How to Fix Insurance Market Failures

I am happy to co-author this article with Beatrice WEDER DI MAURO, President of the CEPR - Centre for Economic Policy Research, reflecting on the urgent need to engage in collective thinking and action to adapt our response to the challenge of insurability in the face of escalating climate risks. This article, which captures key convictions from our joint workshop hosted at Collège de France by the AXA Research Fund and CEPR - Centre for Economic Policy Research, couldn't have been more timely.   Devastating floods in Valencia, the wildfires in Los Angeles, the typhoons in Mayotte and La Réunion... These recent climate catastrophes show a clear reality: climate risks are intensifying and the protection gap for local communities and economies are becoming evident. Global economic losses from extreme weather events reached $320 billion in 2024, while in Europe, only 25% of economic losses were insured - leaving individuals, businesses, and communities vulnerable.    To address this, we need to enhance risk-sharing mechanisms and promote partnerships between public institutions and private companies.   Ensuring insurance accessibility and effectiveness is crucial. This can be done through: ➡️ Hybrid models, combining market mechanisms with public-private partnerships, to help ensure broad coverage and affordability. France’s CatNat regime and Switzerland’s hybrid model offer valuable insights. These models can be adapted to regions facing extreme exposure, such as sea level risks. ➡️ Greater investment in prevention and risk-sharing mechanisms. Initiatives like local municipal risk assessments can help small municipalities assess and mitigate local climate risks. ➡️ Impact underwriting, where insurers incentivize policyholders to adopt risk-reducing measures in exchange for lower premiums. ➡️ Public education on climate risks and stronger coordination between insurers, governments, and consumers to ensure preventive measures are taken seriously.   As we move forward, it's clear that policymakers, insurers, and society must work together to strike a sustainable balance between affordability and fiscal viability. This is not just about who pays the bill. It is about how we manage risk in an increasingly uncertain climate landscape. Let's continue to foster collaboration and innovation to close the protection gap and build a resilient future. 👇 https://lnkd.in/er6BkrtZ

🔥 Monday Mornings With Michelle - CA wildfires, can something good come out of this tragedy? 🔥 In the wake of the utter devastation happening in Los Angeles, there is a lot of press being paid to the fact that some of the biggest names in homeowners insurance, like State Farm and Allstate, decided to stop writing policies in the state. With the magnitude of the devastation, if nothing changes, many of the remaining carriers may have no choice but to exit the market. This isn't just about corporate decisions—it’s a wake-up call for the state’s insurance market. Here are the three main reasons why insurers are leaving: 1️⃣ Rising Catastrophic Risks: Wildfires in California are more frequent, intense, and expensive than ever before. Insurers are paying billions in claims, outpacing the premiums they collect. 2️⃣ Regulatory Constraints: California's Proposition 103 makes it tough for insurers to adjust rates based on future risks. They're stuck using historical data that doesn't reflect the increasing challenges from climate change and rising costs. 3️⃣ Soaring Costs: Rebuilding after a disaster isn’t cheap. Construction costs, labor, and reinsurance rates are climbing, leaving insurers with losses higher than premiums. What can be done to fix this? Here are some solutions to stabilize the market and ensure homeowners can get the coverage they need: ✅ Wildfire Risk Mitigation: Invest in better land management and incentivize homeowners to adopt fire-resistant materials and maintain defensible spaces around their properties. ✅ Rate Regulation Reform: Modernize regulations to let insurers use forward-looking models and climate data to set rates that reflect today’s risks. ✅ State-Backed Reinsurance: Create a public-private partnership to spread catastrophic risks and stabilize the reinsurance market. ✅ Consumer Education: Help homeowners understand how to protect their homes and why premiums may increase due to rising risks. ✅ Fair Plan Improvements: Strengthen California’s insurer of last resort to ensure coverage remains available for high-risk areas. This situation is complex, but the stakes are high—for homeowners, businesses, and the state’s economy. We need bold, collaborative solutions to create a sustainable insurance market in California. What are your thoughts on this crisis? Let’s start a conversation about the changes we need to see. #Insurance #California #Wildfires #ClimateChange #Innovation

