Judd Boomhower, an assistant professor of economics at UC-San Diego, dives into how climate disasters are reshaping insurance markets. He discusses why insurers are pulling out of high-risk areas like California and Florida, and the unique challenges of disaster insurance facing simultaneous claims. The conversation highlights the limitations of catastrophe models and the complications of private reinsurance markets. Boomhower also explores parametric insurance as a possible solution, shedding light on the world of undercapitalized insurers and their risks.
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insights INSIGHT
Disaster Risk Pricing Challenges
Insurers struggle to price disaster risks due to limited historical data, unlike auto or health insurance.
They rely on catastrophe models (CAT models), which are simulation-based and imperfect, leading to reactive decisions like pulling out of markets.
insights INSIGHT
CAT Models and Their Limitations
Catastrophe (CAT) models simulate potential disaster scenarios by resampling historical events and projecting losses.
While AI can improve CAT models, their fundamental limitation is the lack of sufficient historical data.
insights INSIGHT
CAT Model Accuracy and Transparency Issues
CAT models' accuracy is hard to assess due to limited real-world events for comparison and the "black box" nature of private models.
The lack of transparency from for-profit modelers makes objective evaluation difficult, raising concerns about potential biases.
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Premiums are rising. Insurers are leaving markets. But people keep building in risk-prone areas, and the climate disasters just keep coming.
Can insurance markets adapt?
In this episode, Shayle talks to Dr. Judd Boomhower, an assistant professor of economics at the University of California-San Diego and a faculty research fellow at the National Bureau of Economic Research. He studies how insurance markets are reacting to climate change. Shayle and Judd cover topics like:
Why insurers are limiting coverage in California, Florida, and other high-risk markets
How disaster insurance, unlike auto or health insurance, faces a flood of claims all at the same time
How catastrophe models (or “cat models” for short) work and why AI and other improvements struggle the solve the fundamental problem: a lack of historical data needed to predict future events
The challenges of private “black-box” catastrophe models that can’t be reviewed by third parties
Reinsurance markets and why they’re not attracting more capital to shore up insurers
The pros and cons of parametric insurance, an emerging category of insurance products
Undercapitalized “fly-by-night” insurers that risk insolvency and failing to pay out claim
Recommended resources
NBER: How Are Insurance Markets Adapting to Climate Change? Risk Classification and Pricing in the Market for Homeowners Insurance
Brookings: “How is climate change impacting home insurance markets?”
Credits: Hosted by Shayle Kann. Produced and edited by Daniel Woldorff. Original music and engineering by Sean Marquand. Stephen Lacey is executive editor.
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