Solar panels on a bright sunny day.

Re-thinking Insurance in a Time of Climate Change

Nov 3, 2023

Just because we broker insurance doesn’t mean we always recommend it.
Here’s why.

An industry in crisis

The insurance industry has traditionally used one method for analyzing risks and setting prices: Looking back at past experience. (Sort of like a driver who can only plan a route forward by looking through the rear-view mirror.) But what happens when the industry is faced with a risk like climate change that is unlike anything it’s experienced—something that includes natural catastrophes that are wildly unpredictable in both their frequency and severity?

So far, the only things the industry has done are what it’s always done: become more selective in underwriting, offer less insurance per risk, community, and geographic region, and (of course) increase their pricing.

But, sooner or later, the terms, conditions, and pricing offered by insurers become unaffordable. In parts of the US and Europe, that’s already happened.

When the stakes are raised this high, other options present themselves.

Thinking outside the policy

Insurance is not an end in itself: it’s a means to one. The ultimate goal we should all strive for is the protection of assets through informed risk management. For us at Altus, insurance is only one of many tools that we encourage our clients to use as we help them design optimal risk management solutions.

Emerging technologies and advances in materials and engineering might provide as many (or more) ways as traditional insurance for property owners to effectively address risks associated with climate change.

For example, if you own a coastal property and your premiums have spiked in recent years, you could pay off the mortgage that requires you to carry wind insurance, drop the wind coverage, and use the premium savings to protect your home by installing hurricane shutters, fortifying the roof, building a sea wall in front of it, or elevating the structure above storm surge levels.

Necessity is breeding innovation

Altus is closely monitoring these new approaches. Throughout America, we see more communities finding ways of dealing with the threat of climate-related disasters, such as stormwater management, floodplain restoration, buried power lines and solar grids, fire-resistant building materials, and more.

One of the most promising examples is Babcock Ranch, an 18,000-acre community just north of Fort Myers, Florida. In 2022, it was in the eye of Hurricane Ian, the costliest storm in Florida history. But because it was conceived, designed, and built to withstand even a Category Four storm like Ian, it emerged virtually unscathed: no resident even lost power.

There are signs of change at the government level as well. As hurricanes have increasingly battered Alabama, the state’s response has included a program that provides grants to homeowners for wind-proofing their homes. And California has announced reforms that would soon allow insurance companies to use forward-looking (not rear-view mirror) risk modeling. While this will almost certainly mean insurers will charge higher rates, the reform also requires insurers to lower rates for owners who take steps to protect their property against wildfires.

Why would an insurance broker advise against insurance?

Because insurance is not always the best and only way to manage risk. And because Altus Partners is uniquely equipped to help clients explore the many new alternatives available to them.

We have always been driven by how well we can serve our clients as unbiased advocates and advisors on their behalf. Not by how much insurance we can sell them. Because relying on commissions from policy sales creates an inherent conflict of interest between the clients who buy insurance and the brokers who sell it and can unduly influence what coverage they recommend. That’s why we are the only 100% commission-free corporate insurance broker in the US (and the leading proponent for changing industry regulations that prevent eliminating commissions for private clients as well – but stay tuned as we bring about that change).

And because we’re on a mission to transform how the insurance business is done, Altus is especially adept at helping clients find the most cost-effective ways to safeguard their interests and assets—regardless of how much or little insurance they purchase.

The more we are faced with the challenges of climate change, the more essential this creative and often disruptive thinking will become.

That’s fine with us. We’re used to breaking the mold.