Risky business

As the world gets warmer and storms get worse, insurance companies are jacking up rates or refusing to cover homeowners altogether. Is the future uninsurable? (Originally aired in 2024). Guests: Umair Irfan, climate reporter; Karen Clark, co-founder and CEO of Karen Clark & Company; Joe Skuba, VP at The Gray Insurance Company; and Carolyn Kousky, Associate VP at Environmental Defense Fund For show transcripts, go to vox.com/unxtranscriptsFor more, go to vox.com/unexplainableAnd please email us! [email protected] read every email. Support Unexplainable by becoming a Vox Member today: vox.com/members Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Noam Hassenfeld?

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• 0:37Speaker 01

  This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed sponsored jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed sponsored jobs. Get a $75 sponsored job credit at indeed.com/podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed sponsored jobs.

• 1:10Speaker 02

  Hello, it is Bird. As you might have heard, we are busily working away on a big project over here at Unexplainable, and I'm very jazzed to finally show you all what we have been doing soon. But for now, as we work on that, we are bringing you a few of our favorite episodes. So today's comes from 2024. It is hosted by the amazing Meredith Hodnot. And I wanted to share it now because we are at the start of hurricane and wildfire season. It seems that every year we get these devastating natural disasters that kill dozens of people, cause tens of billions of dollars in damages.

• 1:55Speaker 02

  And this episode focuses on the ways that we protect ourselves from disasters, which is to say insurance. It asks, when risks become less predictable, what do we do next? Here's Mara.

• 2:14Speaker 03

  Karen Clark says she wasn't that nervous when she walked into the Lloyds 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.

• 2:36Speaker 04

  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?

• 2:52Speaker 03

  Karen was using new-fangled 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.

• 3:18Speaker 04

  They had their tried and true methods of assessing risk and they had been making a lot of money. So they felt that they had everything all figured out.

• 3:29Speaker 03

  Risk is a combination of two things. First, the hazard. So in this case, the hurricanes.

• 3:37Speaker 04

  It's not really enough to know what-if scenarios. So for example, what if a category four hurricane hits New York City? Or what if a category five hits Miami? That's very interesting information, but what is the probability of that?

• 3:54Speaker 03

  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?

• 4:05Speaker 04

  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.

• 4:19Speaker 03

  But it didn't take long before Karen's catastrophe models were put to the test.

• 4:25Speaker 05

  A hurricane watch is now in effect for South Florida.

• 4:29Speaker 04

  So Hurricane Andrew, I remember like it was yesterday, made landfall at 5:00 a.m. on August 24th, 1992.

• 4:37Speaker 05

  It is starting to rock and roll out here.

• 4:39Speaker 03

  Raging storm surges and treacherous winds battered Florida's southern coast.

• 4:45Speaker 06

  We have no Miami radar, so we can forget the Miami radar. It fell off the building.

• 4:51Speaker 03

  Karen and her team ran the numbers again and again, trying to get a sense of just how much devastation Andrew would bring.

• 5:00Speaker 04

  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?

• 5:31Speaker 03

  But as the storm passed, the destructive power of Andrew was clear.

• 5:37Speaker 01

  It looks like the aftermath of nuclear war in many places.

• 5:41Speaker 03

  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.

• 5:55Speaker 06

  Is there enough insurance money out there to rebuild these communities?

• 5:59Speaker 03

  In the aftermath, nearly a dozen insurance companies went bankrupt. The whole industry was in shock, and Andrew had just missed downtown Miami.

• 6:10Speaker 04

  Right there, insurers saw that, oh, had Andrew struck 50 miles north, the losses would have been about $60 billion.

• 6:22Speaker 03

  All of a sudden, Karen's fringe models seemed prophetic.

• 6:27Speaker 04

  The world really changed, I would say, after Andrew. It was really a wake-up call.

• 6:37Speaker 03

  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 Hadnot, and this is Unexplainable.

• 7:32Speaker 07

  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.

• 7:43Speaker 03

  Umar Urfan is a correspondent at Vox, reporting on all things climate and science.

• 7:50Speaker 07

  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.

• 7:59Speaker 03

  Umar is the one in the newsroom, tracking every major storm and putting everything in context.

• 8:06Speaker 07

  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?

• 8:29Speaker 05

  As someone in the insurance industry, intellectually, I understand it. As a homeowner, it's awful. It really sucks.

• 8:34Speaker 07

  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.

• 8:46Speaker 05

  As I talked to friends, they're just, oh, my God, you know, you're in insurance. Have you, have you seen this? Are they, are they raking me over the coals? Am I getting taken advantage of? Like, no, man, there's... I mean, it's been it's been a lot.

• 9:01Speaker 03

  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 roots. And he loved how much space he had to raise his now 10 year old triplets.

• 9:16Speaker 05

  Got a nice little yard. It's nothing huge, but it's there and there's room to go play outside and

• 9:22Speaker 05

  a nice place to live, I think.

• 9:24Speaker 03

  Most importantly, it was above sea level, something to really consider in New Orleans.

• 9:29Speaker 05

  You know, we we've lived through Katrina and had families whose houses were underwater for weeks. And trying to stay out of that danger zone was was certainly key for us.

