The Insurance Industry Faces Challenges in the Wake of Climate Change
Insurance Sector Navigating Climate Change Impact
The insurance industry is currently grappling with the daunting challenges posed by climate change. Six years ago, Henri de Castries, the former head of Axa, a prominent French insurer, declared that divesting from coal companies was a necessity, as a world subjected to a 4°C temperature increase would be uninsurable. Ironically, that now appears optimistic.
The ongoing efforts to meet the Paris Agreement's temperature-rise limits are encountering hurdles due to increasingly extreme weather patterns and greater insurance losses.
In California, an agreement was recently reached with insurance companies to continue writing policies for properties in disaster-prone regions. Several major US insurers, such as State Farm and Allstate, ceased issuing new policies in such areas. A similar situation has unfolded in states like Florida and Louisiana, where multiple insurers have withdrawn coverage, leading to skyrocketing premiums. This problem isn't confined to the US; approximately one in seven properties in high-risk zones in Australia is projected to be uninsurable this decade, with soaring prices following the 2022 floods in Queensland and New South Wales.
Climate scientist Michael Mann emphasizes that the insurance sector is facing the consequences of climate change sooner than expected. The impact of climate change on persistent weather extremes, such as wildfires, floods, and heatwaves, has likely been underestimated by climate models. This unpredictability poses a particular challenge for insurers reliant on historical data.
Historic data sets are no longer reliable indicators of climate risk's future effects, as indicated by the Bank of England. During the first half of 2023, insured losses from natural catastrophes exceeded their 10-year average by 54%, according to Swiss Re.
This has created a concerning scenario where the insurance industry is seemingly entangled in a climate doom loop, diverting attention from the core issue—the management of climate change fallout.
One facet of this predicament is self-defeating behavior. Research by Ceres, based on 2019 data, found that major US insurers continued to be substantial holders of fossil-fuel assets. As climate change costs are shifted to consumers and taxpayers, there is a growing need to impose stricter restrictions on insurer investments and green transition requirements for underwriting.
Measures that obscure the proper pricing of climate risk perpetuate a vicious circle. While California's agreement allows insurers to incorporate forward-looking modeling and reinsurance costs into rate-setting, using publicly funded alternatives to cover gaps tends to depress prices, diminishing the incentives to deter construction in high-risk regions.
Insurers and governments should instead focus on mitigating risk by promoting changes in behavior. This includes exploring nature-based adaptations like improved forest management or salt marsh restoration to reduce wildfire or flood risk. For instance, insurers should be compelled to incorporate the proven impact of ecological forestry in premiums.
The issue of uninsurability has gained the attention of financial regulators, who are increasingly concerned about climate-related losses in the financial sector. Prudential regulators, including Australia's, have made the "availability, affordability, and sustainability" of insurance a key supervision priority. The European Central Bank has voiced concern that only a quarter of EU climate-related catastrophe losses are insured, given their potential "macroeconomic, financial, and fiscal impacts."
As climate scientist Michael Mann has long maintained, uninsurability is the initial stage of uninhabitability. It is essential to manage this challenge in a way that mitigates the underlying risks rather than exacerbating them.
#ClimateChange, #InsuranceIndustry, #ClimateRisk, #FinancialSector, #ClimatePolicy, #RiskMitigation, #dambeekeeper,#climatestory, #environmentalstory
