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Insurance and extreme heat: The policy gap

Theodore E Lamm


  • With extreme heat days increasing as the climate warms, impacts will become more severe and complex in coming decades.
  • As local governments begin to develop comprehensive climate resilience and adaptation plans, they are beginning to craft extreme heat programs.
  • Insurance has the potential to drive investment in risk-reducing infrastructure and response that otherwise would not take place.
  • Lawmakers could enact enforceable protections to guarantee access to cool spaces, implement cool planning and building codes, and invest in heat response capacity.
Insurance and extreme heat: The policy gap
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Worldwide, extreme heat conditions are a leading climate-related cause of death, illness, lost productivity, and infrastructure damage. As the U.S. Environmental Protection Agency defines it: “Extreme heat conditions are defined as weather that is much hotter than average for a particular time and place—and sometimes more humid, too. Extreme heat is not just a nuisance; it kills hundreds of Americans every year and causes many more to become seriously ill.

With extreme heat days increasing as the climate warms, impacts will become more severe and complex in coming decades. According to the National Oceanic and Atmospheric Administration, the seven warmest years on record have all occurred since 2014, with 2020 the second hottest year ever recorded. And 2021 is already breaking heat records across the western United States. Yet even as governments and financial institutions develop resilience plans and risk transfer models (such as innovative insurance products) to mitigate climate risks, extreme heat presents a policy and fiscal gap—for governments and insurers alike—that must be addressed.

The threat of extreme heat

Extreme heat causes thousands of premature deaths per year in the United States, a number that will increase significantly without aggressive emission mitigation. Heat also exacerbates mental health problems, inhibits educational attainmentreduces labor and economic productivity, and disrupts transportation networks, among other immediate and consequential harms.

Unsurprisingly, these risks disproportionately affect lower-income communities, where residents are most likely to suffer from health complications, rely on public transportation, work outdoors, and lack access to air conditioning.

Despite its potential to cause billions of dollars in public health costs, extreme heat often receives less attention than climate-related risks like wildfire and flood, likely because its impacts are less visually dramatic and because many of the costs are borne socially rather than by individual businesses or property owners. But these impacts will continue to worsen. According to a 2013 study from the state of California’s Heat Adaptation Workgroup, by the end of the 21st century, major cities across the United States are projected to experience a significant increase in extreme heat days, including over 100 per year in California’s most populous cities under a high-emissions scenario. As extreme heat risk grows, governments and communities will need a robust set of tools to address it.

The need for comprehensive mitigation and response

As local governments begin to develop comprehensive climate resilience and adaptation plans, they are beginning to craft extreme heat programs centered on five core elements:

  1. Natural infrastructure, like enhanced tree canopy and urban vegetation;
  2. Built infrastructure, like cool surfaces and shade structures;
  3. Social infrastructure, like cooling centers and subsidized public transit;
  4. Communication infrastructure, like early warning systems; and
  5. Planning infrastructure, like zoning policies designed to reduce urban heat island effects.

Leading jurisdictions, such as the City and County of Los Angeles, are incorporating some or all of these strategies into their broader resilience and sustainability plans, while a few cities like Phoenix and The City of New York, Cool Neighborhoods NYC: A Comprehensive Approach to Keep Communities Safe in Extreme Heat, York have built heat-specific plans.

Physical environment investments in tree canopy and cool surfaces hold particular promise for protecting public health and improving quality of life; innovative analyses demonstrate that these interventions can significantly reduce urban extreme heat, limiting mortality at the neighborhood scale and providing billions of dollars of public health and energy savings.

However, most local governments broadly lack the comprehensive policy infrastructure and legal mandates to coordinate extreme heat mitigation and response across planning, public health, public works, parks, transit, emergency management, and other agencies. And they lack the funding to pay for many potential mitigation measures.

The potential role of insurance

Governments and businesses seeking to build their capacity to address climate-related risks are accessing a cohort of innovative insurance and risk-transfer arrangements developed in recent years, from multi-jurisdiction disaster recovery finance pools to environmental impact bonds that leverage private capital to fund resilience infrastructure.

The most promising of these instruments, including parametric coral reef insurance in the Caribbean and forest resilience bonds in Northern California, have attracted capital and action from public and private entities with distinct but overlapping interests in resilience.

Experts such as McKinsey & Company have called for new insurance vehicles to address the multitude of climate-change risks including extreme heat.

Thus, insurance has the potential to drive investment in risk-reducing infrastructure and response that otherwise would not take place. Such insurance could be vital for mitigating extreme heat risk, where governments and businesses share an interest in fighting the worst impacts on communities, infrastructure, and productivity. This role for insurance is particularly important for the many public (and private) actors that lack direct financial capacity to make large-scale investments.

The extreme heat policy gap

While the potential is great and the need is clear, insurance or other financial risk transfer mechanisms to mitigate extreme heat risk are not currently available—evidence of the current lack of effective policy responses, and legal obligations, to address extreme heat. If such responses were being implemented, then the parties required to act might be incentivized to invest in insurance or other arrangements to manage the costs. But few are doing so.

California is one of few states that require local governments to address climate resilience in their general plans, and one of very few states that requires outdoor employers to provide rest and shade during high heat events. A new bill currently under consideration in the state legislature, AB 585, would support further research and planning.

Nationwide, however, governments have no direct legal obligation to invest in comprehensive heat mitigation and response infrastructure. Employers and schools face few requirements to protect workers and students from heat; and private property owners have little incentive to add green and cool surface cover for the benefit of the community. Aside from a few notable examples (such as Phoenix, New York City, and Los Angeles) most communities lack even a basic plan for coping with extreme heat conditions. As a result, communities face a growing extreme heat threat with few tools to address or to pay for it.

To fill the policy gap for dealing with extreme heat conditions, lawmakers could enact enforceable protections for outdoor workers during high heat days; require schools, landlords, and employers to guarantee access to cool spaces; implement cool planning and building codes; and invest in heat response capacity. In addition, policymakers could work with insurers and financial institutions to pilot innovative risk transfer mechanisms that involve development and certification of a comprehensive local heat plans, creation and purchase of trigger-based insurance to fund heat response, and premium reductions for installation of cooling green and built infrastructure.

Such innovation—including public policy and risk-transfer based measures—could drive investment in all five types of extreme heat mitigation infrastructure, ensuring protection for residents, workers, and all communities facing a hotter future.