Senator Whitehouse: "It May Be Too Late"

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55. Historically, insurance has been based on the concept of universal risk pools.

Last edited Mon Sep 22, 2025, 10:05 AM - Edit history (1)

The concept of a "risk pool" is to cover everyone, regardless of the risk (within certain limits, of course). Insurance companies achieve this by grouping all individuals together in a risk pool, to spread the costs of insuring the riskiest members across the entire population of insureds, thus preventing insurance companies from excluding high-risk individuals which would negatively affect the economy.

Insurance works on the (reasonable) expectation that most insureds will never file claims within the policy period, offsetting the higher costs of those who will sustain losses. By creating a single, large pool, the financial burden is distributed across a broader population, which ideally stabilizes premiums for everyone. This has been a fundamental concept in the insurance industry from the beginning, but climate change is altering that equation.

Adverse selection occurs when higher risk entities are more likely to buy insurance coverage, while the lower risks, who often cannot afford coverage because of high premiums, choose to opt-out. This pushes up the average cost for those who remain in the risk pool, creating a "premium spiral" that eventually makes coverage unaffordable for almost everyone. That's what's happening in the property insurance market now.

Mandated universal risk pools mitigate this by requiring everyone to purchase insurance, and requiring insurers to cover everyone at affordable prices (within certain limits). This is how automobile insurance works; every vehicle owner is required by law to purchase insurance, guaranteeing coverage for everyone at an affordable price (within certain limits). Property insurance doesn't work like auto insurance; only those with mortgages are required by lenders to purchase insurance to protect their lenders' interests.

For the property insurance market to remain viable, governments will likely be forced to mandate coverage for every property owner, and to subsidize part of the risk. That won't be popular with "free market" Republicans, or their voters.