How climate change casts storm clouds over insurance premiums.
One of Donald Trump’s first acts in his second presidential term was to start the process of withdrawing the USA from the Paris Agreement…
– the global contract signed by almost 200 countries, pledging to keep global temperatures “well below” two degrees Celsius above pre-industrial levels.
It’s the second time he’s taken America out of the 2015 climate change accord, having ditched it already in 2017 during his first term; only for President Biden to rejoin in 2021.
If this game of climate hokey-cokey seems confusing, it could be viewed as especially so in light of the disastrous LA wildfires. The region became a tinderbox after months of drought, a key symptom of climate change, and we all know the tragedy which followed.
The knock-on effects of climate change reach so many areas of life. And while, in the context of all of that, insurance might feel like a marginal issue, it’s a fact that all of our premiums are affected to some degree by international events over which we have no control.
Losses from the January wildfires are expecting to run into billions of dollars, according to Moody’s, the financial analysts, and could be California’s most expensive wildfire disaster. The 2018 Camp Fire which erupted in the Sierra Nevada foothills, killing 85 people and destroying almost 19,000 homes, resulted in an insurance loss of $12.5 billion in today’s money. The economic damage is estimated to have totalled north of $400 billion.
The human tragedy of these events is unmistakable. But why should we be concerned about the insurance impact of events which take place thousands of miles away?
First, it’s worth noting the role of climate change in these events. Scientists pretty much unanimously agree that climate change is leading to more extreme weather – drought, flooding, storms, and other phenomena. The increased frequency of these events means that property and other damage is happening more often and seems to be getting more severe.
Yet this is why insurance was designed. If your property, car or something else is lost or damaged, you generally expect insurance to be there to help you recover or repair it. This is where it gets a bit nerdy.
Insurers themselves take out insurance against their own losses. In other words, if a tree lands on your shed and smashes up your expensive bicycle, your insurer will want to recover the money it’s had to pay out for the claim you make to replace your bike. It does this by insuring its own risk in the global insurance (or reinsurance, as it’s called) market. It’s a bit more complicated than this, but this is basically how it works.
In any case, if insurers are claiming their losses on an enormous scale at more regular intervals, it follows that global insurance markets will have to increase their prices to absorb the additional claims. In some cases, there could be incidents which happen so frequently that the reinsurance markets refuse to cover them, or the price gets so high it becomes uneconomical for your insurer to cover that risk.
Hence why the Flood Re scheme was established in the UK. The Government underwrites the flood element of policies in eligible homes, which helps to ensure people are able to access flood cover where they might otherwise struggle to find an insurer willing to provide a suitable policy.
As always, there are steps you can take to mitigate insurance rises but, as climate changes continues – 2024 was the warmest year in history – it’s becoming a fact of life that insurers will pass on higher costs to commercial and personal customers.
We’d always recommend speaking to your broker early to find out how you can manage your overall risk, which may help reduce your premiums and offset the impact of global events.
Get in touch
For more information contact Mark.Bonthrone@blackfordinsurance.com, client manager (commercial team) or Michael.Gregson@blackfordinsurance.com, head of private clients.