. And maybe to pick up on the last part of your question there. I think the first thing that comes to my mind is what do we mean by uninsurable, which is that what I'm seeing happening now is that when the private sector pulls back like we were just talking about that risk moves into our state markets of last resort.

And so there are places across Southern Florida [00:29:00] and Southern Louisiana, for example, where you cannot get private insurance and you can only get it through Louisiana or Florida citizens. Those residual markets in those states. So is that uninsurable? They're still getting insurance and they're getting insurance and that's providing protection to our housing and mortgage markets, but it's not a place where the private sector feels they can profitably offer insurance anymore.

So it does raise these questions of when is the government going to be providing insurance in high risk areas and for how long and what prices that we were just talking about. But that sort of maintains a sort of pseudo insurability, right? When the private market is pulled out, we are seeing in recent research and certainly in reporting about how insurance market stress spills over into housing and mortgage markets. A colleague, a couple of colleagues at Freddie Mac and I have a new working paper out where we look in California and we see that as insurance availability goes down and as insurance prices go up, people look to move in safer [00:30:00] areas and people are less likely to move in areas that have insurance market stress and it's capitalized into home values and those home values go down.

Louie: That's the behavioral economics at work there,

Carolyn: Exactly. And those connections between those markets do exist. And while I don't think we're imminently near a systemic crisis where we see insurance deserts and huge collapsing of mortgage financing yet, I do think it's really good to be talking about it now. Because, as we were just saying, it's our decisions today about where we build and how we build our communities that are going to determine whether we get to that scary future.

And can we be, have enough, forethought, which we just talked about is super hard and we're not very good at as a species or as a public or private institutions to change the way we're doing right now in terms of, doing more climate adaptation and more climate abatement so that we prevent that type of future.

Louie: [00:31:00] Now I want to turn to some of the solutions that Insurance for Good partners and members might be, are working on. New models that might work include community wide insurance policies, or even smaller level like group insurance policies. Parametric insurance as well is something we've talked about before in this podcast. Again Jonathan at Raincoat, that's a firm that's focused on parametric insurance. So I'm wondering about these and other interesting new models of insurance and what you think the strengths and weaknesses of them are, and are there any other examples that you can point to about these models being deployed effectively, either here in the US or elsewhere in the world?

Carolyn: Okay. As a quick reminder, parametric insurance is when there's a sort of predefined automatic payout based on a observation of the hazard [00:32:00] itself. So you can think like, when wind speeds exceed some threshold within so many miles of your house, you got an automatic set amount of money. The attractive thing about parametric approaches is that they're almost infinitely flexible because you can set that payout and that trigger that releases the funds in many different ways. And so that's allowed for just a lot of different use cases and to come back to the question at the top of our discussion about filling insurance gaps to fill a bunch of gaps that had previously existed. So it's used by commercial entities, for example, think about you're a Florida hotel and there's a hurricane down the coast from you and you don't sustain any damage, so your property insurance isn't going to pay out. But all the tourists get scared and stay away. You still lose a bunch of revenue. A parametric product that's triggered based on a nearby hurricane is a really nice solution to providing that financial protection to you. So it's used in those types of environments.

We also see Jonathan and Raincoat have been leaders in this in the US and in other countries. The use of parametric in [00:33:00] micro insurance products. These are small payouts designed to fill certain needs or in many developing and emerging economies designed for lower income populations. They have been used globally for protection against agricultural losses, livestock losses.

They've been used in health. Puerto Rico under Raincoat's leadership now has a catastrophe micro insurance market with thousands of policyholders. We also see parametric being used by countries. So we have several pools set up in the Caribbean, in Africa, in the Pacific, where countries in those regions are using parametric approaches to secure immediate, flexible, post disaster dollars at, yeah, the level of the nation because international aid can be slow and sometimes ill matched to need.

And so this is a great solution to bring in dollars really quickly for those recovery. So it has a lot of uses, which I think has made people really excited about its role in improving kind of climate resilience and [00:34:00] financial resilience in the face of these risks. But you also have to be, it's not a panacea and I can't solve every problem.

So I think, an important part of the conversation is. When is it useful? And it's useful when you need fast and flexible dollars, but sometimes what you really need is a homeowner's policy that's going to cover, the complete loss of your home, not $10K quickly. And so it's not a good use case then.

And it's also, we're saying it's sometimes not worth the cost, right? You have to pay a premium for this. And there are times where it would be better to save those dollars and pay losses yourselves. Or use those dollars to lower your loss and invest in risk reduction instead. So with all products, you have to weigh the benefits against the costs.

But there's still a lot of opportunities.

Louie: Yes, I'm thinking about the potential challenges of parametric insurance when we think about insurance and equity, right? In terms of equitable access to insurance and equitable insurance contract. What does that look like? And there's this concern with parametric policies at all levels about basis risk, right?

