This is part three of an FT series on the implications of climate change for insurance. Read part one Here and part two Here.

Thomas Brennan is a keen observer of the growing pressure that climate change is putting on the insurability of American companies. He is an insurance broker and member of the Brennan family, which has owned restaurants throughout New Orleans since his grandfather’s generation.

The low-lying city – like many other areas particularly exposed to floods, fires or storms – is affected by the withdrawal of insurers, unsettled by a toxic mix of rising claim costs and increasing extreme weather events.

The struggle to find affordable insurance is even more difficult for companies like his family’s today than it was after Hurricane Katrina in 2005, the costliest storm on record, Brennan says.

“I would argue that the market is worse today than it was then,” he told the Financial Times about the challenge of finding private flood insurance. The last option is government insurance, but this has a $500,000 limit for building damage and separate coverage for contents.

“The limits (of additional coverage available through private sector policies) were eroded, premiums went up, deductibles went up,” Brennan said.

Instead, the Brennan restaurants turned to FloodFlash, a British start-up that is one of a growing number of insurers large and small that offer a form of insurance known as parametric: fixed-amount cover based on a pre-agreed trigger.

In this case, the trigger is a water sensor on the victim’s property. A flood of sufficient depth is covered and the damage is paid out quickly at the agreed rate.

Parametric insurance is just one way the global insurance sector is trying to keep homes and businesses insurable as climate change leads to more extreme weather and rising losses.

Another strategy that is gaining increasing attention is adaptation. After bottler Coca-Cola Consolidated suffered a devastating flood at its Nashville plant in 2010, it worked with its insurer, FM, to redesign the factory so that floodwaters could pass through the building without damaging critical electrical equipment and other vulnerable areas.

When the floods returned with a vengeance a decade later, the damage was minimal and the power plant was out of service for only a few days instead of several weeks.

Such efforts raise hopes in the insurance industry that a combination of preventive and adaptive actions by property owners and new methods of measuring and insuring risks will be sufficient to meet the challenges of climate change.

Paula Jarzabkowski, a risk expert at the University of Queensland, advocates for a new insurance “ecosystem” of public and private initiatives that can ensure that homes and businesses remain insurable even in times of rising temperatures.

According to this view, the global patchwork of emergency insurance currently provided by government programs alone will not be enough. “Much of what we already have … is not adequate to solve the problem we are in,” she said.

Private sector innovations fall broadly into two categories: more accurate calibration of risks – which can remove enough uncertainty to offer traditional property insurance – or the development of new forms of insurance protection.

Risk modelling companies have recently invested in technologies that they believe can much more accurately identify the risks of localised events such as fires and floods that affect a building on one side of the street but not the other.

“We are now able to offer much more sophisticated modeling methods and more insights into these types of risks because we now have the computing power to do so,” said Julie Serakos, head of the model product management team at risk modeler Moody’s RMS.

There are several approaches. Specialised property insurers such as London-listed Hiscox can analyse home insurance risks on a property-by-property basis, drawing on the increasingly extensive data sources available to insurers.

In addition, startups have emerged such as Delos, founded in San Francisco in 2017, which uses machine learning and satellite data to get a more detailed picture of the wildfire risk of individual properties. The goal is to provide insurance coverage to households that others may avoid with their broad-based risk assessments.

Some insurers rely on external climate specialists such as US company Jupiter Intelligence, which provides forward-looking analysis on how climate change will affect their portfolio.

The insurance market has also benefited from the increasing popularity of structures such as catastrophe bonds – an increasingly popular form of protection against extreme weather events that investors offer through securities. Issuance of these bonds has increased sharply in recent years.

Even the largest companies in the industry are increasingly relying on parametric policies. “With a parametric trigger, uninsurable risks become more insurable,” said Aon, one of the largest insurance brokers.

But some of these approaches also have pitfalls, experts say. With parametric insurance, for example, there is a risk that a flood or hurricane will not reach exactly the required trigger speed and therefore there will be no insurance coverage at all.

While increasingly detailed analysis could potentially enable the insurance of certain objects that could not otherwise be insured, it could also widen the gap between the objects and people considered to be “good risks” and “bad risks.”

The role of local and national governments in providing a safety net is also a growing concern for policymakers.

Petra Hielkema, head of the EU’s insurance regulator Eiopa, told the FT there was growing support among politicians in the bloc – the fastest-warming continent – for national risk-sharing schemes for natural disasters. A “next step”, she added, would be a pan-European scheme, which the regulator and the European Central Bank proposed last year.

“These (natural disaster) problems of this magnitude will ultimately require a European solution,” Hielkema said, adding, however, that this solution would need to be carefully crafted to avoid moral hazard, for example by reducing incentives for individual countries to invest in resilience measures.

Smaller-scale initiatives have also been launched, such as a pilot program that provides emergency cash assistance to low-income and marginalized families in New York City neighborhoods at high risk of flooding following severe flooding.

Some believe that it is the responsibility of local communities to engage with the insurance industry and regulators on the issue of insurability.

InnSure, a nonprofit that promotes new insurance solutions against climate risks, says community leaders can protect their insurability by applying insurance-focused assessments to new developments and infrastructure.

“The simple question, ‘If we do this, what impact will it have on insurance and the economy?’ can have tremendous implications, because unaffordable insurance can impact housing prices and damage community prosperity,” says Charlie Sidoti, the institute’s executive director.

For some leaders, the way forward is simply to recognize the extent of the problem and adapt — working with customers or households to either protect themselves from water or fire at the door, or to make sure it doesn’t cause significant damage if it does happen. Such measures can keep insurance costs at affordable levels, they say.

FM chief executive Malcolm Roberts told the FT that requests from companies such as the Coca-Cola bottler for its resilience services, which are based on its own natural disaster risk maps, had reached unprecedented levels.

The company has been offering insurance and prevention services since 1835, when textile mill owners in Rhode Island formed a mutual insurer for those willing to take preventive measures such as thick floors and fire walls to minimize damage from fire.

“When insurance gets expensive,” Roberts says, “people start asking, ‘What can I do about it?'”