Insuring Against Extreme Heat Navigating Risks in a Warming World 2025

The cost of reinsuring properties against extreme weather has increased 1995 2005 2010 2015 2020 200080100180220 140 120160200240 Note: Index of property catastrophe reinsurance rates (rebased, 1992=100). Source: Howden.CASE STUDY 1 CONTINUED Turmoil in insurance markets not only impacts housing but also may portend a stormy picture for the economy as a whole. In the US, much of the banking sector is built on housing and property. Without insurance, banks will not issue mortgages; without mortgages, people cannot buy homes. This further strains an already tight housing market in the state, and causes decreasing property tax revenues, which, in turn, leaves communities with less revenue for schools, police and other essential services. Communities that are “uninsurable” are also “uninvestable”, which spurs long- term economic and social consequences for climate-risk- prone communities. Additionally, smaller regional banks are often more vulnerable to disruptions in the commercial and residential real estate markets, further straining institutions that have already exhibited susceptibility to instability and failure. In the long term, building climate resilience in California will require a generation-defining commitment from the private sector, policy-makers and other key stakeholders. This will involve retrofitting infrastructure and human capital to thrive in a world more prone to climate risks. In the short term, much of the insurance industry is proposing policy and regulatory changes to keep insurance affordable and attainable in climate-risk-prone communities, including: –Reinsurance priced into rates: insurance companies buy reinsurance to cover the costs of claims, and these reinsurance rates are also rising. Discussions are under way to factor in the net cost of reinsurance as a legitimate business expense when setting rates. This will help improve access to coverage and is already considered in rates across all states except California. –Predictive risk modelling: Californian regulators have made significant progress in building a system that allows forward-looking, science-based risk modelling to predict the likelihood of catastrophic events. As the severity and frequency of these events increase, relying on 20 years of past claims data to determine rates is no longer effective in assessing current risk. Catastrophic risk modelling is used in almost every other state. –Rate process: Californian regulators continue to work towards a streamlined rate application review process. Currently, California’s rate filings can take over six months to review and up to a year or more when an intervenor is involved. California is one of the only states that allows external groups to participate in the rate review process.31 Keeping California insurable aligns with the incentives of communities, insurance companies and policy-makers. The question of how to keep private insurance attainable and affordable in the state is a challenge, especially in light of the increasingly unsustainable growth of California’s public insurance market. The insurance industry and policy-makers must balance making insurance affordable and accessible for homeowners with allowing insurers to set prices that reflect increasing climate-related risks. Despite the challenges, there have already been promising developments on this front: –Regional resilience grants: These fund regional partnerships, allowing them to plan and implement climate adaptation and resilience projects.32 –Climate-related financial risk act: The California Senate Bill 219 requires companies with annual revenues of at least $500 million to prepare reports on climate-related financial risks.33 The first reports are due by 1 January 2026. –Risk communication: Sharing risk information with decision makers can help create risk-based pricing signals that encourage sustainable development, risk reduction, and rebuilding efforts. –Hazard maps: These maps help identify communities at disproportionate risk from climate perils and highlight opportunities to promote available insurance solutions.34 Insuring Against Extreme Heat: Navigating Risks in a Warming World 11