Updated Hurricane Models: A New Opportunity to Insure Against Climate Change

Abstract:     
This article suggests that the insurance industry’s increased recognition of the economic implications of climate change, as evidenced by the industry’s desire to use updated hurricane models that account for global warming in the rate setting process, will enable insurers to make more accurate estimates of their losses but only if state insurance regulators step up to the challenge of understanding and scrutinizing the models. The article briefly discusses how states are empowered to regulate the insurance industry and influence its rate setting approaches. The article then discusses the major approaches to rate setting and highlights the inaccuracy that is characteristic of the traditional approaches. It also discusses the primary obstacle to increased usage of modeling in the rate setting process- state insurance regulators, who are concerned for consumer protection, fear insurers will use the proprietary nature of the models to hide the fact that they are charging unjustifiably high premiums for insurance. Next the article shows, through a case study from Massachusetts, how this fear can be addressed. The paper further discusses how proactive measures to encourage more widespread understanding and usage of the models will contribute to a more financially stable insurance industry that can withstand climate change and enable homeowners to make better long-term decisions about where they want to live and how they want their homes to be constructed.

Number of Pages in PDF File: 31

Accepted Paper Series