To cut climate costs, put insurance executives in the hot seat.

Lessons from life insurance – and why Oklahoma might be advancing a stronger climate-insurance policy than New York.

In a recent webinar on wildfire risk, California’s insurance market got a clear prognosis. The experts at Stanford have run the numbers, and it boils down to a simple conclusion: to keep insurance affordable, we need fewer homes to burn. As it turns out, whether you price the risk with blackbox models or public ones, the risk from climate-driven disasters is simply too high. 

From the wildfire-prone west to hail-damaged central states, climate disaster-driven increases are rising so quickly that economists warn they will outpace our ability to afford them. To protect people and the broader economy, climate-driven risk must go down. That means homes must be adapted, new, safer housing must be built, and, most importantly, carbon emissions must go down through every available avenue. 

Each of those tasks will require all hands on deck. The combination of all three at once will require new sources of capital and power, as well as the economics of early intervention. Insurance companies – with a mountain of cash and record profits, currently unparalleled data and predictive capabilities and the power to either sustain or undercut the entire American economy – are not likely to be easily excused from the table. One way or another, insurance dollars must become a force for proactive prevention.

In the era of climate change, insurance must become proactive. So how do we get there?

We recently outlined near-term tools states can use to convert insurance funds to risk reduction, pointing to existing models from states like Oklahoma. This is part of a growing body of literature on new mechanisms and policy design to convert systems designed for merely “pricing” or distributing risk into ones designed to reduce risk. Whether it’s through new fortified roofs, underwriting clean energy or phasing out fossil fuel investments, there’s no shortage of new ideas on how to proactively reduce risk.

The mechanics of each of these tools are essential to explore the world we want to get to, one in which our money is spent to protect us, not increase stock buyouts. But well-behaved white papers rarely make history – at least not on their own. So what does? 

More specifically, what moves insurance companies – or at least unlocks the unparalleled resources they currently command. Is it appealing to the better angels of their nature, to their profit motives, or the policymakers and regulators who oversee them?

To answer that broader question, history has left us a few hints.

The early history of life insurance, which precedes the relatively new invention of modern home insurance, gives some promising signs. Life insurers responded in the early 1900s to an era of rampant infectious diseases like tuberculosis by pioneering new tools for saving lives, including nursing services, educational campaigns and tuberculosis treatment centers. They also helped create something we take for granted today, such as the annual medical check-up, a repurposed life insurance eligibility exam. Tools once used to deny policies were converted into a public health apparatus, aiding in accelerating diagnosis and treatment.

This wasn’t pure benevolence. Much like home retrofits save insurers money today, saving lives turned out to be good for business. But there’s a catch. According to Dan Bouk, historian of statistics and life insurance, it was only after these experiments that life insurers realized they could quantify and profit from the risk reduction benefits. 

That’s good news, because profit motives today aren’t motivating change for home insurance. Much like life insurers at the time, insurers simply make far too much from investing the premiums they collect. Even rising climate disaster tolls don’t make enough of a dent yet. When insurers can raise premiums, retreat, profit and repeat, the logic of long-term savings won’t be enough. 

Profit won’t save us, but politics matters too, and a particular political approach stands out: putting insurers in the hot seat. 

Rather than the neutral calculation of risk or pursuit of profits, Dan Bouk points to another factor. He asserts that one of the pivotal ingredients was political pressure, through a landmark investigation known as the Armstrong investigation: 

“In 1905, the life insurance companies were embarrassed at a set of disastrous public hearings in New York, when their methods for making risks were revealed, along with the extent to which they had become very powerful thanks to their investment capital, and that they had used that power in influencing politics and other industries.

Humiliated, life insurers wanted to find a way to say, “Look, we’ve done something good for people.” So, they got into the business of not only insuring lives but also trying to help people extend lives by offering advice based on analysis of their policy holders’ medical information.”

After the Armstrong investigations, the resignations of five insurance CEOs opened the way for new leadership. Those who inherited an industry under fire had watched their bosses ousted or humiliated by public scandal. They brought in new, broader public appeal to their social purpose. For employees with pre-existing social justice inclinations, their arguments took new force, allowing them to tap partners from nurses to public health reformers to European socialists for new public-private partnerships. 

To convert insurance into a proactive stance, we may need a modern day Armstrong investigation first. 

The good news is that, in an era of affordability politics, the conditions are already ripe. Many home insurance tools could be repurposed for climate purposes – from aerial footage for roof repair to endorsements for clean energy. The investments insurers can make – the kind that got Armstrong-era executives in trouble – could be reshaped to invest in our homes, rather than the expansion of new fossil fuel development abroad. 

More importantly, this doesn’t require a superhero or time traveler, just a politician who understands populist sentiment and wants to win. After all, the Armstrong investigation did more than prompt insurers into self-serving self-reflection; it also launched the political career of the investigation’s chief counsel, Charles Evan Hughes, a utility reformer turned insurance investigator who went on to win the governor’s seat, run for president and land himself as the Chief Justice of the Supreme Court. (Not a bad outcome for the hard work of taking powerful companies to task.)

For reformers looking to push insurance funds into proactive risk reduction, the inspiration won’t just be in the mechanics of innovative policy design. It may also come from Oklahoma, where the state draws resilience funds from the industry, where commissioner candidates debate jail time for executives, and where the Attorney General and governor candidate announced a significant lawsuit against Allstate, seeking fines for both violations of consumer protection law and racketeering laws. 

Politicians in states like New York, Massachusetts and California – historical leaders on insurance rules and investigations – should take note. If they want to keep that reputation, they’d better start digging. 

If life insurance is any evidence, the innovations we need from our insurance systems won’t come from polite suggestions. They’re more likely to be diamonds – they’ll only result from pressure.