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“We have no choice,” AXA’s then-president Henri de Castries said in 2015, when the French insurer announced plans to avoid investing in coal companies. “Insurance may apply in a 2C world, but it will not apply in a 4C world.”
If anything, it looks optimistic. The world is working to meet the Paris targets to limit global temperature rise, but we are already seeing an increase in extreme weather patterns and extreme insurance losses.
Last month, California agreed to continue insurance policies for real estate in disaster-prone areas, after major US companies such as State Farm and Allstate stopped issuing new insurance in disaster-prone areas. contracted with an insurance company. Several insurance companies have already gone bankrupt or exited states such as Florida and Louisiana, where insurance premiums are soaring. This isn’t just a US phenomenon either. Around one in seven properties in Australia’s high-risk areas are expected to become uninsurable this decade, with prices rising in Queensland and New South Wales after the 2022 floods. ing.
For climate scientist Michael Mann, the ability to cover the effects of climate change is being tested sooner than expected. “Climate models may be underpredicting the effects of climate change on the types of persistent extreme weather events that are behind the devastating wildfires, floods, and heatwaves we’ve seen in recent summers.” he says. The unpredictable course of climate change is especially problematic for insurance companies, which cling to historical data like a comfort blanket. As the Bank of England states, “Historical data sets are unlikely to be a good predictor of how climate risks will affect a company’s future losses.” According to Swiss Re. , insured losses from natural catastrophes were 54% higher than the 10-year average in the first half of 2023.
As a result, the insurance industry appears to be stuck in a destructive loop that climate campaigners fear, where the need to manage the effects of climate change distracts from the fundamental problem.
This aspect is self-defeating behavior. A Ceres study based on 2019 data found that the largest U.S. insurance companies remain substantial and influential holders of fossil fuel assets. As the costs of climate change are pushed onto consumers through premiums and onto taxpayers through public provision and backstops, few will tighten restrictions on where insurers invest or require green transition plans for underwriting. It makes no sense. This is especially true as collective action by the sector on carbon emissions is collapsing under US political pressure.
Measures that obscure the proper pricing of climate risks also contribute to the vicious cycle. The California agreement moves forward by allowing insurers to increase prices by incorporating forward-looking modeling and reinsurance costs into pricing. But the political instinct to use publicly funded alternatives to fill the gap, whether it’s federal flood insurance in the US, state safety nets in Florida or flood relief in the UK, drives down prices. There is a need to send a warning to people who are likely to enter high-risk housing or move into high-risk areas. region. Continued growth in high-risk, high-value areas also contributed to higher losses.
Insurers and governments should instead focus more on changes and actions that reduce risk. “Society, including insurance companies, is not being rigorous enough about prevention globally,” said Frédéric de Courtois, AXA’s deputy chief executive.
This includes considering how nature-based adaptations, such as improved forest management and salt marsh restoration, can reduce wildfire and flood risks, said former California Insurance Commissioner Dave.・Mr. Jones argues. He argues that insurers need to incorporate the proven impacts of ecological forestry into their premiums. Lack of data can be a problem. British insurance company Aviva this week announced a research project in Lancashire on salt marshes, coastal wetlands shown to reduce property-related damage in the US from Hurricane Sandy.
The impact of uninsurability has attracted the attention of financial regulators. Regulators have previously considered climate-related losses in the financial sector to be a key stability issue. Australia’s prudential regulator this year made the “availability, affordability and sustainability” of insurance one of its key supervisory priorities. The European Central Bank has expressed concern that only a quarter of the EU’s climate-related catastrophe losses are guaranteed, taking into account the possible “macroeconomic, financial and fiscal implications”.
Mann has long said that “uninsured is the first stage of uninhabitability.” It must be managed in a way that reduces, rather than exacerbates, the underlying risks.
helen.thomas@ft.com
