Addressing Extreme Heat Risk with Insurance
Latest report assesses potential for modern insurance solutions to support response and mitigation
This past summer, California suffered through a record heat wave with triple-digit temperatures throughout the state that helped spark the record-setting wildfires that left tens of millions of acres burned, hundreds of individuals displaced, dozens dead or missing, and tens of millions respiratory toxic air. But extreme heat is a climate killer in its own right, answerable for hundreds of deaths per 12 months in the USA, a number that will grow significantly this century.
Today, CLEE is releasing a recent report, Insuring Extreme Heat Risks, that studies the potential for insurance and other financial risk-transfer mechanisms to assist local governments reply to and mitigate the intense heat risk they are going to face with increasing regularity in coming many years. (The report was prepared with support from the California Department of Insurance and features a foreword by California Insurance Commissioner Ricardo Lara.) While insurance is traditionally used to mitigate the financial cost of property damage after a disaster event, governments and businesses are increasingly trying to insurance as a solution to address climate-related risks by supporting each recovery and mitigation efforts.
While extreme heat is comparable in origin to other climate-related risks like wildfire, extreme weather, flooding, and drought, its impacts are especially diffuse and difficult to handle: they fall totally on individuals (and on our fractured, multi-payer health care system), moderately than on physical property; they disproportionately affect vulnerable and disadvantaged communities; they usually typically exacerbate existing health problems, making deaths and hospitalizations difficult to trace.
Extreme heat affects not only physical health but in addition mental health, educational success, birth outcomes, employee productivity, transportation networks, and utility infrastructure. Each of those heat-related risks adds to the group of stakeholders enthusiastic about effective mitigation and response, while highlighting the challenge of organizing and paying for it. Extreme heat is a fiercely complex problem demanding comprehensive solutions that cross public health, emergency response, public works and parks, and dozens of other government capacities.
Cities like Los Angeles and San Francisco have developed resilience plans that include comprehensive extreme heat elements, often incorporating five kinds of infrastructure: natural (urban vegetation and tree cover), built (cool surfaces and shade structures), social (cooling centers and air conditioner access), communications (early warning systems), and planning (zoning codes that emphasize cool development.
These strategies have the potential to substantially cool urban areas, reduce harmful health outcomes, improve quality of life, and generate significant cost savings for society. But they need policy and financial support to get off the bottom.
Insurance, and the broader category of economic risk transfer, can have the potential to supply each the capital and the coordination structure needed. In recent times, insurance and financial sector leaders have developed or adapted a variety of tools to handle a growing range of climate-related risks. For instance:
- Parametric insurance, which involves a payout based on the occurrence of a pre-determined weather/climate event (moderately than assessment of actual damage), has helped national governments to get well from climate-related risks like cyclones and excess rainfall; energy providers to guard against high spot prices for fossil fuels when drought reduces hydroelectric production; and travel and tourism businesses to guard against business interruption during extreme haze events.
- The Washington, DC water authority used an environmental impact bond to finance investments in natural infrastructure to administer stormwater runoff, with contingency payments owed to investors or to the authority in case of over- or under-performance of the infrastructure.
- Forest resilience bonds can raise capital for forest restoration projects based on the anticipated ecological and wildfire protection advantages of sustainable forest management, with stakeholders including water utilities and mission-oriented investors.
Perhaps most prominently, the federal government of Quintana Roo, Mexico partnered with an insurer, a nonprofit, and native resorts to fund a trust that purchases a hurricane wind-based parametric insurance policy and uses the policy payouts to finance recovery of the coral reef along the state’s coastline—bringing multiple private and non-private stakeholders together over their shared interest in natural infrastructure, supporting resilience investment and disaster recovery.
Extreme heat poses a good greater challenge, on account of the complex web of stakeholders and mitigation measures described above and the dearth of a single government entity with responsibility or capability to administer it. However the policy tools that these modern instruments offer—including multi-jurisdiction risk pooling, incentives for risk mitigation and crisis management investments, and public-private partnerships—have the potential to form a workable risk transfer framework for extreme heat. This framework might include:
- Development of a comprehensive local extreme heat plan including appropriate components across natural, built, social, communications, and planning infrastructure.
- Evaluation of economic implications of warmth plan implementation including the associated fee of mitigation investments and responses; anticipated temperature reductions; expected health impact of social and communications investments; and estimated savings generated by these measures.
- Certification of the warmth plan through a model “performance contract” that identifies needed plan components and monitors achievement of key milestones and adherence to recurring plan elements.
- Establishment of a neighborhood heat vulnerability index including multiple trigger points at different daytime and overnight temperatures and time periods in multi-day extreme heat event.
- Creation of an insurance policy with payouts linked to heat triggers, vulnerability indicators, and appropriate responses from the warmth plan, to supply financial support where and when it’s most needed.
- Provision of premium discounts or other subsidies for investment in and maintenance of long-term heat mitigation infrastructure.
Significant research and policy development, from more detailed data on the societal cost of maximum heat events to recent public heat management authorities and public health protections, can be needed to support this framework. (California is already a frontrunner in a single aspect of the policy department: Cal/OSHA regulations require outdoor employers to supply cooling breaks on high heat days. Senators Kamala Harris and Sherrod Brown recently introduced federal laws that may function similarly.) Smaller-scale pilot projects focused on individual elements of maximum heat mitigation and response by a neighborhood hospital system or outdoor industry sector could provide initial proof of concept and construct the needed coalition.
While the questions currently outrank the feasibility of risk transfer for extreme heat, the necessity—with heat records falling worldwide amid multiple cascading disasters, and governments in poor health equipped to guard their most vulnerable residents—is self-evident.
Download the report here.