Not surprising, as global temperatures rise, leading insurers are sounding the alarm. They worry that if the climate crisis continues to escalate, the industry won’t be able to underwrite future coverage. Impacts Why experts are predicting the world’s biggest temperature increase this century If we stick with business-as-usual policies, we’re looking at an increase of at least 2.7 up to 3 degrees Celsius. This trajectory risks putting entire areas beyond the reach of insurance, a situation that would force countless Americans to bear enormous financial burdens.
The need is great, too, with the imperative to avoid surpassing 1.5 degrees Celsius of global average heating. This is essential to mitigating the worst effects of the climate crisis. As Allianz’s Günther Thallinger told us, the adaptation to climate change can no longer be an unbearable burden. If we continue on the trajectory of our existing policies, we’re headed towards at least a 2.7 to 3 degree increase in temperatures. After that, it’s too late to adapt and adjust. Thallinger called attention to a sad reality for cities such as Amsterdam. Importantly, he said, “We are not able to protect Amsterdam against a three meter sea level rise.” This is just not doable.
Insured losses have more than doubled relative to global growth over the past three decades, according to Zurich Insurance Group. Secondly, average insured losses have increased at an annual rate of 5.9% from 1994-2023. The growth rate of global gross domestic product (GDP) was a meager 2.7%. This difference might have been something positive to report—a shift toward equity and adequate funding. Yet two-thirds of natural disaster economic losses remain uninsured, as we’ve discussed in this series. Thallinger labeled this a “major societal problem.”
The catastrophe bond market has seen a boom, largely offsetting the insurance industry’s losses, growing 75% since the end of 2020. This expansion goes hand in hand with a growing trend of increasing frequency and severity of extreme weather events. Sadly, these events are more frequent than ever. Munich Re’s newly appointed chief climate scientist, Tobias Grimm, said people should be cautious about some of the more dramatic projections of climate change. He conceded that the insurance industry remains receptive to offering coverage of this type, but it comes down to pricing.
“It’s all about the question of price. We have appetite still to offer — not cut — insurance given that there are healthy market conditions, and we get risk adequate premium on that.” – Tobias Grimm
The implications of climate change are profound. As Thallinger cautioned, with insured losses only climbing higher and higher, premium growth for climate risk will have to grow at an increasing rate. He outlined the difficulty of insuring areas determined to be high-risk. He added, “The main issue here is that we continue to build in places we know are high-risk.” This concern is now acute in states like California, as wealthy mansions in fire-prone areas are threatened by worsening fires.
Steve Evans, an industry consultant with a focus on equity and resilience, warned about the dangers of insufficient climate resilience in areas at risk from climate catastrophes. He noted that if we don’t increase resilience and put preventative measures in place, areas will continue to suffer from worsening catastrophes. This will have the effect of driving insurance prices through the roof. This leads to a negative feedback loop with the potential to become a vicious cycle.
The United Nations estimates that, if we continue with business as usual, the world will warm by as much as 3.1 degrees Celsius. Even this much of an increase could hit tipping points that will bring about irreversible changes to Earth’s systems, making it all the more difficult to adapt. Their concern isn’t only for losses from the immediate historic extreme weather events, but more importantly long-term sustainability in providing coverage.
Tobias Grimm, CEO of Resilience Shift International, emphasized the need for action to stop losses before they happen. “That’s the rub,” he said. “We can address that by advancing loss prevention and focusing on smarter land use management plans. Not only would such strategies save lives and property, they would be a key way to address the increasing costs of natural disasters.
Thallinger highlighted the opportunity for climate change adaptation by investing in better infrastructure planning. It’s a good time to really explore the theme of adaptation. What I want to hear about is how we’re going to build our infrastructure—from houses to highways, sewer systems to smart grids—to withstand floods and fire and hurricane winds,” he said. Fulfilling these actions can make a strong economic case for improving resilience to climate-related impacts.
While insurers and society more broadly indeed face monumental challenges, hope remains. By prioritizing our most dangerous roads, we can achieve solutions that address both immediate dangers and future unknowns. Even industry leaders, who often resist such action, recognize the urgency for meaningful changes in policy and practice. Absent these changes, the prospect of an uninsurable world becomes ever more likely.
“If this volume just grows even more, we simply have a societal situation that is not bearable anymore because it is just too much risk that is no longer covered.” – Günther Thallinger