Will Climate Change Make Insurance Too Expensive?
The actual amount of damage caused is much greater, however, as not everything is covered by insurance. In fact, only half of all the world’s natural disasters are covered at all, Rauch says. Even in Germany, for example, only about half of all buildings are insured against flooding, he points out.
Extreme weather events in Germany, such as the exceptionally hot and dry summers of recent years and the devasting flood of 2021, have caused more than €80 billion in damage, says Germany’s Environment Ministry. This figure includes damage caused to buildings and infrastructure, harvest losses and damaged forestry, as well as indirect losses, for instance due to reduced labor productivity.
Premiums Must Match Risk
Does Rauch believe Germany may one day find itself in a similar situation to California, where insurers like State Farm have stopped issuing policies? He explains that US supervisory authorities, called insurance commissioners, do not allow insurers to increase premiums to reflect growing risks. This, he said, is the reason State Farm withdrew from California.
In the long term, however, Rauch believes that certain regions may find it impossible to get insurance coverage even in those parts of the world where insurers can charge what they want. He does not think this could happen in the next five to 10 years, with the exception of some smaller regions.
The overall economic costs wrought by climate change will increase enormously in Germany in the coming years, the German government has found. Depending on how rapidly the planet heats up, this could cause damages in the range of €280 to €900 billion by 2050. This estimate excludes the impact of deaths, diminished quality of life, animal and plant species going extinct and damage to the water supply system.
Damage Prevention Ever more Important
When it comes to controlling costs, damage prevention plays a key role alongside attempts to limit climate change. According to Rauch, these are the most important measures that can be taken in areas where the climate risks become so high that insurance companies can no longer offer affordable policies. Possible examples in the public realm include building levees; private individuals can secure their heating oil tanks, tile their basements and make sure no valuable possessions are stored there.
Flood protection measures improved greatly in Germany after significant flooding occurred along the country’s major rivers in 2002 and 2013, Rauch says, adding that similar measures must be implemented along coastlines around the world.
The German Insurance Association (GDV) has also called for action: “The top priority should be climate-adapted planning, construction and renovation.” No new building should take place in areas prone to flooding, the association says, and natural surfaces must be restored.
No time to Waste
The industry group believes fast action is required. “If we fail to systematically institute preventive measures and adapt to the climate, our estimates show that premiums for homeowners insurance will double in Germany within the next 10 years due to climate damage alone,” Jörg Asmussen, the chief executive officer of the German Insurance Association, warned more than a year ago.
Europe as a whole is also too slow when it comes to prevention, the European Environment Agency (EEA) concluded in its first European Climate Risk Assessment. The EEA’s executive director, Leena Ylä-Mononen, has called on the responsible European and national political authorities to act now, saying the only way to minimize climate risks is by quickly reducing emissions, adopting ambitious adjustment strategies and undertaking the necessary related measures.
Insa Wrede is an editor at DW. This article is published courtesy of Deutsche Welle (DW).
