While the devastation from Hurricanes Helene and Milton has given all of us a lot to think about these past few weeks, I'd like to focus for a minute on a far less obvious but intriguing issue that the insurance industry could address as it helps the world adapt to climate change: What if we can insure against heat?
A construction company can purchase insurance covering, for instance, flooding that would raise costs and delay the completion of a project. What if that company could buy insurance covering delays and cost increases because heat made it too dangerous for people to work outside for days or at least required that they be given lengthy water breaks inside? What if property owners could buy coverage for the direct damage that heat might do to a roof?
The idea of insuring against the direct effects of heat came up at an interesting gathering last month of a group called CIRCAD that is combining academic research capabilities with insurance expertise to advance the industry's ability to mitigate the effects of climate change.
The two-day, inaugural meeting offered a number of provocative ideas, including the possibility of using nature-based solutions to limit damage from storms and of having communities tackle prevention and purchase insurance, in some sort of combination with the property insurance that individuals and organizations buy now.
I'll get to those ideas and introduce you to CIRCAD, but let's start with heat.
Jordan Clark, a senior policy associate at Duke University, who made the presentation on heat at the CIRCAD meeting in Atlanta, said the first requirement is an agreed-on way to measure heat. That may sound simple. Heat is temperature, right? But humidity is also a factor when it comes to the effects of heat on people and property. And, if you're insuring people, what you really need to know is how the heat might be endangering them — which means monitoring biometrics such as heart rate, blood pressure, and perspiration.
So, not simple, but it feels to me like there's opportunity there. If construction can be covered for heavy rain and flooding, why not heat? Phoenix faced 113 consecutive days this year with temperatures above 100 degrees Fahrenheit. If construction wasn't halted or at least slowed on some of those days, well, it should have been.
At the least, heat considerations should become a factor in existing lines of insurance. Heat can clearly impair health and even lead to fatalities, and it does more damage to property than we may understand, given our reliance on historical records.
When I caught up with Jordan after the meeting, he said:
"There is increased wear and tear on siding and roofing materials and HVAC units due to extreme heat and fluctuations.... Homes, for instance, may be more likely to suffer wind damage than underwriters understand.
"This past summer, there were drawbridges in the New York City area where authorities had to bring out a powerful sander because parts had expanded so much that the bridges couldn’t close. Amtrak had to suspend service at times because the rails just got too hot. Heat increases wear and tear on bridges and other infrastructure at the county and municipal level. Heat can cause big problems for the electric grid."
For now, Jordan said, "We’re mostly looking at the data and having conversations [about how to possibly insure against heat]. But we’ve been increasingly engaging with certain sectors, such as construction and some municipal and county governmental organizations. And we have a pilot project going with an electric utility that pays it if temperatures reach a certain level, to cover the expected cost of shutting off power and having to compensate its customers."
He said more, too, in an interview. If you've stuck with me this far, you might also be interested in an insightful interview I did with Veronika Torarp, a partner with PwC, for this month's ITL Focus, which, as it happens is on Resilience and Sustainability. Among other things, Veronika said this about heat:
"There's an opportunity for prevention, through different ways to help with cooling and generally reduce exposures. That certainly will have implications on workers’ compensation and other lines, such as business interruption, when operations are affected by extreme heat. The first step for insurers is understanding the risk exposure that more severe heat is introducing to the lines they're already writing and products they’re already offering their clients. Once you understand what that risk profile is, there's also an opportunity to think about if you can introduce specialized coverage or specific endorsements or specific products around heat exposures."
The sort of back-and-forth between those two interviews — between the theoretical approach of an academic and the let's-find-something-valuable-to-do-now approach of an insurance pro — is the raison d'être of CIRCAD. (The back-and-forth may even have happened between Jordan and Veronika in real time at the meeting, as Veronika was among the 100 or so who attended.)
CIRCAD (which stands for the rather ungainly Center for Innovation in Risk analysis for Climate Adaptation and Decision-making) structured the meeting as mostly a series of 10 proposals by the academics (from Duke and the University of Georgia) for projects that would be funded by the major insurance companies represented there. The goals, timelines, and dollar amounts were placeholders, really just designed to get a conversation started — and they did. I've seldom seen a meeting as energized as this one.
Among the other ideas that really popped for me was the notion of community-based insurance. Some perils clearly relate to community (if the brush in my yard ignites in a wildfire, it's a danger to all the houses around me, and vice versa) and some others can (a seawall is rarely an individual effort), so why shouldn't insurance happen at the community level? A community focus would certainly get people to cooperate more on prevention.
The insurance professionals raised plenty of questions. A key one concerned equity. If your house is up on a hill while mine is in a valley by the river, why should you pay as much for a community flooding policy as I do? Another concerned concentration of risk. Several insurance executives said any company offering community-based insurance would need to have a portfolio of risks — not just flooding in one region, but flooding spread geographically, together with wildfire and other perils.
But the idea certainly sparked some interest and will be pursued. (If you want to read more, here is a long report on a pilot project for community-based insurance in New York City.)
The possibility of nature-based solutions also sparked considerable discussion. The idea is that some combination of individuals, organizations, insurers, and government might, for instance, plant mangroves along shorelines to prevent erosion in storms.
You can already see the complexities here. It will take a lot of work to decide who pays what, given the benefits they receive. Nature-based solutions are also rarely quick fixes. Mangroves don't grow overnight.
Still, I'm sure that idea will be pursued, along with those about heat, community insurance, and several others. We're in the very early days, but I suspect you'll be hearing in the next couple of years about projects with ties to CIRCAD.
I encourage you to check out the group. If you have questions, you might connect with Francis Bouchard, managing director, climate, at March McLennan, who is one of the leaders of the group.
I think it will not only generate some important work about climate but could be a model for aligning research at universities such as Duke and Georgia with major questions and opportunities in the insurance world.
Cheers,
Paul