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Can Insurance Help Californians Recover From Natural Disasters?

SB30 has bipartisan support in the state, and also enjoys the backing of Southern California Edison and representatives from the insurance industry.
Heavy smoke covers the seaside enclave of Mondos Beach beside the 101 highway as flames reach the coast during the Thomas wildfire near Ventura, California, on December 6th, 2017.

Heavy smoke covers the seaside enclave of Mondos Beach beside the 101 highway as flames reach the coast during the Thomas wildfire near Ventura, California, on December 6th, 2017.

California is set to be the first state to insure its natural environment against disasters linked to climate change.

Senate Bill 30, introduced by Democratic State Senator Ricardo Lara, will establish a working group to discuss how to insure assets such as wetlands and forests, providing everyday maintenance as well as funds for a swift payout to restore these natural landscapes following a disaster.

"We are behind other countries actually when it comes to engaging our insurance community in our united front against climate change," Lara says. "Just like home insurance requires you to keep a roof or foundation in good shape, climate insurance can encourage healthy environments." In the United Kingdom, for instance, Bank of England Governor Mark Carney has spearheaded the Task Force on Climate-Related Financial Disclosures, an international effort to reduce financial risks that has reached out to the insurance industry (former New York Mayor Michael Bloomberg is the chair of the group).

Given its expertise in calculating risk, the insurance industry could prove an invaluable partner in dealing with climate change. And using insurance companies to aid community recovery and restore the natural environment in the wake of a disaster offers several advantages, Lara says, including reducing the strain on state budgets, as well as enabling faster payouts.

The bill was inspired by an insurance scheme established earlier this year in the Mexican state of Quintana Roo. There, the coral reef and beaches provide valuable protection against damage from hurricanes, which are predicted to become more frequent and severe due to climate change. The reefs are essential to the tourism industry that thrives along the coastline. According to a study published in Nature Communications in June of 2018 and led by Michael Beck, a scientist at the Nature Conservancy, a non-governmental organization, global costs from frequent storms would triple without reefs, and Mexico alone avoids $452 million in damage every year thanks to the protection that the reefs offer.

Yet the reef off Quintana Roo is vulnerable to environmental change and disasters, including disease and bleaching events, and the force of a Category 4 or 5 hurricane can destroy up to 60 percent of live coral cover. So the Nature Conservancy teamed up with insurance company Swiss Re and the state government of Quintana Roo to protect this important natural asset. By putting funds collected by the local tourism industry into a trust fund, the local government was able to purchase an insurance policy that is triggered whenever severe weather hits the reef. The rest of the money is used for ongoing conservation work, reducing the shorter-term risk to these coastline communities.

It turns out that what's true for Mexico is true for California: Healthy environments create resilient communities. From managing forests to restoring wetlands, working in tandem with nature can reduce risk to lives and property, preventing costly damages in the future. When Louis Blumberg, director of California's climate change program at the Nature Conservancy, heard about this project in Quintana Roo, he was curious whether it could be applied in his own backyard.

At COP23, the 2017 United Nations climate conference in Bonn, Germany, Blumberg introduced Lara to the notion of an insurance mechanism for nature. Lara, who was part of California's delegation to the conference, was interested, and the following spring they started work on a bill.

"If one insurance company is making money doing this, then chances are others will follow," Blumberg says. "That's the theory. When you have a market mechanism on anything, you create a new market, a new product, and you have early actors making money, then the others follow."

The bill will establish a committee to look at the design and usefulness of insurance products to protect the natural environment. During a speech to the insurance industry in London last year, the Nature Conservancy's president, Mark Tercek, floated some initial ideas. As well as products similar to the one they set up in Mexico, he's been looking at reducing premiums among property owners whose land is protected by a healthy natural infrastructure. "This would incentivize those parties to help keep that infrastructure healthy," he said. Another idea is "nature-based captives, where companies create their own insurance companies to cover the protective services of natural infrastructure."

Lara sees the policy being used by communities or local governments in California, who together could undertake meaningful restorations to their natural environment and thus improve their resilience, earning lower premiums as a result.

Specifically, the bill instructs the California working group to consider questions including: Can we use insurance to create incentives for wetland restoration to help defend the coast against storm surge? Can we create incentives for forests to be managed to reduce the risk of major fires? It also asks the working group to consider the benefits of such a scheme to the insurance industry, including whether its own exposure to losses can be reduced by new pricing mechanisms that reward good behavior and penalize actions that increase risk.

Whether such an insurance scheme would even work is unclear, but California is certainly a good place to try. The state has established a pioneering approach to climate policy, and its statewide carbon market is a megalithic example of a market mechanism in action. Its offsets market, which allows polluters to fund others' emissions reductions in lieu of their own, has helped restore forests and grasslands across the U.S.

SB30 has bipartisan support, and also enjoys the backing of Southern California Edison and representatives from the insurance industry. But climate campaigners haven’t always welcomed the insurance industry into their efforts. Harjeet Singh, who leads climate work for the non-profit ActionAid, has raised concerns that insurance mechanisms in the developing world aid corporations rather than the poor. While there was no opposition to the bill, Kathryn Phillips, director of Sierra Club California, says: "If that task force or study results in new proposed legislation, then there might be a robust opposition, depending on the proposed legislation." (The Sierra Club also supported the bill.)

The senate passed the bill in a 28–10 vote on August 24th. Governor Jerry Brown now has until September 30th to sign or veto it. The legislation could have strong support from the insurance commissioner: Lara himself is currently campaigning for the role.

"We want to make sure that California is the first state in the United States to explore a climate insurance market that can help us protect our natural resources, especially given the devastating fires that are occurring worldwide," Lara says.

New Landscapes is a regular series investigating how environmental policies are affecting communities across America.