The actual difference between a level of event that [00:35:00] triggers the policy and an event that doesn't trigger the policy, but still creates mass damage. We saw some of this last year with these catastrophe bonds that are based on parametric triggers, right? And they were supposed to pay out if air pressure resulting from a hurricane reached a certain level.

Over, I think it was Jamaica, right? It was Jamaica or some of the Caribbean islands. And these bonds didn't trigger because even though the storms are massive, the triggers have been very finely tuned in such a way that actually only a very extreme storm would have triggered them.

So how do you think about this? How do you think about parametric insurance in terms of equitable equity and justice? Because you're supposed to be Insurance for Good. That means providing insurance against climate risk to build resilience, but also about fairness, really. So is that complaint about parametric insurance, does that ring true to you?

And what ways can we, in what ways can we remedy those issues?

Carolyn: Yeah, I think it's a really valid question. And you mentioned the one last year, but another example that comes to mind was during the pandemic and there had been. [00:36:00] Pandemic bonds with parametric triggers that didn't trigger when everyone thought they should have and there was a lot of criticism that they were designed for the investors and to profit the investors and not for the vulnerable African countries that were supposedly benefiting from them.

And so I think there's really important questions there about trigger design and transparency, which is the beneficiaries have to have a voice in what that looks like and an understanding of it. Is this going to pay out at the time? I need it to pay out. Is it too complicated or hard to understand or are at least transparent to the people purchasing them or the ultimate beneficiaries of them if done. That should be achievable. And some of the benefits on the other side of the equity coin that we've seen from parametric approaches in the U.S. to is that [00:37:00] they eliminate a lot of the contention that happens post disaster with your insurance company, where a lot of low income or otherwise socially vulnerable households and communities feel like they do not have the upper hand and that in a fight with the insurance company wins.

But if you don't have to fight with them, if you're just going to get your payout when you know you need it, and it's automatically in your bank account that provides a level of trust in the product that doesn't always exist with our more indemnity focus models. I've also heard advocates of parametric approaches be sure to highlight that even if you have a indemnity product, like your standard homeowners, that doesn't mean it doesn't have basis risk. There are lots of losses that might not be covered. And we're seeing this as a growing concern as climate risk escalate to where we're seeing just increasing anecdotal evidence that one of the ways ensures are managing that growing risk is by hollowing out the coverage.

And if you're not reading the fine print of your insurance policy, and you don't know that if you [00:38:00] have hail on your roof, you're not getting your full payout. You're only getting a sublimit that's not enough to replace it. Or you have a sublimit for burst pipes, or you have a sublimit for any number of things, then you don't really have full coverage and you don't have your losses either. And it's another issue of transparency and making sure the policyholder, the beneficiary knows what type of coverage and situations in which they're going to have payouts. And I think it's. I think it's maybe not a realistic solution to think that people are going to read a bunch of fine print.

And so I think if we're talking about residential, I would lean towards solutions that simplify, because I just don't think that we're going to educate everybody about the nuances of every kind of tweak in your policy. That's just my personal feeling on it.

Louie: Yes, information asymmetries are endemic in financial services, right? And I think when it comes to insurance, this is why a blend of products, right? A simple parametric product that can give you quick liquidity, plus an indemnity product that maybe has a few more terms and conditions in it that, unless you are [00:39:00] being very careful to read all the fine print you might not be aware of is still supposed to provide you quick liquidity.

Good coverage, but maybe not as much as you expected, and I feel that maybe combining products in innovative ways will be Something we see more of in the future and it probably explains why there's a bunch of parametric insurance startups that are flourishing, right? Because they actually want to work not to replace traditional insurance, but to work alongside or it's a kind of a layered approach So that's how that's why I'm thinking about it.

But yes, the information asymmetry between insurers and policyholders is a real issue and can mean people losing out when they thought they had coverage

Carolyn: Yeah, absolutely. And to your point, which I think is a really good solution. We're also seeing some sort of standard insurance products start to pull parametric like pieces in. And this includes the National Flood Insurance Program and others and also some homeowners insurers who are realizing that kind of like fast, small amount of like flexible dollars is really important for recovery.

And so okay, let's get you a quick, fast payout. To deal with emergency needs, and then to your point, we have the kind of loss [00:40:00] adjustment and the longer term indemnity policy. So I think, yeah, I think you're on to something.

Louie: Now, finally, this may be an unfair question because you focus on Insurance for Good, it's about building up the insurance market. But we hear one solution to growing client risks is managed retreat, forced retreat, transition, if you want to call it that, transition to retreat. And I'm thinking about how you are seeing a world where uninsurable truly means uninsurable, right?

There's this argument that there's no such thing as bad insurance, just a bad price for insurance, and maybe you will continue to see certain providers and governments providing insurance in certain parts of the U.S. and in other countries as well. Thinking beyond insurance, are there alternative resilience financing mechanisms that could take its place, disaster relief financing, or indeed just incentives for people not to build, like maybe rewarding people not for building in certain areas or doing operations in certain areas.

