How climate change could crash the global insurance sector

Climate change could make insurance unaffordable for ordinary people leading to wide-ranging social issues, the world’s largest reinsurance firm has warned.

Citing £18bn of losses from the recent Californian wildfires, Ernst Rauch, Munich Re’s chief climatologist, told The Guardian costs could soon be widely felt, with premium rises already under discussion with clients holding asset concentrations in vulnerable parts of the state.

“If the risk from wildfires, flooding, storms or hail is increasing then the only sustainable option we have is to adjust our risk prices accordingly. In the long run it might become a social issue,” he said, warning that “affordability is so critical [because] some people on low and average incomes in some regions will no longer be able to buy insurance.”

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“What makes the insurance industry's relationship with climate change so unique is the fact that the industry is built on the concept of managing risk,” says The Ecologist, and “with climate change set to be one of the greatest risks of them all, insurers stand to be impacted in significant and far-reaching ways.”

Analysing decades worth of data, Munich Re, the world’s largest reinsurance company, concluded the spike in wildfires, and hence insurance claims, was “broadly consistent with climate change”.

It is the first time an insurer has linked wildfires to climate change, and the repercussions across the entire sector could be huge.

The UK insurance industry is the largest in Europe and the third largest in the world. The industry manages total investments that equate to 25% of the UK’s net worth, “making it pivotal to our economy”, says the Ecologist.

This “may also influence several court cases testing the liability of fossil fuel companies for the effects of global warming”, The Guardian says.

In the US, for example, numerous cities and one state — Rhode Island — are suing the oil industry over the impact of fossil fuel emissions.

“The litigation is likely to run for some years, and it is not yet clear whether it will be decided in state or federal courts”, says the Financial Times, “but if the 38 oil companies being sued lose, they are very likely to claim some or all of their costs back on their insurance policies.”

Neil Beresford, partner at law firm Clyde & Co, predicts “the insurance industry’s exposure could go up to tens or even hundreds of billions of dollars.”

This could easily see firms increase their premiums, the knock-on effect of which could pose a threat to social order warns Nicolas Jeanmart, the head of personal insurance, general insurance and macroeconomics at Insurance Europe, which speaks for 34 national insurance associations.

“The sector is concerned that continuing global increases in temperature could make it increasingly difficult to offer the affordable financial protection that people deserve, and that modern society requires to function properly,” he said.