Cars piled up on the road with other debris after floods hit Valencia, Spain, in October … [+]
Human-caused climate change has accounted for a third of weather-related insurance claims made this century, the bill is rising fast and insurers are underestimating climate risks, a new study has warned.
Global warming has led to losses totaling nearly $600 billion over the past two decades, and climate-related insurance losses have increased from 31% to 38% in the past decade, according to the report by the Insure Our Future network, which represents dozens of non-profit organizations.
In its analysis of 28 major global property and casualty insurers, Insure Our Future found that “climate-attributable losses” reached $475-720 billion between 2002 and 2022. The researchers determined that in 2022 alone, $52 billion $132 billion of total weather-related losses are attributable to climate change.
Additionally, the report found that the $10.6 billion in climate-related losses estimated by 28 large insurers in 2023 rivaled the $11.3 billion in premiums those firms insured for corporate fossil fuel customers in the same year.
“The impact of climate change is not just a present and future problem – it has already increased risks and caused huge losses this century,” said researcher Ilan Noy of Victoria University of Wellington, New Zealand, commenting on the report. . The research, Noy said, should prompt reinsurers — the firms that insure insurance companies — to update their understanding of climate risk.
Earlier this year, reinsurer Swiss Re published a report showing that climate impacts were causing insurers to withdraw altogether from some countries. In that report, Swiss Re urged countries to increase global spending on reducing greenhouse gas emissions, stating that to avoid much higher losses, “this is money well spent.” But the Securing Our Future report suggests that even this framing underestimates the urgency of the crisis.
“Lloyd’s and Swiss Re’s framing of the drivers behind rising insured losses shows a fundamental misunderstanding of causality and what the science of climate attribution has identified in the last 15 years,” Noy said. “Financial regulators must ensure that independent climate science informs their view of the true costs and risks of the climate crisis before they overwhelm insurers and economies.”
The report’s authors said insurers should take specific steps to reduce risk and ensure that instead of being part of the problem, they can be part of the solution.
“The insurance industry has historically helped make societies more resilient,” former California insurance commissioner Dave Jones and senior actuary Louise Pryor write in their foreword. “Now it must embrace its power and accelerate the transition to clean energy, stop signing new fossil fuel projects and rapidly align with credible 1.5 degrees Celsius transition pathways.”
Doom Loop
Welcoming the report, Laurie Laybourn, director of the UK-based Strategic Climate Risk Initiative, told me that climate change represented an existential threat to the insurance industry and that if it was to survive, it would have to change.
“Because insurance impacts are increasing and because we don’t have an insurance system built for the way climate change is evolving, this dynamic is going to get worse,” Laybourn said. “As we are already seeing, governments need to step in to effectively ensure that insurance can still exist in certain countries.”
Laybourn told me that recent extreme weather events in the US and UK had revealed that the insurance sector was extremely vulnerable to climate risk – and that as firms continued to reap profits, losses were increasingly being covered by the state.
“In Florida, you have a situation where flood insurance is getting less and less and the government has to make decisions about how and what to cover,” he said. “It is also the case in the UK, where major flood events led to the creation of Flood Re, a government-backed reinsurance agency to cover places that are effectively uninsurable through the private markets.”
Laybourn said the situation threatens to create a “punishment loop”, in which climate impacts cause growing financial and social instability, which in turn prevents swift action to prevent further climate change.
“We need systems that are more resilient so that we can continue to remain focused on decarbonisation, even as things become more volatile,” he said.
The seven-point plan
The Secure Our Future report includes a list of seven policy actions the authors say governments should take to protect communities and secure a future for the insurance sector. These are:
- Take precautions by integrating climate risks into supervisory frameworks and capital standards.
- Oversee the management of climate risks by insurers and related mitigation measures to ensure the safety and soundness of insurance undertakings and the ability to provide cover.
- Implement policies that support the equitable distribution of climate risks and costs to protect individuals, entities and communities from bearing risks and costs that they did not create and have limited capacity to manage.
- Mandate data transparency by requiring insurers to disclose comprehensive and accurate data on both physical and transition risks, sectoral composition of investment portfolios, access to insurance and underwriting fossil fuel expansion.
- Mandate the use of scientifically robust climate scenario analysis that captures the full complexity of climate-related risks, including tipping points.
- Require insurers to develop, implement and disclose 1.5°C-aligned transition plans, consistent with limiting warming to 1.5°C with the smallest possible overshoot.
- Higher capital requirements for fossil fuel exposure are required to ensure the safety and soundness of the insurer itself and to account for the risks that insurers are creating for the financial system.
You can see the full report here [PDF].