Climate Change: A Rising Tide of Insurance Claims
Written by Ted Shabecoff and Maureen Cureton
Forest fires are raging swifter and deadlier. Hurricanes unleash more powerful and deadly winds. 2023 was the world’s hottest year on record and it is likely that 2024 will snatch this title. The Earth’s climate is changing at an alarming rate, and businesses and society across the globe are feeling the consequences.
Increasing frequency and intensity of weather events are contributing to mounting insurance losses known in the insurance sector as “catastrophic losses.” Climate change is causing rising sea surface temperatures and exacerbating La Niña–conditions conducive to storm formation. Additionally, wildfires, heatwaves and droughts cause immediate destruction and disrupt supply chains and infrastructure, leading to long-term economic losses as well as social impacts that may last for years.
One industry sector acutely impacted is the insurance industry.
With mounting costs and insurance claims pay-outs, the industry can play an important role in both climate mitigation and adaptation. Being on the front lines of climate impacts, insurers are waking up to the importance of deploying technological solutions to predict risk, and other strategies to reduce greenhouse gas emissions and to adapt to the impacts of climate change.
For an industry based on data and risk assessment, the numbers are staggering.
In 2023, insurers experienced net losses on homeowner insurance coverage in 18 states, up from 8 states in 2013. As a result, homeowner insurance premiums have increased by 21% since 2015.
Climate change isn’t a single-threat scenario for insurance companies; there are a number of types of claims it impacts. Floods, storms, and wildfires devastate homes and buildings, leading to a spike in property insurance claims as repair and rebuilding costs rise. Climate-related events are also causing infrastructure damage, accidents, and health problems –which all contribute to rising insurance claims.
Droughts, heatwaves, and erratic rainfall are disrupting agricultural yields, threatening our food security, and making farmers increasingly reliant on crop insurance as their livelihood is threatened. According to a study by Stanford University, rising temperatures from 1991 to 2017 contributed to $27 billion in crop insurance losses.
One of the most infamous hurricanes in history, Hurricane Katrina, which struck the Gulf Coast of the United States in August 2005, profoundly impacted the industry. With insured losses totaling $65 billion, it remains one of the costliest natural disasters in U.S. history. The event also heavily impacted the reinsurance industry, tightening the market and increasing premiums. In response, insurers revised risk models, and passed on the increase in premiums to their clients. They also adjusted coverage options in hurricane-prone areas, while advancing the use of technology for more accurate risk assessment. Regulatory changes and a focus on community resilience, including stricter building codes, also emerged as critical long-term strategies to mitigate future risks.
Increasing claim payouts strain the financial resources of insurance companies, leading to higher premiums or even a reduction in coverage options in some areas.
For the insurance sector, this isn’t news, but insurance pricing and coverage decisions based on past portfolio performance and historic weather events are long longer adequate. Hurricane Katrina underscored the necessity for the insurance industry to adapt continuously to the growing challenges and risks posed by climate change. Accurately predicting climate-related risks becomes more challenging with a changing climate, as traditional risk models may are unlikely to foresee consequences of extreme weather events.
So how will the insurance sector deal with increasing climate risks?
While downside costs and risks associated with climate change mount, the insurance sector looks to the upside. The insurance industry is adapting to this new reality by implementing technological solutions and proactive strategies. Utilizing big data and predictive analytics allows for more accurate risk assessments and pricing structures that reflect the evolving climate landscape. By incorporating climate risks into underwriting decisions, insurers can better manage their exposure to potential losses.
Collaborating with communities and governments on infrastructure improvements and climate resilience programs can help alleviate impacts of climate events and reduce future claims. Intact insurance company in the USA is helping restore wetlands to protect flood prone areas and offering programs to better protect their clients’ properties from floods. In Canada insurers are funding cloud seeding to decrease damage and insurance claims associated with hail storms.
Other insurers are supporting climate mitigation solutions, addressing their own operating practices, the impact of their investments, and impacts of their suppliers. AVIVA, one of the world’s largest insurance companies, was the first insurer to commit to Net Zero carbon emissions by 2040. This includes engagement of their supply chain. For example, AVIVA Canada launched a program, called Net-Zero Accelerator Supplier Program, to support their suppliers to set targets and take action to reduce greenhouse gas emissions.
Also, in Canada, Cooperators insurance company is developing new policies to encourage their clients to make decisions that better protect their properties from events associated with climate change. With Cooperators’ TomorrowStrongTM coverage, clients can receive a higher pay out after a claim if they replace or repair a damaged roof with roofing materials that offer better protection against hail and wind. They also offer additional funds to install hurricane straps after a claim, to better secure roofs to walls. This makes properties more resistant to hurricanes and tornadoes. Other preventative measures, such as water leak detectors, sump pumps, and surge protectors may also qualify for additional support, better protecting properties from floods and high waters.
Cooperators also encourages restoration contractors to avoid and reduce waste associated with the claims they handle. Insurance claims generate a lot of waste –and waste is a key source of greenhouse gas (GhG) emissions. Other insurers, such as Gore Mutual are selecting preferred vendors, in part, based on certification by EcoClaim. EcoClaim trains contractors to measure and reduce claims-related waste, and is expanding training to help contractors target other sources of greenhouse gas emissions. Insurers looking to reduce their supply chain emissions benefit by working with contractors that are avoiding and reducing emissions too. EcoClaim’s software tracks actual and avoided emissions associated with contractors and their claims, so that insurers can capture that data for their GhG reporting and disclosure.
Being on the front line of climate impacts, insurers recognize that climate change poses severe risks to families, businesses, communities and the companies that insure them. Leading insurers are responding by deploying technology to better predict risks, by advocating for climate action by governments, and by taking action to reduce their own greenhouse gas emissions and to engage their suppliers in changes that will reduce GhGs associated with claims and other supply chain activities. Insurers are also engaging their clients, revising policies and creating new programs to enable their clients to build resilience to the growing impacts of climate change.
By embracing technological solutions, and by promoting climate mitigation and adaptation, insurers will play a vital role in ensuring a more sustainable future for both the industry and the communities and clients they serve.
Will these actions be enough to stem the tide of rising climate-related insurance claims? Time will tell.
About EcoClaim
EcoClaim serves as a catalyst for climate action in the insurance industry. Helping insurers target the significant potential to reduce and avoid claims-related Scope 3 emissions, EcoClaim drives supply chain engagement, action and outcomes through training, certification and software. EcoClaim’s solutions enable efficient aggregation of actual and avoided GhG emissions, supporting insurers on a path to net zero.