As extreme weather ratchets ever upwards, it seems inevitable that more and more locations will become uninsurable over time, whether as a result of coastal inundation, sea level rise or supercharged storms and flooding events. I took a look this this climatic ‘Achilles heel’ of the global economy in a piece for the Business Post in late October.
SO FAR THIS year, the world has been riven with war and economic uncertainty in Europe, famine and drought in Africa and record-breaking extreme weather right across the northern hemisphere.
Yet for the global energy sector, 2022 has been another annus mirabilis. While consumers and many businesses have been severely squeezed by soaring energy prices, fossil fuel energy corporations have raked in massive windfall profits in recent months.
A study published earlier this year based on World Bank data found that petro-states and fossil fuel companies have made $2.8 billion in pure profits every day – or more than $1 trillion a year – in the decades since 1970, when adjusted to 2020 prices.
The true cost to the planet of releasing tens of billions of tons in carbon emissions, largely from fossil fuel burning, is becoming ever more abundantly clear. But while the energy titans appear indifferent to the human suffering and hardship resulting from the dramatic recent increase in climate-fuelled extreme weather events, there is one major player proving altogether more difficult to ignore.
The global insurance and reinsurance industry is a colossal sector with an estimated $25 trillion in investments under management, and annual revenues in the region of $2 trillion to $3 trillion. But the industry is now in crisis, as it faces spiralling claims from ever more expensive weather-related disasters.
Earlier this month, Munich RE, the world’s largest reinsurance firm, announced that from April 2023 it would no longer invest in, or offer insurance for, the financing, construction or operation of new oil or gas fields or related infrastructure. In tandem, Munich RE will also cease all new investments in firms where oil or gas exploration is the core business. Allianz and some other major insurers have made similar commitments.
The world’s insurers find themselves in the paradoxical position of coming to understand that one of their largest revenue sources – the energy industry – is also in the process of destroying the broadly stable climatic conditions upon which these same insurers depend in order to be able to both quantify and cover risks from extreme weather.
“Insurance is the Achilles heel of the fossil fuel industry and has the power to accelerate the transition to clean energy,” according to Insure Our Future, a global coalition of environmental non-governmental organisations. It published a report this month which noted that 62 per cent of reinsurance businesses globally are planning to phase out coverage for coal firms, with two in five now excluding at least some oil and gas projects.
Part of the pressure to divest from the fossil fuel sector comes from corporate investors, but the penny is slowly dropping that the biggest existential threat facing the entire insurance industry is the rapid destabilisation of the global climate system as a result of fast-rising carbon dioxide levels.
In August, the Central Bank of Ireland launched a consultation on climate risk guidance for the insurance sector. “Climate change is no longer an emerging risk – the stakes are high, not just for the future viability of the insurance sector, but also for society as a whole,” Gabriel Makhlouf, its governor, said.
A survey published by the bank in May found that only 20 per cent of insurers and reinsurers fully integrate climate change risk in their risk management frameworks. This is an egregious, baffling and increasingly expensive oversight.
To grasp just how overwhelming the risks involved are, this month the Potsdam Institute for Climate Research in Germany published a study that found the increasing strength of hurricanes alone is capable of destroying the US economy.
“Increasing hurricane damages will exceed the coping capacities of this economic super-power,” Robin Middelanis of the institute said.
Those calculations related only to hurricanes – impacts from drought, desertification, flooding, wildfires and extreme heat waves form what insurers describe as compounding effects. While an insurer can largely ignore a ‘once-in-a-millennium’ risk of mega-disaster, what happens once that risk becomes ‘once in 30 years’ due to global warming?
Insurance companies are acutely conscious of the risks from catastrophic single events and in many cases will simply not offer cover to at-risk communities for events such as flooding and wildfires, which can devastate entire regions.
In some countries, such as France, Spain and New Zealand, governments require insurance companies to offer homeowners cover for all forms of natural disasters, but then provide a financial cushion in the form of reinsurance to these firms to ensure a large single disaster doesn’t bankrupt them.
In Britain, one in six homes is regarded as being at risk from flooding. The British government, working with the insurance industry, set up an initiative known as Flood RE to make flood cover affordable to the estimated 350,000 households located in flood plains for whom the risk is too high for commercial insurers to offer cover.
No equivalent scheme exists in Ireland, where insurance companies have developed blacklists of areas where they will no longer provide flooding insurance cover – lists that can even include areas where flood relief works have been carried out. While efforts have been made at government level to compel insurers to offer cover, this is still a matter for individual companies – and it is standard practice to withdraw such cover for future claims once one claim has been made.
Despite the evidence worldwide, large numbers of people continue to move into at-risk areas such as the coastal regions of Florida as these are still considered highly desirable places to live.
Similarly, areas of the southern US such as Charlestown in South Carolina are seeing strong inward migration despite its location within a known hurricane zone. In this case, people are attracted by affordable housing; many poorer people feel they have no choice but to hope for the best when it comes to risks.
Ultimately, the only insurance against ever-escalating losses from extreme weather events is the Herculean global effort required to follow the science and turn off the tap of climate-destroying fossil fuels while we still have that option.