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New climate insurance: Weathering storms may be impossible soon

Climate change is driving high insurance premiums and making some areas no longer insurable.

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Quantumrun Foresight
August 23, 2023

Insight highlights

In the face of an escalating climate crisis, insurance firms are transforming to offer novel solutions while re-evaluating existing ones. With rising insurance premiums, low-income households and some industries may face increased financial strain and risk, potentially driving population shifts, policy reforms, and a demand for greener practices and advanced risk assessment technology. Amid these challenges, the expanding climate change insurance market offers opportunities for job growth in diverse sectors but also highlights the urgent need for more sustainable practices.

New climate insurance context

In the first half of 2021, insurance companies had to pay the most compensation for damage from natural disasters in a decade, primarily due to extreme cold in the US. This compensation amount was projected to reach USD $42 billion. Scientists have warned that climate change will lead to more severe weather events worldwide.

The US was particularly affected, with events such as the Arctic cold in Texas in February 2021 causing significant disruption. Although total economic losses were below the 10-year median at USD $93 billion, several climate records were broken worldwide. This period saw the highest insurance losses since 2011 when Japan experienced a devastating earthquake and tsunami. Extreme storms in Europe towards the end of June 2021 led to insurance claims amounting to USD $4.5 billion.

Coastal infrastructure, such as seaports and railways, is at risk due to an expected sea level rise of 12 inches by 2030. The potential cost of damage and disruptions could range from USD $2.9 billion to over USD $25 billion by 2100 without any preventative measures. A mere 3 percent of US ports are prepared for these changes. A survey by French insurer AXA revealed that many risk managers fear certain global areas or activities may become uninsurable due to climate change, and half are unaware of these risks. As a potential early warning sign, several insurance companies have pulled out of Florida and California due to fraud and high risk, leaving homeowners increasingly vulnerable.

Disruptive impact

As climate change becomes an increasingly stark reality, the insurance industry is evolving in response by offering novel products and re-evaluating existing ones. Climate change insurance will likely challenge the traditional concept of insurability as the frequency and intensity of weather-related disasters escalate. Such a transformation can lead to potential job creation in insurance sectors, risk assessment, environmental science, and analytics as the demand for specialized knowledge to assess, manage, and predict climate-related risks increases.

For example, the US flood insurance market, where publicly-funded insurance has struggled to keep up with escalating damages and costs, has led to a growing private demand for flood coverage. In this market, there's a rapidly emerging need for flood risk modelers, claims specialists who understand the intricacies of flood damage, and customer service professionals to explain these complex products to policyholders. Similarly, there's a growing demand for climate change risk assessors in commercial insurance.

Many businesses may need to adjust their strategies and operations to account for these new risks, leading to potential disruptions and opportunities across various sectors. For example, real estate developers might have to rethink their project locations and designs to mitigate insurance costs, potentially driving job growth in green architecture and sustainable construction. Similarly, financial institutions might need to re-evaluate their investment and lending practices to consider their clients' climate change risks, which could generate new roles in environmental risk assessment and sustainable finance.

Implications of new climate insurance

Wider implications of new climate insurance may include:

Low-income households in coastal cities and disaster-prone areas struggling to afford adequate coverage, leading to growing wealth disparities in the aftermath of climate disasters.

Higher ground and less climate-vulnerable areas becoming more desirable, leading to potential "climate gentrification" as wealthier residents move to these safer zones and potentially displace existing communities.

Governments revisiting policy frameworks to ensure affordable insurance coverage for their citizens, leading to increased public intervention in insurance markets or new regulations mandating climate resilience measures.

High insurance premiums in areas with elevated climate risk triggering significant population movements away from these zones, reshaping demographic patterns in many countries.

Demand for new technologies to monitor, predict, and mitigate climate risks, from satellite imagery for disaster management to AI for sophisticated climate modeling.

Specific industries experiencing job losses if they fail to adapt to changing climate risks and insurance costs, such as the coastal tourism sector in areas with high hurricane risk or ski resorts in regions facing less reliable snowfall.

Businesses and households adopting greener technologies and practices, driving innovation in renewable energy, water conservation, and the circular economy.

Greater environmental justice activism, prompting demands for more equitable climate policies and insurance solutions.

Large-scale insurance losses posing systemic risks to the global financial system that central banks and international financial institutions would need to manage.