Can you insure against climate change? | The Economist


Extreme weather events like these are becoming more frequent Fire seasons growing longer and more intense Florence could produce 50% more rain… …than it otherwise would have… …in a non-climate change environment I don’t know how to describe this… …other than we’re in the middle of a climate emergency right now It’s not just causing untold human suffering… …but also ever-growing economic costs As the losses pile up, will insurers be able to cope with the damage? In 2017 Hurricane Harvey… …mudslides in Sierra Leone… …and monsoon floods in South Asia… …all contributed to the largest year on record for insurance losses… …with payouts totalling $144bn In America for example between 1980 and 2015… …you had about five events a year… …that each cost more than $1bn in damage Since 2016 it’s been an average of 15 events like this a year This leaves the insurance industry uniquely exposed… …and having to pay out a lot of money all at once Insurers aren’t helped by the obsolete information they rely on either They find it hard to predict when this happens because their models are… …not really taking into account climate change They look at maybe 30, 40 years of data… …and they assume that the environment within these data… …this period is pretty stable So these models look at a world that doesn’t really exist anymore And it’s no surprise what’s now happening to the price of insurance If you look at the last quarter… …premiums on property insurance in America rose by 10%… ….in Australia and New Zealand they rose by about 18% And at some point premiums may simply become unaffordable… …especially so as disasters regularly happen in places where… …people can least afford to pay high premiums Half of last year’s losses from natural disasters were uninsured And in America 85% of homeowners have no flood insurance… …even though half of the population lives near water Increasing premiums might just lead to… …even more people being left out in the cold But there are some more novel solutions So, for example, Lloyd’s of London has a policy that sends… …€1,000 per hectare to Spanish olive farmers… …as soon as the temperatures reach 36 degrees So these are very simple solutions to put in place… …very easy to implement and also quite cheap in fact… …which is the main advantage Rather than compensate the farmers after their losses are reported… …insurance companies monitor a specific parameter… …such as rainfall or temperature When this passes an agreed threshold they pay out a lump sum Known as parametric insurance… …this approach can help the insurance companies cut costs… …and in turn bring down premiums for the consumer But as the climate crisis worsens… …the same challenges are likely to re-emerge We cannot expect insurers to save us from climate change… …because the world fundamentally cannot be insured against climate change …because the world fundamentally cannot be insured against climate change However many companies already offer discounts… …to homeowners who for example… …install metallic shutters on the windows or flood-proof doors But they could make a more drastic step So a city on the coast wants to build flood defences This will require a lot of money but perhaps insurers… …maybe in cooperation with banks could offer some financing… …for them to do that They can help us design solutions or take measures that will limit losses And this is really the crucial role they can play

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