Rising Climate Risks Threaten Business Insurability, Driving Innovation and Government Intervention

The growing impact of climate change is putting unprecedented pressure on the insurability of businesses, particularly in areas prone to extreme weather events like New Orleans. Thomas Brennan, an insurance broker and part of a family with long-standing restaurant businesses in the city, highlights the challenges of securing affordable insurance amidst rising costs and more frequent natural disasters.

The situation has become even more difficult than after Hurricane Katrina, as private insurers have increased rates and deductibles while reducing coverage limits, forcing businesses to explore alternative insurance options.

One such alternative is parametric insurance, which offers a set payout based on predefined triggers, such as a flood sensor reading. This method is gaining traction as a way to maintain insurability in the face of growing climate risks. The Brennan family’s restaurants, for instance, have turned to a UK-based start-up, FloodFlash, for coverage.

Parametric insurance is part of a broader trend in the global insurance industry, where companies are seeking innovative ways to keep properties and businesses insured despite the escalating threats posed by climate change.

In addition to new forms of insurance, there is a growing emphasis on adaptation strategies. Companies like Coca-Cola Consolidated have worked with insurers to redesign facilities to minimize damage from future floods, demonstrating that proactive measures can reduce the financial impact of extreme weather.

These efforts contribute to the hope within the insurance sector that a combination of preventive measures and innovative risk assessment can help businesses remain insurable.

However, the insurance industry’s response to climate change is not without challenges. While advancements in risk modeling and data analysis have allowed for more precise assessments of localized risks, these improvements could also exacerbate inequalities between properties deemed “good risks” and “bad risks.”

This has led to concerns that some properties may become uninsurable, leaving gaps in coverage that could have broader economic implications.

Policymakers are increasingly recognizing the need for government intervention to provide a safety net where private insurance falls short. In the European Union, there is growing support for national and potentially pan-EU risk-sharing schemes for natural catastrophes.

Such initiatives would need to be carefully designed to avoid moral hazards while ensuring that all countries invest in resilience measures. Smaller-scale initiatives, like a pilot program in New York providing emergency cash payouts to low-income families after floods, also demonstrate the role of government in addressing these issues.

Ultimately, the future of insurability in a climate-impacted world will likely depend on a combination of private innovation, public policy, and community engagement.

Organizations like InnSure advocate for local communities to actively engage with insurers and regulators to assess the insurance implications of new developments and infrastructure projects. As insurance costs rise, there is a growing recognition of the need for proactive measures to protect businesses and communities from the increasing risks posed by climate change.