This won’t win applause, but it’s true: when insurers say a state is “too hard to do business in,” it isn’t punishment. It’s physics. I’ve sat at kitchen tables after wildfires as families opened non-renewal letters. I’ve watched closings fall apart because wind coverage vanished. It feels like abandonment. It’s a signal: price is being held below risk, and capital is walking. Insurers don’t exit because weather got worse. They exit because the rules won’t let price, models, and mitigation line up with reality. When that alignment breaks, the math breaks. What makes a state “too hard”? ✔️ Rate approvals that lag loss trends and reinsurance. ✔️ Bans or limits on forward-looking catastrophe models (wildfire, wind, flood, hail). ✔️ Legal friction that turns small claims into big volatility. ✔️ Underwriting with one hand tied—maps you can’t use, data you can’t price. ✔️ FAIR Plans swelling from last resort to first stop. Price must equal risk—or capital leaves. Unpopular, yes. Also fixable: ✔️ Allow credible, forward-looking cat models and recognize reinsurance costs. ✔️ Tie real discounts to verified mitigation: a 0–5 ft noncombustible zone, ember-resistant vents and eaves, fortified roofs, elevated utilities. ✔️ Use transparent hazard maps with consumer protections—not bans. ✔️ Fund community-scale risk reduction (fuels, drainage, roof upgrades, codes) so expected losses actually fall. ✔️ Keep residual markets small and temporary, with clear off-ramps back to private capacity. I don’t like the human cost of saying this. I’ve seen it. But pretending risk is cheap doesn’t protect people; it just delays the bill and shrinks options. We can choose applause now—or availability later. #Insurance #Resilience #Wildfire #ClimateRisk #RiskModeling #Infrastructure #PublicPolicy #DisasterMitigation

I now have a significantly updated & improved version of my proposal to fix homeowners insurance markets in a time of climate change: Obamacare For Homeowners Insurance: Fixing America's Broken Insurance Markets In A Time Of Climate Change, Harv. Env. L. Rev. (forthcoming): https://lnkd.in/geymJT4C. It argues homeowners insurance reform modeled on Obamacare—featuring mandated coverage for climate risks, ban on non-causal risk discrimination, elimination of utility-style rate regulation, creation of insurance exchanges, & progressive subsidies—can fix failing markets & foster climate adaptation.

The spatial correlation of climate risks breaks standard insurance models. New research synthesizes how this and other market failures should guide adaptation policy. A new working paper identifies key market failures preventing efficient adaptation: insurance markets cannot fully cover spatially correlated climate risks (e.g. hurricanes in Florida making state-wide infrastructure damages), credit constraints block adaptation investments for low-income households, and positive and negative externalities distort private adaptation decisions. Their analysis formalizes adaptation through two economic channels. Ex-post responses to weather shocks and ex-ante investments based on climate expectations. This framework shows how incomplete insurance markets and credit constraints create adaptation gaps. For instance, smallholder farmers often cannot access credit to invest in irrigation systems, while disaster insurance remains prohibitively expensive due to correlated risks. The chapter points toward distributional concerns in adaptation markets. Low-income households invest less in adaptation despite higher marginal benefits, creating a feedback loop where climate vulnerability concentrates among the poor. These distributional effects justify public intervention even when markets function well - particularly as historical emissions from wealthy regions drive adaptation needs in poorer areas. Great work from top scientists: Tamma Carleton, Esther Duflo, Jack Kelsey, and Guglielmo Zappalà, published by the National Bureau of Economic Research. (https://lnkd.in/e3gcrvn8)

I'm seeing plenty of posts from folks like Mark Cuban and Katy Talento ND ScM about how "The ACA is garbage." Their solutions seem to point towards funding HSA's and allowing people to go purchase their own coverage. I'd argue the solution is the individual mandate. The ACA's biggest flaw wasn't the marketplace, subsidies or the carriers. It was the decision to gut the individual mandate. The individual mandate was the wall for the entire risk pool, it's what would've made this thing work. The math is pretty simple: - Healthy people sitting out = older, sicker and more expensive risk pool - more expensive risk pool = higher premiums - higher premiums = even more healthy people sitting out - this is the death cycle The mandate wasn't just about forcing people to buy coverage (though on it's face, that's what it is!). It was a market stabilization mechanism. It allowed the law to function without constant volatility. When the mandate was removed, the ACA didn't collapse, obviously! It just lot the one mechanism that kept risk balanced. Everything since then - more subsidies, plan redesigns, insurer churn - has been a patchwork on top of a structural void. If you want predictable premiums and real long term stability in an individual market- you need a mechanism that forces broad participation. Every functioning insurance system on earth has one! Even Medicare!!! We took our forcing mechanism out and pretended the economics wouldn't notice.