PerspectiveChanging Weather Could Put Insurance Firms Out of Business

The fiercer storms which a changing climate produces could soon come to British shores, paralyzing trade for days. This is an example of the costs that fossil-fuel emissions may bring.

Insurance companies are uniquely exposed to these sorts of changes. Tens of millions of businesses buy policies every year to protect themselves from risks. The Economist writes that as a result, the industry is vast—last year the premiums paid for property and casualty insurance worldwide reached $2.4trn, according to Swiss Re, one of the big reinsurance firms on to which consumer-facing insurers pass the risk of mega-losses. Insurance companies spent $180bn on reinsurance premiums. Extreme events becoming the norm could force insurers to fork out ever greater payouts to policyholders, as well as lower the value of the assets they hold. The best case is that insurers reinvent themselves, helping the world cope—risk is, after all, how they make their money. The worst is that some fail and, more worryingly, that swathes of the global economy become uninsurable.

Already, insurers are seeing disasters of unprecedented scale. Very costly disasters are becoming more frequent. Between 1980 and 2015 America saw an average of five events causing over $1bn in damage (in current prices) each year. Between 2016 and 2018 the yearly average was 15. In the 20th century, according to AIR Worldwide, a climate-modelling firm, a hurricane on the scale of Harvey, America’s costliest ever, would have been regarded as a one-in-2,000-year event. By 2017, when Harvey blew in, that frequency was estimated at one in 300 years. By 2100, says Peter Sousounis of AIR, it will be once a century, and tidal surges that used to be classed as once-a-millennium events will be expected to strike every 30 years.

Catastrophes are also getting harder to predict.

The Economist notes:

Where risks become uninsurable, states and firms may work hand-in-hand. In Britain, where a sixth of homes are at risk of flooding, government and insurers have set up Flood Re, a reinsurer of last resort that enables insurers to offer affordable premiums on 350,000 homes in flood plains. Every firm selling home insurance in the country pays into the scheme, spreading the costs across hundreds of thousands of policies. To avoid perverse incentives, houses built in high-risk areas after 2009 are excluded.

“Above all,” says The Economist, “insurers need to take the lead in publicizing the growing risks posed by climate change, and the need for cover.”