How Climate Change is Influencing Insurance Costs

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Insurers are being pressured to reduce their “insured emissions,” regulators are breathing down their necks, and the headlines are filled with a seemingly endless string of historic storms, floods, wildfires and crop-killing heat waves.

Whether induced by man or not, climate change is here and, in case you hadn’t noticed, is definitely having an impact on the insurance world.

How big of an impact? Consider that losses from natural catastrophes globally totaled $40 billion in the first half of 2021, according to the Swiss Re Institute, an arm of the reinsurance giant. Keep in mind that figure was before Hurricane Ida.

Whether induced by man or not, climate change is here and, in case you hadn’t noticed, is definitely having an impact on the insurance world.

But there’s a lot more at risk. Research by McKinsey shows that the value at stake from climate-induced hazards could, conservatively, increase from about 2 percent of global GDP to more than 4 percent of global GDP in 2050.

This, unfortunately, has and will continue to have a direct impact on your insurance costs, whether you own a business or a home, whether on the beach, in the mountains, or, in fact, pretty much anywhere.

Insurers, just to be clear, don’t simply cover catastrophic losses and hope for a better tomorrow. They pass their costs down to the buyer; we’re all already paying for climate change to one degree or another. And as the weather gets crazier, insurance costs will continue to go up.

State of the Climate Report

In case you missed it, the just-out 31st annual State of the Climate report found that greenhouse gases and global sea levels reached record highs in 2020. In other words, the pandemic-induced lull in human activity didn’t do a thing for the planet.

Last year set several other related records, including:

  • The highest annual increase in concentrations of methane, a potent climate-changing gas.
  • Average global surface temperatures that were among the hottest on record.
  • Sea levels that reached the highest on record.
  • A year that was the hottest on record that did not feature an El Niño.

Like a lot of companies, many insurers in recent years have declared a commitment to reducing their environmental footprint. The industry has also steered more of its investment portfolios away from polluting companies. It may be a pipe dream, but climate activists would like insurers to stop covering new oil and gas projects altogether.

Changes in Policies

Closer to home for most of us, whether as businessowners or homeowners, climate change has meant some key changes in our property insurance policies, especially in how deductibles and limits are applied.

Among other things, insurers are now increasingly paying hail and storm claims based on the actual cash value of, say, a roof, not the replacement cost. In other words, property owners are getting a payout based on the value of their roofs after depreciation, rather than a check that would buy a brand-new roof.

Also, deductibles in property policies, especially in hail-prone areas, are now typically based on a percentage of the value of the property rather than a pre-set figure.

In the West, many insurers are pulling out of areas prone to wildfires, leaving even property owners who faithfully prune and clear brush around their businesses or homes unable to find coverage or facing huge increases in their premiums. Earlier this summer, California’s insurance regulator went so far as to endorse proposals to halt new home construction in fire-prone areas.

That idea may never fly, but more changes are coming.

Among them? Wider adoption of parametric pricing, an approach that insures policyholders against events of a set magnitude and pays a set amount instead of insuring the value of losses.

As we might expect, insurance industry groups are paying close attention to the effects of climate change on the industry.

The Geneva Association – whose members represent the world’s largest insurers and reinsurers – is looking into a raft of questions related to building resilience to extreme weather events and climate risk, as well as the transition to a low-carbon economy.

The organization also works to encourage dialogue between industry executives and policymakers, regulators, lawmakers, the United Nations, and development organizations.

Where will all this go? Hard to know, especially because developed nations eager to address climate change don’t see eye-to-eye with developing nations that don’t want to do anything to chock off their economic growth. Regardless, it’s safe to suggest that as temperature rise, insurance costs are likely to, as well.

The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the nation. For more information about business insurance coverage, contact us online or call 480-730-4920.

This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.

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