Risky business: Climate change turns up heat on insurers

Tony and Jhan Dunn never thought they would leave California, where they grew up, built a life together and planned to retire.

But after a wildfire swept through their Northern California town of Paradise three years ago, burning their home to the ground, they could not get insurance to buy another.

“We basically got priced out of California,” Dunn, a retired planning specialist, told Reuters from the couple’s new home in North Carolina.

There are thousands of homeowners and businesses from California to Australia in a similar position because the insurance industry, known for its readiness to cover anything from Bruce Springsteen’s vocal chords to alien abductions, has trouble factoring in climate change.

The tried and tested approach, where decades’ worth of historical data serve to estimate future claims, falls short when weather patterns change and hurricanes, floods, heat waves or snowstorms become more extreme and unpredictable, industry experts say. And the British hosts of the U.N. climate conference in Glasgow acknowledged on Wednesday that current pledges to cut greenhouse gases were not enough to avert climate catastrophe.

Insurance broker Aon said in a report last week that “highly anomalous” floods in Germany and China this year caused record insured losses in those regions.

“Insurers are pulling out because nobody wants to be in the business of losing money,” says Attila Toth, chief executive at specialist risk analytics firm Zesty.ai. “And if they don’t trust their traditional models, then they are concerned that they will be losing money.”

Zesty.ai, whose customers include Farmers Insurance, reinsurer Berkshire Hathaway and Aon, uses artificial intelligence trained on more than 1,400 wildfire events to produce climate change risk scores for any individual property.

In the same vein, reinsurance broker Willis Re is using data from AI firm Cloud to Street to help clients price flood reinsurance.

Insurance statistics show an urgent need for such innovation.

For example, the average number of large US wildfires has risen by 30 per cent over the past 15 years and by nearly a fifth in just the last five, according to Lloyd’s of London (SOLYD.UL) insurer Chaucer.

In all, insured losses for so-called “secondary” perils such as floods and wildfires - rather than more closely modelled perils such as hurricanes - nearly doubled over the past decade, data compiled by Swiss Re shows.

The reinsurer expects no let-up, forecasting a 30-63 per cent rise in insured losses for all types of natural catastrophes in advanced markets by 2040. China, Britain, France and Germany, could even see those soaring between 90 per cent and 120 per cent.

Given the momentum, it is no surprise that traditional models cannot keep up, Bruce Carnegie-Brown, chairman of insurance market Lloyd’s of London told Reuters.

“If you’ve reached an exponential part of the curve where suddenly, something’s accelerating, it’s almost certain that we are underpricing the risk that we’re taking.”

Feeling the heat

Policyholders are already feeling the heat, with coverage getting costlier or harder to come by.

Broker Marsh estimates US property insurance rates have risen by 10 per cent in the third quarter.

In California, non-renewals of homeowners’ insurance policies rose 31 per cent from a year earlier in 2019 to more than 235,000, the state’s Insurance Department’s most recent data showed. The data for 2020 could be similar, according to Carmen Balber, executive director of Consumer Watchdog LA.

Across the northern border, the Insurance Bureau of Canada warned on its website homeowners might not be able to buy a new insurance policy if they have suffered a fire.

Among those pulling back from home insurance in California are some household names such as Liberty Mutual, Nationwide and State Farm. Liberty Mutual said it was a “difficult but necessary step to reduce overall exposure to wildfires,” a sentiment echoed by other insurers.

Some insurers aim to reduce their exposure by helping clients become more resilient. Commercial insurer AXA, for example, offers a consulting service for clients such as manufacturers, identifying their vulnerabilities and suggesting remedies, such as erecting flood barriers, its chief risk officer Renaud Guidee told Reuters. “This is really an alignment of interest.”

US insurer Chubb is also working with clients to help them make their infrastructure sturdier, said Paul J Krump, Vice Chairman, Chubb Group, Global Underwriting and Claims.

Reinsurers, with their global scope and long history of underwriting catastrophe risks, also have a role to play in helping the industry adapt to climate change, analysts say.