Beyond insurance, what other mechanisms do you [00:41:00] feel are important to promote in relation to adaptation and resilience?

Carolyn: Yeah, I think it is really important to be honest that there are going to be places that become uninhabitable as the planet continues to warm. We have not done the pace and scale of decarbonization needed to protect ourselves against some very serious risks that are going to make it uneconomic to continue having people live in certain areas.

And I think we're going to need to face that. And for insurance to be sending that signal, I think what you're going to see is two levels of uninsurability to come back to that question. The first, as you raised is that as risks go up, the prices are going to have to go off. And so before we get to a place where insurance can truly not be offered where actually the mathematics of risk pooling break. We're going to get to a point where doing so costs more than the insureds are willing or able to pay. And indeed, that has already happened in many places around the world and around the country is why we have these government programs that we were [00:42:00] talking about before.

But I think there's also very real concern that some risks are going to become truly uninsurable by which I mean, either. The frequency of risks. So think like sunny day flooding that's now happening many times a month. That is a certainty. We can't ensure certainties. And so when we get to a problem like that, insurance doesn't work anymore.

Similarly is the tail of the loss distribution. So very big events. If we get to globally systemic events cannot be insured. And so there's this like Goldilocks area in between very frequent and very severe risks where insurance works, and climate change is pushing that narrower and narrower on both edges.

So I think that is a very real challenge, and I think that it's going to require retreating from some areas. I think that there's actually a role for insurance to play in helping with that, not only the risk assessments and the price signals, but again, coming back to this idea of using disasters as an opportunity to rethink where and how we're living using that as an opportunity [00:43:00] for people to say, it's time to get out.

I don't want to live in this high-risk environment. I want to move to safety. And being able to take your insurance proceeds and go live somewhere else and rebuild or purchase a home somewhere else. California currently allows that post-wildfire. You can take all your insurance proceeds and choose to relocate somewhere else, but there's nothing tying it to keeping that land undeveloped.

So we've seen in a flood context, right? A lot of policies in some communities to, Purchase highly flood prone land and then keep it in open space in perpetuity so that societal risk is lower. And then it can also provide a bunch of co benefits like habitat and water purification and improve flood risk reduction by being water storage.

And so if we're going to have people moving out of high risk areas, we need to be able to couple it to a program like that, where we can put the land into more beneficial uses. Because if one person moves out and somebody else just moves in, we haven't lowered society societal risk.

Louie: Yes, it feels like an area where nature-based solutions, NBS, can really have an effect, right? There's this drive [00:44:00] for these nature-based solutions that create mitigate climate mitigation, climate adaptation and biodiversity benefits. And yes, finding the way to basically sequester land for that purpose sounds promising, but it's all about how do you compensate those who held the land originally, right? And this is where you come to the argument of carbon markets or nature markets or biodiversity credit markets, right? So you can actually have a habitable land. Sorry, the land that is Reserved from development actually turn into something else that actually provides benefits to the environment and benefits the climate, but still generates revenue in the form of credits or something so that the landowner doesn't feel hard done by that's interesting.

I like that idea. Also, I love this idea. You just mentioned about insurance can't handle certainty, right? I think you make a good point there and how climate change is actually turned risks that were would occur on a kind of stochastic basis or, a distribution that was manageable for insurance to cover and now actually some risks are becoming almost so 100 percent certain over certain time ranges that yes, it doesn't make sense for them to be insured.

[00:45:00] And it's the idea about climate risk, climate change, raising the risk floor universally, right? So that some risks become uninsurable. Some risks become such that they can't actually be incorporated in the insurance world. I think that's a really interesting way of thinking about it. So I'll be using that idea in my own communications.

Yeah, I like that a lot. Brilliant. Now finally, Carolyn, can you tell me what the focus of Insurance for Good will be over the next six months? What do you hope to achieve as we enter the end of 2025?

Carolyn: Well, 2025, is our first year. So we're using it as a year of testing and learning and also trying to build capacity and fundraising so we can keep doing this important work. I am really excited about some of the projects we have underway. And the partnerships we're creating, some of it pivoted with the L.A. fires, honestly, as it did for others, because it's raised some issues around insurance in California to the fore.

So we're leaning into that. But we're also working nationwide and on all payrolls and also hoping to be an institution that can create [00:46:00] this cross country, cross payroll learning to just help accelerate change.

Louie: Excellent. Sounds like an exciting year and lots to be done. And yes, with the volatile climate adjusted world we're living in, you're not entirely sure what curveball is going to be thrown your way. So it's interesting to hear that you are being reactive and that uou are responding to needs as they are coming up and I really look forward to seeing I really look forward to keeping track of insurance for good keeping tabs on your work And yes, hopefully we'll be featuring plenty of your good work on Climate Proof and in the Climate Proofers podcast in months to come. For now Carolyn, thank you so much for your time and have a great

Carolyn: Thank you so much for having me on. It's been a pleasure to talk with you. Â