There are many reasons the fires that set Los Angeles ablaze in January were so severe: from development pushing into an inherently fire-prone ecosystem to California’s byzantine regulations; from an extremely dry winter season to the particularly intense Santa Ana winds.

In the aftermath of the disaster, California has turned to rebuilding. Unfortunately, local policymakers have already demonstrated a clear preference to recreate existing vulnerabilities and housing shortages, going as far as expediting permits for “like-for-like rebuilds.”

This isn’t just a California problem; many places struggle with catastrophic losses from extreme weather; indeed, as extensive and robust research and industry reporting shows, disaster losses have risen precisely because more people and property are exposed to weather extremes.

This trend should lead to thorough debate about land management, urban design, and post-disaster rebuilding: How can national prosperity and public safety be protected from disasters, specifically from rising insurance costs related to increasingly expensive disasters?

Instead, debates about insurance affordability and availability are routinely framed in the context of climate change and energy. But why?

There are two circular and self-serving reasons. The first: those who advocate that climate change poses large economic risks point to rising insurance costs as proof of concept. The second: public perception of disasters and climate change, born of politicized science and advocacy reporting, creates an “inexhaustible market” for firms selling climate change risk analytics and risk related products.

Yet framing rising disaster losses as a problem of climate change has allowed advocates, policymakers, and the public to skirt the real issues for decades. Instead, they need to do the hard work of grappling with better land management, building requirements, and ways to improve the public experience with insurance.

Insurance is essential for American prosperity and well being

In the wake of natural disasters in the United States—a wealthy country that heavily insures property—there is typically renewed attention on insurance pricing. The expectation is that “real risk pricing” in insurance is a market fix to the complex underpinnings of disaster.

The view has merit, but it is also a deceptive oversimplification.

First, insurance is a foundational component of economic activity and general wellbeing. You cannot drive a car to work without insurance. It is difficult to build wealth without buying a house, which requires insurance. In the United States, you have no real access to medical care without insurance.

Insurance is thus a forefront public concern.

In turn, long ago, the Supreme Court decided that the business of insurance is different from other sorts of commercial activity; it is “affected with a public interest.” Unlike pizza and Gucci handbags, insurance rates—the basis of the cost of insurance—are subject to heavy regulation. The battle over the extent of regulation and its wisdom has lasted over a century.

Regulators and legislators oversee the insurance regime by attempting to strike a balance between social value concerns and insurer business concerns. It is not unusual for policymakers to try to spread loss over time and a broad population through public insurance mechanisms rather than assuredly receive the public wrath for insurance costs or undermine a real estate market in the present.

Of course, if regulators rule with too heavy a hand, insurers will pack up their business and leave. This is a problem in states prone to catastrophic losses such as California, where a shockingly constrained insurance regulatory regime has run up against difficult market conditions. Insurers including State Farm have withdrawn from the state citing infeasible business conditions.

Another problem is that individual homeowners, through their individual insurance policies, may be left holding the bag for increasing catastrophic risk due to land management decisions and building regulations that they have little to no control over. For instance, it is not straightforward that individual homeowners are responsible for the catastrophic hurricane and flood loss potential in Florida that has developed over decades of population growth giving rise to the fourth largest state economy.

Complicating things still further, insurance pricing does not represent an absolute measure of risk—not in any real geophysical sense, at least. Rather, it is an integration of science, human risk perception, and market conditions. There is no one right way to calculate it, but some ways are more or less profitable, competitive, or affordable in any given year.

Rate calculations can fluctuate rapidly in response to background market conditions such as inflation, large loss events, and the introduction of new data and technologies to measure risk. For most of us, though, our incomes are basically the same each year.

Because of all this, the problem of societal vulnerability to weather extremes is not easily resolved through insurance pricing, nor does looking at the fluctuations of insurance pricing reveal much about societal exposure to climate change.

The origin story of the insurance problem as harbinger of climate change

The story of how insurance nonetheless became wrapped up in climate change narratives takes us back to the summer of 1992.

In early June of that year, the creation of the United Nations Convention on Climate Change (UNFCCC) brought climate change to the forefront of global political attention. Then, in August, Hurricane Andrew made landfall in South Florida creating economic losses unseen in the United States before then. A rash of insurer insolvencies led policymakers to implement extreme measures to avoid a collapse of the state’s economy.

The financial and societal havoc wrought by Hurricane Andrew became an instant symbol of climate change. The article below from Newsweek features a couple of today’s legendary climate scientists—then, still early in their careers. In the article, the scientists promised hurricanes would get worse with climate change. They have since established prominent careers advancing technical methodologies to prove their prophecy.

The global insurance industry, too, changed its structure and risk measurement practices. Rapidly and widely adopted catastrophe modeling revolutionized the methods for risk calculations, which in turn supported new investment practices. In Florida, sudden hikes in insurance costs led to increased use of the state’s public insurance programs.

To support these investment activities and build their catastrophe modeling, reinsurers became important sponsors of research considering the nexus of climate change and extreme weather. Yet the relationship between many reinsurers, risk analytics, and academic researchers was rarely made apparent in the published literature.

