Insuring Extreme Weather Disasters: Losing Money to Climate Change

This article about extreme weather catastrophe insurance originally appeared in Deutsche Welle (DW) and is part of Covering Climate Now, a global journalistic collaboration strengthening coverage of climate history.

At first, the insurance companies did not know what had hit them.

In the summer of 2021 there had been summer rain for weeks. The ground in western Germany was soaked. As the storm hit, flooding homes and washing away livelihoods, scientists from the companies that would foot the bill pored over weather data as they watched television footage of the destruction.

“It took a few days before we realized that roads, railways and bridges were also destroyed, [as well as] Telecommunication lines and energy systems,” said Ernst Rauch, chief climate scientist at Munich Re, the world’s largest reinsurer. He found out later that the total insured losses amounted to 8.2 billion euros in Germany alone. His employer would take on almost half a billion euros of this.

The rains that hit northern Europe last July killed more than 220 people in Germany, Belgium and the Netherlands, resulting in the costliest weather-related disaster the continent has ever seen. Scientists from the World Weather Attribution Network found this out Burning fossil fuels had made rainfall 3-19% heavier and at least 20% more likely. The insurers liable for damages had not fully priced in the risk.

“I have never seen such devastation from a flash flood in my more than 30-year career in natural catastrophe at Munich Re,” said Rauch.

Pay damages, heat up the climate

As the planet warms and extreme weather events intensify, insurance companies are in a unique position on the frontlines of climate change. On the one hand, they pay more for damage and have trouble pricing in unforeseeable risks. On the other hand, they finance and take over environmentally harmful activities that further distort the climate.

Insurers have traditionally used historical data to determine the risk of storms and wildfires threatening their assets – and charging their customers accordingly. But such calculations are no longer enough. A landmark review by the Intergovernmental Panel on Climate Change (IPCC) in April concluded that climate risks are becoming increasingly complex and difficult to manage, while at the same time crises are becoming more intense. The sea level has risen higher. Heat waves have gotten hotter. Tropical cyclones are getting stronger.

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This poses an existential problem for an industry that acts as a “strategic pin” to hold the economic system together in the face of disasters, said Zac Taylor, a climate finance expert at Delft University of Technology in the Netherlands. “If it goes away – or it becomes more difficult or expensive to insure – it impacts the whole system.”

Retreat from areas deemed too risky

In response, insurance companies have started increasing premiums and exiting areas they consider too risky. “Normal people are going to feel that at home in two ways,” Taylor said. “Either their insurance will cost a lot more or they won’t be able to have it.”

When disasters strike and insurers can’t pay, governments can use public money to foot the bill. Reinsurance companies – who sell insurance to primary insurers – act as a barrier by sharing that risk among better-funded players. They also expect premiums to rise.

Because the reinsurance market is global, even when extreme weather hits other parts of the world, people pay more, Taylor said. “If there’s a really bad flood in Germany, a bush fire in Australia, a typhoon in Japan, then household insurance in Florida goes up – regardless of whether there’s a hurricane in Florida or not.”

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World leaders pledged in 2015 to limit global warming to “well below” 2 degrees Celsius this century, and ideally to 1.5 degrees Celsius. Instead, current policies are expected to warm the planet by 2.7°C, according to an analysis by Climate Action Tracker, a project by two German environmental research institutes. By the end of the century, floods that used to come once a century will hit most coasts every year.

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Such changes could push weather risks beyond what the global insurance industry can sustainably fund. In a 2015 speech, then-CEO of insurance giant Axa said, “A 2C world might be insurable – a 4C world certainly wouldn’t be.”

Enable fossil fuels – or block them?

But insurance companies also have enormous power in the energy transition. They can block or enable fossil fuel projects by deciding whether to insure them and at what price. An accelerated green energy transition would expose them to fewer weather disasters.

A 2021 analysis by McKinsey, a consulting firm, found that investing in climate solutions like wind farms and electric vehicle charging stations could result in $10 billion to $15 billion in insurance premiums for investments alone. The oil and gas market is worth about $18.5 billion in annual bounty, including new and existing projects, according to a report released last year by environmental campaign group Insure Our Future.

The reinsurance market is so concentrated that it doesn’t take a lot of movement to make big changes, said Regina Richter, a green finance activist at Urgewald, a nonprofit in Germany that worked on the report. “Even a powerful industry like the oil and gas industry will eventually look for reinsurance. If just a handful of companies get involved, it makes a big difference.”

In a path to the 1.5 degree temperature target released last year, the International Energy Agency stated that no new coal mines, oil fields or gas fields should be approved for development. Activists say the insurance industry has not taken these recommendations seriously.

Munich Re, which has been warning of the dangers of climate change for more than half a century, is still touting companies that “handle large amounts of hydrocarbons,” according to its website, and claims to have been leaders in the downstream energy market for 35 years .

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The company stopped insuring coal mines and facilities in 2018. And more recently, it has set targets to reduce emissions from the oil and gas projects it underwrites by 5% by 2025 to achieve net-zero emissions by 2050.

“In fact, one can argue that this can be faster,” said Rauch. “The question is, would we pull out of the fossil fuel market, say, by tomorrow or so, the industry would still be there because the demand is there.”

Still, competitors have proven that bolder action is possible. Swiss Re and Hannover Re, the second and third largest reinsurers respectively, have stopped insuring new oil and gas projects. Hannover Re told DW in a written statement that it also plans to cut emissions from its investments by 30% by 2025, but declined to give a figure on the current size of its fossil fuel assets.

Berkshire Hathaway, a non-exclusion fossil fuel reinsurance company, declined an interview request. Two other major reinsurers, China Re and Lloyd’s, did not respond to a request for comment.

Activists hope energy companies will find it harder to promote polluting fuels as more insurers rule out new oil and gas projects. This has already happened with coal, said Richter. “Some coal plants or mines find it really difficult to find insurance – and when they do it’s more expensive – so they have to ask whether it makes sense or not.”

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This article was written by Ajit Niranjan.

Editor’s note: The opinions of the authors expressed here are their own and not those of Impakter.comIn the post photo: Silhouette of a firefighter holding a hose cleaning up after an extreme weather disaster. Featured Photo Credit: Denniz Futalán.