(Roughly) Daily

One of the effectively-secret ingredients in the world’s economic growth over the last couple of centuries has been insurance. The ability to insure against catastrophic loss has underwritten (pun intended) the trillions and trillions of dollars of loans that have funded the construction and acquisition that has enabled the growth of both commercial endeavor and the the accumulation of personal wealth (directly through home ownership and indirectly through equity ownership in those commercial endeavors or participation in pension schemes that own that equity).

But in a way that was enitrely predictable, climate change is rendering a growing portion of the world uninsurable. Gavin Evans ponders what that might mean…

The Florida peninsula looks like a sore thumb. It juts into the Gulf of Mexico and the Atlantic, where the water is getting warmer year on year, prompting fiercer hurricanes that can blow down houses like collapsing decks of cards. Climate scientists are convinced all hell will break loose sooner or later when a monster-sized, property-destroying storm makes a direct hit on Miami or Tampa-St Petersburg. Given three near-misses in the recent past, the experts view such a calamity as inevitable. It’s a huge risk for anyone living there – they stand to lose everything – but also for those bearing the financial side of this risk, the insurance companies. Some in the industry are seeing this as a portent for their future – an impending existential threat with profound implications for the economic system.

There are no easy solutions for people still paying off mortgages and those who want to buy property along the Florida coast, because the potential payout on the back of a mammoth storm is so high that the reinsurers (who insure the insurers against catastrophe) are refusing to underwrite their clients and, with no reinsurance, there’s no insurance; and with no insurance, no mortgages; and with no mortgages, no property market. Insurance protects investments against loss and is therefore a pillar of the economic system. If it goes, economies are destabilised.

Many panicked homeowners have rushed to make their houses less risky for insurance companies by reinforcing their roofs with hurricane clips, installing impact-resistant windows, doors and shutters, and strengthening their foundations. But it’s not just storms and higher, warmer seas that concern insurers. Rising temperatures mean that the frequency, range and ferocity of wildfires are also on the rise.

So far this year, 3,374 wildfires have burned an area of Florida totalling 231,172 acres (at the time of writing), and it is even worse in California where 7,855 blazes have killed at least 31 people, destroyed more than 17,000 houses and devoured 525,208 acres of land, at an estimated cost of more than $250 billion. Here, too, homeowners rushed to make their properties more palatable to cold-footed insurers – clearing their surroundings of anything flammable, covering yards with gravel, sheathing houses with fire-resistant stucco, and replacing wooden roofs with steel.

But, even for the most diligent, insurance companies have turned tail, dumping existing clients and abandoning fire-prone and storm-prone areas altogether. On the Californian fire front, 2024 was a turning point as several insurers ceased issuing new policies because of fire-associated risks, including the United States’ biggest property insurer, State Farm, which cancelled policies in parts of Los Angeles. It is all too easy to view this cynically, but it’s happening because property insurers have been reporting year-on-year losses from climate change-related payouts.

Insurance companies survive by making more money from covering risk than they lose from these risks, which is why they prefer clients less likely to claim (insofar as they can predict the risk involved) and require them to pay substantial excess to discourage claims. When payouts rise above the premium intake, insurance companies either hike up these premiums or withdraw. But when that risk is considered catastrophic, potentially affecting many thousands of clients, as with Floridian storms and Californian fires, it is the reinsurers who are the first to retreat because they will ultimately bear most of the cost.

Reinsurers aggregate payout patterns to establish the likelihood of having to make huge payouts from future natural catastrophes. They do this by gathering exposure data from existing insurers in a geographical area, and by examining catastrophe models (computer simulations that estimate potential losses from natural perils). When they put all this together with detailed analysis of conditions within the area, they come up with a figure for their total potential loss if a catastrophic event strikes.

This is why reinsurers focus so intensely on climate change. Take a glance at the websites of big ones like Swiss Re and Munich Re and you get a sense of how central this is to their calculations – a concern that has spread to property insurers who are starting to hire climate consultants. Even more than market volatility, climate is their biggest headache. ‘You won’t meet a single insurance or reinsurance CEO who doesn’t believe in climate change,’ the insurance investor and former Lombard Insurance CEO James Orford told me. ‘They see it in the numbers – a combination of more extreme, less predictable events, combined with big losses of sums insured. All the modelling suggests these are uninsurable risks.’…

[Evans recaps the history of insurance, starting in Genoa, in the mid-14th century, with the insuring of maritime expeditions; examines the current state of play; examines the efforts (and gauges the weaknesses) of state’s efforts to step up with coverage when insurers step away; then considers another role for states…]

If states do withdraw from insurance and reinsurance, some of the most lucrative areas of the US, Canada, Europe, Asia, Africa and Australia will be devastated: no mortgages and no banks, leading to more ghost towns and villages. ‘It ends with depopulation and abandonment,’ said Agarwala. ‘Climate change reduces the operating space for humanity.’ In the UK, rising sea levels and coastal erosion could literally reduce operating space, putting 200,000 British homes at risk by 2050. There’s no coastal-erosion insurance, which puts more burden on the state, mainly to pay for new defences, but also to help people move.

Governments can take action in other ways, by investing greater sums in risk-prevention and management. There are signs of this happening such as the ‘fire-hardening’ and storm-prevention efforts in Florida, and improved flood defences in the UK; meanwhile, the EU’s Recovery and Resilience Facility is being used in several countries to build and renovate operations centres to cope with wildfires, and to buy firefighting helicopters.

In future, it is likely that voters will demand that their state and national governments do far more, regardless of the cost. They will want tougher building codes, including limitations on building in risky areas; expensive fire-prevention and fire-fighting schemes; better flood and storm defences; improved early catastrophe management, involving relocating people from risky areas and, when disaster strikes, rapid life-saving interventions such as large-scale emergency evacuations. If the insurance industry is forced to retreat by the climate crisis, all of this infrastructural investment will require vast chunks of taxpayers’ money. It is hard to avoid the feeling that this is part of our destiny, and that the sore thumb of the Florida peninsula is pointing us to the future…

Whole regions of the world are now uninsurable, bringing radical uncertainty to the economy: “The insurance catastrophe,” from @aeon.co.

See also: “An Uninsurable Country” (a report form NRDC), “The Insurance Crisis Is So Desperate People Are Turning Socialist” (a gift article from Bloomberg), and “The Uninsurable Future: The Climate Threat to Property Insurance, and How to Stop It” (from Yale Law Review)

* Isaac Asimov

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As we cover up, we might send highly-charged birthday greetings to a man who made foundational contributions both to the detection of climatic conditions and to a technology that may help allieviate climate change: John Frederic Daniell was born on this date in 1790. Named the first professor of chemistry at the newly founded King’s College London in 1831, he was an avid meteorologist. He invented the dew-point hygrometer known by his name and a register pyrometer; in 1830 he erected a water-barometer in the hall of the Royal Society. 

But Daniell is better remembered as a chemist (and physicist), especially for his invention of the Daniell cell, an element of an electric battery much better than voltaic cells, the standard before him. Indeed, the Daniell cell is the historical basis for the contemporary definition of the volt (the unit of electromotive force in the International System of Units). All advances in battery technology since then were “from” the base that Daniell laid.

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