Insurance

SFI researchers are investigating a set of questions around reimagining current models and and building innovative new forms of insurance that better manage physical risk for both public and private entities. The world is entering a phase with increasing physical risk that is burdening states beyond imagined capacities let alone previous capacities. For example, wildfire in California: how can the the private insurance market and the public insurance markets play together to create a a sustainable future?

SFI insurance research examines the role of public policies, insurance markets and adaptation to address the physical risks posed by climate change. Current policies in the United States create significant cross-subsidization and tend to increase risk vulnerability. Consequently, they need to be reformed to promote greater resilience.

SFI built an economic model to assess the impact of several policies on insurance markets and adaptation. Results suggest that the decoupling of risk and insurance premiums does not enable insurers to incentivize the adoption of risk mitigation measures through their pricing. Better alignment of insurance premiums with risk will be key. However, additional policies will need to be implemented to increase insurance penetration and coverage, including possibly means-tested voucher systems and/or subsidized loans for adaptation measures that target low-income households who face borrowing constraints. These policies will increase the level of household welfare.

This work can inform policymakers about reforms to undertake in service of building resilience in the context of increasing physical risk, and inform insurers about their role in incentivizing greater adaptation.