As a result of climate change, insurance rates will rise.
“Rates are determined by risk, and risk rises,” experts say.
According to the sector, which NGOs are calling on to stop insuring investments in fossil fuel exploitation projects, global warming caused by greenhouse gas emissions and the resulting increase in extreme climatic phenomena will lead to an increase in the cost of insurance policies.
This was explained to Efe by various insurance industry experts, who predict that over the next 20 years, global damage premiums will rise by 22% to reach 183 billion dollars (about 160 billion euros) due to an increase in the frequency and virulence of extreme meteorological phenomena.
When asked about the future of insurance in a world that is already one degree warmer than the pre-industrial era, Swiss Re’s director for Spain and Portugal, Santiago Arechaga, says, “Rates depend on risk, and risk is increasing.”
Although Arechaga cautions that “competitive dynamics” may affect this pricing policy, he reiterates that “the logical trend” if the pattern of natural disasters exacerbated by the climate crisis is confirmed – as he recalls, “is already happening” – is that there will be upward “price corrections.”
According to the Swiss Re Institute, the insurance industry suffered $219 billion in losses as a result of natural disasters between 2017 and 2018, the largest loss ever recorded over a two-year period.
While citizens in other countries, such as the United States or Germany, must take out specific flood insurance policies, in Spain, these costs are borne by the Insurance Compensation Consortium (CCS), an entity that reports to the Ministry of Economic Affairs and Digital Transformation.
Every private insurance policy purchased in Spain, whether life or property, is mutualized at a rate of 0.07 per thousand of the insured value, a fixed rate that is independent of the risk of each individual case.
However, the CCS expects to raise its rate if natural disasters become the norm and costs rise, which would mean that insurers would pay more to the CCS, and this increase could be passed on to policy prices (though, according to the Consorcio, the increase would most likely be due to reinsurers’ pricing policies, not the CCS’).
The CCS covers terrorist attacks, riots, and other extraordinary risks in addition to natural disasters, but the vast majority of its costs, 87 percent, go to cover damage from floods and atypical cyclonic storms.
Francisco Espejo, a meteorologist and the CCS’s deputy director of studies and international relations, confirms that the amount of compensation for floods has nearly “tripled” in the last five decades, but qualifies that the number of insured assets is now nearly three times greater.
As a result, while he observes an increase in hazards as a result of global warming, he also observes a greater vulnerability to these threats, which reflects another aspect of the problem: “the same thing that is causing climate change is causing the increase in damages: the level of development of today’s society,” he says.
The agricultural sector is also concerned about the economic cost of the climate crisis: according to Agroseguro, the year 2021 ended with 722 million euros in compensation paid to insured farmers and ranchers, “the second highest figure in the 42-year history of the Spanish Combined Agrarian Insurance system.”
The Function of Insurance
Despite these increasing pressures on the sector, the NGOs that comprise the ‘Insure Our Future’ coalition believe that the world’s major insurers and reinsurers “have not adopted sufficient policies to ensure that their activities do not support the development of carbon-intensive projects.”
Their most recent annual assessment of 30 international insurers’ climate commitments concludes that, while the majority of these companies (including Spain’s Mapfre) have committed to exclude underwriting and investing in the thermal coal sector, “none of these insurers have a fossil fuel exclusion policy aligned with the objectives of the Paris Agreement as of today.”
Quentin Aubineau, a lawyer at the International Institute of Law and Environment (IIDMA), emphasizes the insurance sector’s “fundamental role” in the economy’s decarbonization because “carbon-intensive activities could not be carried out without the insurance policies offered by insurers,” but laments that “very few companies have a policy – albeit very basic – of exclusion in relation to the oil and gas sector.”
Article Author Gerluxe