DISASTER INSURANCEWill Climate Change Make Insurance Too Expensive?

By Insa Wrede

Published 24 June 2024

Extreme weather events influenced by climate change are causing ever greater destruction, forcing insurers to increase their premiums where they can. What does this mean for the future?

Basically, if there is more damage, someone has to pay for it,” said Ernst Rauch, a climate expert with Munich Re, a major reinsurance company. Either insurance companies, the state, or the person who suffered the damage must foot the bill.

The logic behind insurance is that many people sign up, but only a few suffer losses and receive compensation. If a growing number of people are hit by losses, however, insurance companies will pass on the risk and increase premiums for insurance holders. 

As some previous extreme events have proven too costly to cover, insurance companies have in turn passed on some of their risk to what are known as reinsurers. Munich Re is one of these companies. It has been studying the effects of climate change for around 50 years with regard to their consequences for their own business.

A Shrinking Field of Insurance Companies
What happens when climate change creates such great risks that insurers no longer want to insure certain parts of the world, or they have to raise premiums to such an extent that no one is willing to pay them?

One such example is State Farm. The major insurance company has stopped selling insurance policies in California, citing the growing risk of catastrophes, steep construction costs and a challenging reinsurance market.

In California, insurance companies had to cover between $1 to $3 billion (€935 million to €2.8 billion) in damages annually over the past decades, Rauch told DW. These days, however, annual insurance claims have jumped to well over $10 billion, he added.

Global Damages Totaling a Hundred Billion Dollars
Other parts of the world have also been hit by increasingly extreme weather events that cause serious destruction, and Germany is no exception. It experiences floodsstormsdroughts and fires. The German Meteorological Service warns that such extreme events will grow more frequent, resulting in even greater destruction, affecting more and more people.

The amount of insured damage resulting from natural disasters now annually totals around $100 billion worldwide, ” Rauch told DW. “Eighty to 90% of these damages are weather-related.”

Damage Can Be Minimized
The increasing amount of damage is only partly the result of more frequent extreme weather events, Rauch says, explaining that socio-economic factors play a greater role. The value of buildings and infrastructure is increasing, populations are growing, and construction is still taking place in particularly vulnerable areas such as coastal regions or near rivers.