Climate Change Creates New Risks - Raising Insurance Premiums

Climate change creates several new, significant, risk exposures for insurance companies - threatening
them with bankruptcy and forcing them to raise rates; this places great strain on local and national
governments to act as a safety net.

The primary risk climate change creates is physical risk - the physical damage caused by weather or
environmental changes. Climate change has been linked to increased frequency, severity, and
distribution of high-damage weather events: tornados, hurricanes, rising sea levels, and other extreme
weather. These new dangers drastically increase the possibility of damage to life, limb, and property
(all of which can be insured). Changing atmospheric conditions also changes the risk profile of much of
the United States. Areas that previously would have been deemed safe from large natural disasters are
now under threat. As global temperatures increase, extreme weather conditions previously confined to
southern latitudes - like tornados or hurricanes - could start to work towards northern population
centers unequipped and ill-designed to handle them. Additionally, sea levels rising will put many areas
at sudden risk of flooding where previously there was none: annual global flood damages are expected
to rise from $6 billion in 2005 to $1 trillion by 2050. Climate change also renders many of the models
that insurance companies use to calculate weather-related insurance rates obsolete. Most of these
algorithms take all the past weather conditions of a region into account when calculating potential
risks, but, because atmospheric conditions have changed since most of these observations were made,
much of this data is now obsolete. The combination of added risk, and a decreased ability to predict
that risk, will lead to insurance companies drastically increasing premiums in the coming decades.
Insurance companies will also be exposed to liability risks from insuring companies that are
potentially legally responsible for climate change and its damages. If, for example, large carbon
emitters, protected under liability insurance, are successfully sued for their damage to the climate, then
insurance companies could be forced to pay a large chunk of the settlement. This is a real threat, this
past June, New York sued large polluters seeking to collect billions in damages. The size of these
lawsuits could force many insurance companies out of business. This increased exposure to potential
loss will likely cause insurance companies to raise premiums - costing many small businesses their
insurance.
The last category of risks is increased market risks to insurance companies’ investments. When
insurance companies are paid premiums, they often invest some of that money into the market to
attempt to beat inflation. They primarily invest in traditionally stable industries - oil companies and
energy producers - which are the most likely to get disrupted due to climate change policy. If there is a
sudden policy or market shift discriminating against fossil fuel producers or carbon-related assets the
value of market investments could plummet - leaving insurance companies insolvent and bankrupt.
The combination of these three major risks will lead to large, universal insurance premium increases.
These increases will price millions of Americans out of their coverage. This will push a large percentage
of the American population into public, subsidized insurance programs like the National Flood Insurance
program - forcing the United States government and American taxpayer to take on these heightened
risks. These programs are very costly and inefficient because they pay for people to rebuild in high risk
areas. Additionally, public insurance is very limited in scope and coverage, leaving millions of Americans
without proper insurance. This is incredibility dangerous, as one big storm, if it hit a mostly uninsured
region, could set that area back economically by a decade or more. Private insurance is one of the
most efficient ways to inject money from the private sector into destroyed areas, and as it no longer
becomes feasible to insure every American under our current system, the American government is
going to have to step up to fill this role, either by investing in preventative measures (flood prevention
and improved infrastructure) or by subsidizing better public or private insurance solutions.
Sources:

International association of insurance supervisors. July 2018. Issues Paper on Climate Change Risks to
the Insurance Sector. Insurance Journal.

Gretchen Frazee. November 2018. How climate change is affecting your insurance.

Bradley Hope, Nicole Friedman. October 2018. Climate change is facing the insurance industry to
recalculate. Wall Street Journal

Oliver Ralph. October 2018. Insurers act on climate change exposer. Financial times.