To someone who studies uncertainty for a living, question marks around the long-term impact of climate change pose an important research challenge, says Philip Mulder, an assistant professor of risk and insurance at the Wisconsin School of Business.
“How can we design insurance markets to be more resilient in the face of climate change while still protecting vulnerable people and communities?” Mulder says. “Insurance markets are going to be a key determinant of who bears the costs of climate change … [and] whether we have a just and equitable climate transition.”
Mulder joined WSB in 2023 from The Wharton School at the University of Pennsylvania. Along with insurance, his research interests include climate finance, real estate and household finance, and environmental economics. Much of his work explores how households, insurers, lenders, and governments adapt to dynamic climate risk. He is the recipient of numerous research awards including the American Academy of Actuaries Award for Research and the Geneva Association’s Ernst Meyer Prize in Risk and Insurance, both in 2023.
WSB: Tell us about your work in the insurance and disaster space.
Mulder: Broadly speaking, a lot of my research has focused on how well insurance markets work for catastrophic risks. The direction that I come at it from is that catastrophic risks are unique relative to health or life because they can be so correlated and so concentrated: If one geographic area gets hit by hurricane, for example, then everyone in that vicinity has a claim.
So what has happened in those spaces is, first, when you look at, say, flood insurance, that’s something that is primarily offered by the government through the National Flood Insurance Program. It therefore becomes a big public policy issue, so you can study it from a public policy perspective.
“How can we design insurance markets to be more resilient in the face of climate change while still protecting vulnerable people and communities?”
—Philip Mulder
But second, you also now have private insurers who are starting to deal more and more with risks in places that previously hadn’t been thought of as facing quite the same magnitude of risk, such as the wildfires we just saw on Maui. We’re seeing insurers having to face the pressure of more and more concentrated risks—and consequently, those insurers exit. Now, state governments are stepping in for wildfire risk in California or hurricane risk in Florida, much as the federal government has already done for flood.
So I look at both public and private insurers and try to understand how they can better manage those risks. In the case of flood insurance, I’ve found that when the public sector provides accurate information and sets risk-based prices, it leads to much better outcomes. The National Flood Insurance Program borrows less to pay for claims and homes are built to better withstand floods. Even though high-risk households are being charged more for flood insurance, they are actually more likely to insure because they also know they have this high flood risk.
WSB: You have some interesting research in crowdfunding and wildfire recovery. What were some of the takeaways from that study?
Mulder: I have a working paper where we’re looking at how people recover from wildfires, specifically Colorado’s Marshall Fire, which occurred in the Boulder area in December 2021.
Many of the homeowners affected by the fires set up GoFundMe campaigns—essentially fundraising—to supplement their insurance. What we found was that the support from GoFundMes does kind of serve much of the same role as traditional insurance. Individuals who raised more on GoFundMe were still able to, for example, buy a car the following year after the disaster or they would have fewer delinquencies on their credit cards.
However, what was surprising was that the households raising more on GoFundMe tended to be wealthier: Specifically, those with income above $100,000 raised 40% more on GoFundMe than those with income below $50,000.
So, from a distributional point of view, crowdfunding isn’t making up for some of the cracks in the insurance system like you might hope. What the results of the study really emphasize is the value of your social network. That’s why in the paper we refer to it as “social network insurance,” because in a lot of cases, the people who donate are your coworkers and friends. And in this instance, wealthier people had wealthier networks.
WSB: As a researcher, how do you navigate differences of opinion about the impact of climate change?
Mulder: The starting point in my research is always scientific models of disaster risk, looking at both what they say disaster risk is today and might be in the future. There is substantial uncertainty in those models and our understanding of climate risk is evolving, but that’s very different than the differences of opinion you’re talking about, which tend to be more political.
But, opinions do matter for markets. If you’re thinking about whether the risk of sea level rise that we see in climate models is affecting home prices today, then it matters whether buyers and sellers think that’s a real risk. I also hope that my research can transcend some of those disagreements. Functioning insurance markets will be important if disaster risk increases, but they’re already important issues today.
WSB: Why is risk important? Why would you encourage students to go into risk and insurance as a field?
Mulder: Any decision we make deals with risk in some way, right? There’s uncertainty. You’re going to have to prepare for and think through those different outcomes. So, whether you’re talking about how you make decisions in your own personal life, or you’re thinking about going into industry, having the right tools to think through those decisions is going to be valuable.
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