Hurricane Sandy cost the U.S. some $70 billion in direct damages and lost economic output. This is, obviously, a lot of money — Sandy was the second most expensive hurricane in U.S. history after a small tropical storm called Katrina. Much of that cost was borne by the government — local, state and federal — and some of it was absorbed by those of us who lived in the storm’s path. But about $20 billion to $25 billion of the damage from the storm was eventually covered by the insurance industry. Much of that bill in turn was covered by the big reinsurers, the companies that take on insurance policies from primary insurance companies looking to spread out their risk. And if you were an insurance company affected by Sandy, you better hope you had a reinsurer behind you.

One of the biggest of the reinsurers is Swiss Re, and yesterday I had a chance to talk with the CEO of Swiss Re Americas, J. Eric Smith. Smith was in New York City to speak at an event for the Climate Group, an international nonprofit that works with companies, cities and states on sustainability. The event was held at the NASDAQ headquarters in Times Square, where the temperature threatened to push past 100°F. Global warming was on everyone’s mind, even though the air-conditioning inside was on full and shades blocked out the droning city sun. “What keeps us up at night is climate change,” Smith said. “We see the long-term effect of climate change on society, and it really frightens us.”

Heat waves alone, though unpleasant, aren’t foremost on Smith’s mind. Instead it’s the more direct risk — to insurers and the public — of bigger and badder storms, compounded by rising seas. Even putting the effect of climate change on storms aside — though recent research suggests that warming could indeed intensify tropical storms — more people and more property are moving into flood-prone areas. As of 2003, 153 million Americans lived in coastal counties — an increase of 33 million since 1980— and 3.7 million lived within a few feet of high tide. The cost of the storms and the damage and destruction that follows will grow, unless we can create a much more resilient society.

Usually that’s taken to mean building a tougher electrical grid, or improving weather forecasting to more precisely track brewing storms. But as Smith made clear yesterday, it will also mean changing how we insure those who live in high-risk, flood-prone areas. Since 1968, the federal government has taken the responsibility of insuring those communities that are most at risk from flooding. More than 5.5 million homes are protected via the National Flood Insurance Program (NFIP), and a little less than 20% of those homes — usually those who live in the most dangerous areas — receive flood insurance at heavily subsidized rates. The result is a perverse incentive for homeowners to continue to live in areas that are likely to be hit by storms and floods, knowing that the cost of rebuilding will be effectively socialized by the rest of us. At a time when we should be seriously thinking about retreating from the most high-risk coastal areas, government policy inadvertently supports living on top of the sea.

Smith thinks that needs to change. “The program that exists today is not fundamentally sound,” he said. The NFIP is expected to go $25 billion to $30 billion in debt after it fulfills claims from Sandy, and both climate change and population growth will put further pressure on the program. A report released last month by the Federal Emergency Management Agency found that by the end of the century, NFIP could have to insure 80% more properties than it does today, and the average loss on each property could rise by as much as 90%. Keeping up a system that provides subsidized flood insurance for those who live in the riskiest areas is barely doable now — if those risks increase thanks to sea-level rise, it will be impossible. “To keep risks manageable and therefore insurable, all of us need to get serious about broad-scale financial solutions to this crisis,” said Smith.

Change is likely on the way. In 2012, before Sandy hit, Congress passed the Biggert-Waters Flood Insurance Reform Act. That law will require those households receiving subsidized flood insurance via NFIP to pay large premium increases of about 25% per year over the next five years. It also directs FEMA to draw up new flood maps and phase in increases for homes in newly designated higher-risk flood zones over the next four years. That will be painful for many — and indeed, a major battle is brewing in Congress over the implementation of the law, with Senator Mary Landrieu of Louisiana, a state that gets more from NFIP than any other, revealing that her 2014 Homeland Security spending bill will include a policy rider that delays the increases in flood-insurance premiums for a year. But protecting those in the highest-risk flood areas will raise the rates on those who live in comparatively safer territory — which isn’t fair — and will continue essentially promoting development on the very coastal areas that will become increasingly vulnerable as the climate warms and the sea rises.

“The current setup is unstable,” said Smith. The change “will help homeowners understand the true risk that national disaster poses to homes and possessions.” We can’t afford not to listen to the insurers.