By Caroline Fouvet
Is climate change making our world uninsurable? Today this question still sounds implausible, after all, the insurance industry pays out billions of dollars in the wake of climate disasters. When Hurricane Katrina struck New Orleans in 2005, for example, the industry paid out an estimated $25.5 billion. However, costs of extreme weather events are expected to continue to rise, and this could spell trouble for the sector. According to a recent study, the level of climate risk is making many more assets uninsurable, leading to an estimated $100 billion ‘protection gap’ that could see taxpayers footing the bill in the wake of future climate disasters.
The insurance industry’s traditional response to increasing levels of risk is a combination of re-pricing and transferring exposure to others in the market. But this approach is looking increasingly unsustainable. The recent analysis carried out by ClimateWise, a coalition of 29 insurance organisations, shows that weather-related losses have increased five-fold since the 1980s. This has meant that more insured assets are becoming uninsurable, while those that were previously uninsured are even more vulnerable. The resulting protection gap – the difference between the costs of natural disasters and the amount insured – has now reached an estimated US$100 bn (£79 bn). With the most at-risk assets becoming uninsurable the costs of reconstruction after climate-driven events is likely to fall increasingly on private asset owners themselves, or on taxpayers.
What does this mean for the insurance sector? The ClimateWise report suggests that it will require a change in the industry’s approach to risk management. The study recommends that insurers shift capital flows into climate-resilient assets and resilience-enhancing investments. By leveraging their expertise in risk and data management, insurers could help their clients build more robust infrastructure for instance. It also encourages insurers to promote the development of insurance markets in poorer countries, where developing economies are often faced with complex climate adaptation challenges.
The report shows that insurance companies are exposed to climate risks, but it also positions them as crucial actors whose risk-management expertise is valuable to both the public and the private sectors. By taking a more active role in driving climate change resilience and adaptation efforts, insurance companies could open new market opportunities, protect the long-term insurability of assets and sustain revenue from policies.