• 9:40Speaker 03

  That first year, Joe's home insurance premiums weren't that bad.

• 9:44Speaker 05

  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. Wasn't like we moved in and it was a such a stretch that, boy, if 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.

• 10:03Speaker 03

  Even as Joe's premiums skyrocketed, his job in the insurance industry gave him a unique perspective.

• 10:10Speaker 05

  If the 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 were trying to insure.

• 10:30Speaker 03

  So what is causing insurance prices across the country, not just Joe's, to explode in just the last few years?

• 10:39Speaker 07

  The climate is changing, and this is the really fundamental thing. This is the ground that is shaking beneath everybody's feet.

• 10:46Speaker 03

  But of course, climate change isn't anything new.

• 10:49Speaker 04

  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.

• 11:01Speaker 03

  Karen Clark's company has been modeling catastrophe for decades. And she says, right now, we're at an inflection point for the industry.

• 11:10Speaker 04

  There is systemic underestimation in the insurance industry again today, like at the time of Hurricane Andrew, but it's not for hurricanes.

• 11:22Speaker 07

  Extremes like those big named storms aren't the only ones that cause a lot of damage.

• 11:26Speaker 03

  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.

• 11:37Speaker 04

  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.

• 11:58Speaker 03

  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, but 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

• 12:41Speaker 03

  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.

• 12:54Speaker 07

  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.

• 13:33Speaker 03

  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.

• 13:44Speaker 04

  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.

• 13:57Speaker 03

  A lot of home insurance policies in the US 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.

• 14:17Speaker 04

  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.

• 14:28Speaker 03

  That's because it costs a lot to build anything right now with supply chain shortages and inflation driving up construction costs.

• 14:37Speaker 07

  So particularly in places like coastal areas, you know, where you have expensive beachfront condos and houses and mansions.

• 14:44Speaker 03

  But it's not just luxury vacation homes that are driving up risk.

• 14:48Speaker 07

  You know, 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.

• 15:14Speaker 04

  We are still the biggest driver of increasing losses, not Mother Nature, okay? 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.

• 15:31Speaker 05

  The cost to bring my house back to new or back to what it is is higher. You know, the thing that I'm insuring has gone up in value. And so of course, the price has gone up. And would I love to see that different? Of course. But it's a math equation at the end of the day. What does it take to fix it? And that number has changed.

• 15:53Speaker 03

  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.

• 16:06Speaker 05

  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.

• 16:20Speaker 03

  This left Joe and a lot of other homeowners in Louisiana in a pretty tricky situation.

• 16:27Speaker 07

  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.

• 16:45Speaker 05

  There's a breaking point coming. What does that look like? What does it mean? You know, 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, 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.

• 17:17Speaker 03

  So what does it mean if the future is uninsurable?

• 17:29Noam Hassenfeld?

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• 20:24Speaker 01

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• 21:00Speaker 04

  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.

• 21:09Speaker 03

  Carolyn Kouski works for the Environmental Defense Fund.

• 21:13Speaker 04

  And I look at the economic impacts of climate change.

• 21:17Speaker 03

  In particular, she's spent a lot of time studying disaster insurance and Mer's main question.

• 21:25Speaker 07

  How doomed is the insurance industry?

• 21:29Speaker 04

  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.

• 22:09Speaker 04

  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

• 22:52Speaker 04

  and make sure they're getting us the long-term objectives that we want.

• 22:56Speaker 07

  How do insurance companies then determine where to set your deductible and where to set the premiums?

• 23:02Speaker 04

  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, you know, 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.

• 23:42Speaker 07

  Is anyone besides insurance companies using these models?

• 23:46Speaker 04

  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

• 23:59Speaker 07

  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

• 24:42Speaker 07

  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.

• 25:23Speaker 07

  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?

• 26:00Speaker 03

  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.

• 26:13Speaker 05

  Well, it's not an exaggeration to say that everyone I've spoken to has to be with citizens. Just everyone below I-10.

• 26:20Speaker 07

  These 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.

• 26:56Speaker 05

  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.

• 27:11Speaker 03

  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.

• 27:29Speaker 05

  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, you know? And 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. You know, 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.

• 28:07Speaker 05

  If you flip.

• 28:07Speaker 07

  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.

• 28:27Speaker 03

  And the insurance industry might be in a unique position to do just that.

• 28:34Speaker 03

  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.

• 28:52Speaker 07

  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.

• 29:25Speaker 03

  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 a 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,

• 30:11Speaker 03

  and stabilize the insurance market right when we need it the most.

• 30:16Speaker 04

  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.

• 30:47Speaker 03

  This episode was reported by Umarah 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 Dusso. And as always, thank you to Brian Resnick for co-founding our show. If you have thoughts about the show, please send us an email. We're at [email protected]. We'd love to hear your thoughts about the show. And if you can, please go out, leave us a review. Leave us a rating. It really helps new listeners find the show.

• 31:29Speaker 03

  Unexplainable is part of the Vox Media Podcast Network, and we will be back very soon with another episode about everything that we do not know just yet.

• 31:49Noam Hassenfeld?

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• 32:38Speaker 02

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