A new round of flurry over climate change came in wake of the active 2004 and 2005 hurricane seasons. Hurricane Katrina notably created a racially charged, globally publicized humanitarian crisis in New Orleans. Climate change advocates jumped at the chance to market a brewing crisis.

Depleted of capital, reinsurers demanded that catastrophe models further increase their views of future risk by moving from calculations based on the entire historical hurricane record to a shorter, near-term outlook considering current stages of climate variability supercharged by global warming.

When Florida regulators refused to allow use of these new modeling techniques in insurance pricing, insurance companies became squeezed between what they could charge homeowners and what reinsurers required to be paid.

The Florida insurance market was in havoc. Climate advocates and their philanthropic funders showcased the state’s battered and duct-taped market to foreshadow the nation’s economic future without rapid decarbonization.

But wouldn’t you know it? The 2005 hurricane season would kick off a lucky streak of the longest running drought of major hurricane landfalls in the United States lasting until Hurricane Harvey in 2017. Reinsurers ended up with so much cash they started giving more of it away to their investors through special dividends.

Less expensive reinsurance made private market insurance more affordable. Policymakers patted themselves on the back for their success in shrinking the size of Florida’s public insurance program.

But the drought ended. Large loss events have returned, as has a massive spike in inflation post-2020, new instabilities in insurance availability, a new round of cries from advocates that climate change is to blame, and a steady stream of good financial news in the reinsurance business.

The subtle shift from energy policy advocacy to risk business marketing

Following the 2016 Paris Agreement on Climate Change, climate change advocates pushed for a new financial regulatory regime to account for global warming. Eventually, aspects of these regulations took hold in Europe but were engulfed in litigation within the United States.

Around the world, an avalanche of venture capital poured into the development of climate tech including climate risk analytics. By 2020, major catastrophe model vendors serving the insurance industry were marketing their use of climate change scenarios.

The irony in all this is that insurance contracts are written on an annual basis. Those involved in the catastrophe bonds may take an outlook to a few years, at best. Climate change—which takes place over decades and centuries and is having little to no readily observable impact on current loss experience—has no practical meaning in the insurance business context. Many close to the business say that climate change is simply not a consideration when writing contracts.

But the climate change-disaster losses-marketing-advocacy spectacle does affect public and investor risk perception. Insurance industry engagement with climate change, especially among reinsurers and their research funding, is one part due diligence and one part public relations campaign. If there is a model being sold, one might as well take a look at it, use it to satisfy sustainability reporting requirements, and bolster the public image of being attentive to the issue.

Reporting in Bloomberg demonstrates that investors in catastrophe bonds demand more money in exchange for their investments because of their impression that climate change has made the loss experience markedly worse.

Although investors may be well served by these socially constructed inflated views of risk, however, this dynamic does not serve the public, which is struggling to pay insurance costs and make sense of the industry’s mixed messaging.

Dangerous misframings

To be sure, the catastrophic loss potential in some parts of the country is very, very high—and it is challenging to insure those places. Debate about the continuing insurability of catastrophic losses has been raging at least since the 1980s. It’s a serious matter.

Catastrophe modeling has enabled the insurance industry to better handle such scenarios. Florida has benefited tremendously. With the introduction of modeling for California ratemaking, the state is undoubtedly on its way to becoming a leader and beneficiary from greater development of a wildfire risk investment market, too.

Even so, the precariousness of the current system is apparent in the sometimes dramatic fluctuations in the cost of insurance reflecting swings in the cost of capital. The financial industry responds much faster to new technologies, modeling assumptions, and market dynamics than household incomes increase and the built infrastructure evolves.

What to do about insurance and the design of our cities requires rigorous discussion among industry, policymakers, and area-specific experts. It is not the place for advocacy about climate change. And yet, “climate change” has become a politically palatable reason for the increasing costs of insurance that makes housing even more unaffordable for millions of Californians and Floridians.

Such inaccuracies undermine effective understanding of the dynamics in the building and insurance industries, and real world causes of loss while also creating demand for inflated views of climate change risk. When these inflated views make their way into finance, it exacerbates the problem.

There are knock-on effects, too.

California’s former insurance commissioner, now perched up high in the ivory tower of academia, is pushing a loud campaign to fault the fossil fuel industry for the fires in Los Angeles and force it to pay to rebuild. California senators introduced legislation to enable individuals and insurers to pursue recovery of losses from the fossil fuel industry for a “climate disaster.” The United States Senate Budget Committee, whose former chairman also supports this line of reasoning, has highlighted a dark premonition of national economic collapse from climate change driven insurance costs.

The situation is an extension of the original misframing of climate change.

The 1992 UNFCCC framed a problem of “dangerous” climate change that could be resolved by market mechanisms. By mischaracterizing the fundamental industrial and innovation challenge of a world economy based on fossil fuels, the UNFCCC led us into decades of unhealthy politics, a navel-gazing, advocacy-oriented scientific enterprise, and harmful energy and development policies around the world.

The same forces and perspectives that drove climate debates off course back then are some of the same that push debates about disaster losses and insurance into the wild today—summed up into the trendy phrase: “the climate crisis is an insurance crisis.”

The extent to which climate change advocacy has captured the framing of public problems with disasters and insurance is as astounding as it is dangerous.