A recent federal disaster declaration will open the doors for people in six waterlogged California counties to access tens of millions of dollars in federal aid. But federal relief can take months to reach people and often fails to reach those who need it most. 

As climate change brings wave after wave of extreme weather, people across the country are more vulnerable than ever to disasters and the financial devastation that can follow. Some governments (like California’s) are already cutting climate pollution and figuring out how to get people and infrastructure out of harm’s way. 

But studies have shown that insurance — unloved as it may be —  can spell the difference between recovery and ruin, especially for those who lack personal savings or fail to meet the federal criteria to access loans.  

“Insurance can provide critical financial protection after a disaster, but right now, it’s failing many people,” says economist Carolyn Kousky of the Environmental Defense Fund, author of the recent book Understanding Disaster Insurance: New Tools for a More Resilient Future. 

Gaps in insurance coverage

Disaster insurance tends to be expensive, if it’s available at all. That’s partly due to the way traditional insurance is designed — it’s meant to pool risk to cover an accidental event.  If one customer out of a 1,000 has a burst pipe, there’s plenty of money in the insurance pool to cover their damages. 

But when a hurricane or wildfire flattens entire towns, everyone files major claims all at once. Insurance companies, facing heavy losses and even bankruptcy, are pulling up stakes in California, Florida and Louisiana.

In California, 98% of homeowners don’t have flood insurance. That means the vast majority of people affected by this winter’s severe flooding are going to be reliant on their personal savings, loans (if they qualify) and a few thousand dollars from the Federal Emergency Management Agency to recover from disaster. 

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That in itself is a recipe for disaster, especially for lower-income families. Numerous studies have shown that FEMA aid tends to flow toward whiter, wealthier households who can afford to wait a few months for a check, and who have the time and capacity to navigate the application system, meet documentation requirements and handle inspection visits. 

“People end up draining their retirement savings,” says Kousky. “We see low-income families fall behind on bills, or stop spending on health care. Without insurance, disaster recovery can be really damaging.”

It’s not just in drought-prone California where people aren’t insured against floods. Nationwide, around 70% of residences in high-risk areas (as designated by FEMA flood maps) lack flood insurance. These maps are widely considered to underestimate flood risk, because they don’t account for climate change or for inland flooding due to rainfall. 

Parametric insurance: a new model

Kousky and others are on a mission to make insurance more inclusive. A pilot project she helped design, in collaboration with the New York City Mayor’s Office of Climate and Environmental Justice, Center for NYC Neighborhoods and SBP, a national disaster recovery nonprofit, hints at how insurance can be rethought to reach more people with less cost — so everyone has a fair shot at recovering when disaster strikes. 

The project uses a type of insurance rarely seen in the United States. Parametric insurance, common in less wealthy countries, provides rapid cash payouts immediately after a disaster, without any paperwork or a visit from a claims adjustor. The payouts are automatically triggered by a measurable event, such as wind speed or flood water levels. 

In the pilot, the Center for NYC Neighborhoods is using a parametric insurance policy to finance a program that will make emergency cash grants after flooding from heavy rainfall, like the flash flooding that killed 13 people in the city in 2021. Covered households could receive up to $10,000 within days if they’re affected.

That quick infusion of discretionary cash can make a big difference. Nearly one in three American households don’t have enough cash on hand to cover a $400 emergency expense. And disaster expenses often extend beyond property damage, says Kousky, who started studying the economics of disaster relief during Hurricane Katrina. 

“What if your power is out and you need a generator? What if transit flooded and you can’t get to work and you lose income? Or schools close and you need child care? Traditional insurance does a good job of protecting property, but doesn’t always match the reality of what people are facing in their daily lives,” she explains. 

A parametric trigger for rainfall has never been devised before, says Kousky. “It’s very new, so we’re going to keep learning from it and adjusting.” Her hope is that it can be a valuable tool for protecting lower-income populations. South Carolina and several cities in California have already expressed interest. 

Where parametric insurance is used

Parametric insurance isn’t just for individuals. In the Caribbean, entire nations have purchased disaster coverage provided by parametric insurance products, created after frustrations with slow and ineffective international aid. 

The New York City Metropolitan Transit Authority has a parametric catastrophe bond it created after Hurricane Sandy. The agency would receive payouts if storm surge reaches levels that can flood subway tunnels.

Anyone in California can buy Jumpstart insurance, a parametric product triggered by an earthquake. Payouts can be confirmed by responding “yes” to a geotargeted text message.

Flood Flash, an insurance start-up already operating in the U.K., uses flood sensors installed on customers’ buildings to trigger claims and says it can issue payouts within hours. The company plans to launch in the U.S. with parametric policies for businesses in Texas, Florida, Virginia, Louisiana and California.  

Reducing climate risk

Another intriguing possibility for insurance reform is damage prevention. In Kenya, cattle farmers can get parametric payouts at the first sign of drought so they can stock up on feed. In Canada, 15 major insurance companies are teaming up with Ducks Unlimited to invest in wetlands protection to reduce flooding.

And in the U.S., EDF is working with a leading commercial insurer to use insurance as a means to reduce climate risk. Insurers could, for example, encourage oil and gas companies to reduce methane pollution, which is accelerating climate change, by demanding they meet emissions control criteria in order to qualify for coverage. 

Of course, insurance alone can’t save a society that ignores the risks posed by climate change. 

“We also need to be thinking about building codes, land use, and how and where to build after a disaster,” says Kousky. “Playing with the structure of insurance isn’t going to get us out of this. We have to reduce risk.”