There’s no word in any language to appropriately capture the climate calamity befalling us… So, let’s just say “dire.”
The situation is dire. Carriers continue to retreat from markets. Consumers shoulder the burden of ever-increasing insurance premiums. And the unprecedented loss of life and destruction of property leaves communities across the globe shaken and terrified.
I imagine the residents of Los Alamos, New Mexico felt a similar sense of manic urgency when Oppenheimer began directing work at his laboratory. But solving climate risk will be more complicated than building a nuclear device.
Climate risk represents the single greatest threat the insurance ecosystem (and humanity) faces. You do not have to look very hard to find evidence of this truth:
- Hurricane Beryl is the earliest forming category 5 storm in 100 years.
- A year’s worth of rain fell on the Dubai airport in a day.
- Customers are losing property coverage in disaster-prone areas.
Unprecedented events have become the precedent
It’s a problem so big no one entity will solve it alone. Insurers, governments (at all levels), communities, technology providers and thought leaders will need to come together to do so.
We need leaders who understand that geo-specific climate risk regulations are imperative – insurers can fill this need.
ESG policy and climate regulation
The 2024 Climate and Catastrophe Insights report from Aon calculates that global natural disasters in 2023 resulted in above-average economic losses totaling $380 billion. Around the world, insurers covered $118 billion and set a record number of billion-dollar insured disasters. That year was also the deadliest since 2010 (with 95,000 fatalities). And it was the hottest year on record.
Encouragingly, climate regulation and inclusivity policy development have already begun and will continue to develop. However, adoption has been unequal – with different stages of regulatory maturity. We need leaders who understand that geo-specific climate risk regulations are imperative – insurers can fill this need.
We continue to see progress from regulatory bodies on ESG-forward policies, including budget commitments to build resilient communities. Consider the UK’s investment of £2.4 billion until 2026 to support flood resilience and defend communities, businesses and families.
Similar priorities for bodies like the NAIC focus on similar challenges, including:
- Climate risks/natural catastrophes and resilience.
- Race and insurance, financial inclusion and protection gaps.
- Use of AI by insurers and cyber risk.
And agencies, like the European Environment Agency (EEA), sound the klaxon on countries’ “under-preparedness” for the devastating effects of climate risk.
While encouraging, such actions alone will not shift our current trajectory. Regulation and policy have no value unless they are put into practice by insurers and technology providers alike.
Where have all the cowboys (insurers) gone?
Paula Cole’s lyrics were never intended to describe the insurance retreat happening across the globe – but they do.
- In New Zealand, amid 21% rate increases, thousands are expected to lose flood coverage by 2050.
- The Inter-governmental Panel on Climate Change notes North and Central America are becoming volatile places to live.
- BBC reports that climate change fuels the US insurance problem, sharing examples of major carriers leaving the most populated states (California and Florida).
Premium growth is fueled by historic rate increases
According to the Allianz Global Insurance Report, the industry grew an estimated 7.5% in 2023 (the fastest growth since 2006). All three segments grew: life at 8.4%, P&C at 7.0% and health at 6.6%.
In part, this growth is a result of double-digit increases in premiums. For example, auto insurance in the US has increased 22% year-over-year. The burden of losses and inflation is being felt by consumers and businesses alike.
In some markets, owning a home or a vehicle presents illogical financial burdens for individuals and families. Bay Area home prices are comical. With Uber announcing partnerships with Cruise and Waymo, an individual living and working in such a community has little need of a personal vehicle for transportation – renting may be a better financial decision than buying.
The growing void and increasing costs have given rise to captive insurance programs.
Regulation and policy have no value unless they are put into practice by insurers and technology providers alike.
Talking about captive insurance
According to the EY 2024 Global Insurance Outlook, captives represented nearly 25% of the overall commercial insurance market and an estimated $176 billion in gross written premiums in 2022. Captives are performing better than US-domiciled commercial carriers in combined ratios (98% versus 83.9%). Such results will continue as traditional insurance methods fail.
Chris Lay, CEO of Marsh McLennan UK, says that budget cuts could create opportunities for captive insurance programs – reinforcing the prestige of the UK insurance market. “Establishing a proportionate and competitive UK captive framework could deliver a major boost to the UK insurance market, demonstrating our innovation and signaling we are open for business.”
Such a signal would be a welcome sign for many. The next step would be to relentlessly challenge the old ways of thinking.
Build resilient communities: Don’t settle for the old ways
To quote the great [Smashmouth] – the ice we skate is getting pretty thin. We must acknowledge the water is getting warm; and rather than freezing it, we might as well swim.
Natural disasters will continue to happen – so we must adapt our approaches to them.
Tragically, the Lahaina fire killed 102 people and caused billions in damage. It also left toxic debris (which was then dumped in a “nearby hole”). For Hawaiians, the land is sacred and disposing of 400,000 tons of fire waste in such a manner feels wrong.
We have success stories on how communities can protect themselves from such disasters through planning, building codes and cooperation.
The Woolsey Fire (burning from November 8 to November 21, 2018), accounted for $1.6 billion in home losses, burning nearly 100,000 acres and destroying 1,500 homes. It took two weeks to fully contain. A quarter million people evacuated.
Why Pepperdine University did not evacuate during the Woolsey fire
While the community around them burned, Pepperdine University officials encouraged – but did not require students and faculty to shelter in place. The university experienced minimal damage. No one was hurt.
Despite massive criticism, the decision to shelter in place was the right one.
It was not dumb luck. In previous years, the university’s leaders had taken thoughtful action to remove vegetation, replace flammable materials with hardscape, and position structures in a way that made Pepperdine resilient by design.
Other examples of helping communities deal with climate risk include:
- In South Carolina, historically flooded homes are being bought out.
- In California, affordable, fire-resistant homes are being 3D printed by college students.
- Jakarta mitigates flood risk through IoT.
Innovation is alive and well in insurance
Not to be outdone, some insurers or insurance-adjacent entities are rethinking their business models, engaging in responsible investing and aligning their values with communities.
- Innovative products like parametric insurance offer affordable protection with event triggers rather than loss triggers.
- The world’s largest insurers, like Ping An and AXA, have publicly committed to responsible investment, climate pledges and sustainability policies, and reported on those commitments through tools like Progress Indexes.
- Insurers continue to disrupt themselves by aligning their culture with that of their customers. For example, Takaful is a principled cooperative system grounded in Shariah law. It is one of the largest bancassurers in Southeast Asia, with 21% market share in Malaysia.
Such stories spark the imagination and give us hope for our future. But we still lack a clear champion to lead the charge.
The bottom line: Insurers can lead the “climate-conscious” evolution
Once upon a time, a brilliant man – surrounded by the finest minds on the planet, with clear goals and unlimited resources – accomplished the unimaginable.
We face another impossible today. Yet, instead of fighting, we must come together to win this war.
One Oxford University Press report discusses climate change as a social justice issue. This mindset acknowledges that already marginalized populations tend to be more vulnerable to climate impacts.
This observation is further reinforced when you examine the natural catastrophe protection gap, which now stands at a 62% gap globally. The Geneva Association concludes there’s been no progress in closing gaps in lower-middle and lower-income countries, which persist at upwards of 95%.
AXA’s Future Risks Report 2024 notes that 91% of experts agree insurers’ role in protecting populations from existing and emerging risks is more critical than ever. Ultimately, a continuing retreat, and ratcheting up of rates is not the answer – working together is. Otherwise, we have to face the truth about the future:
