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2021 Climate Change and Insurance Report: Changes Are in the Air

BY BRIAN O’CONNELL

climate change impacts insurance claims

As climate change escalates, consumers are looking at a “new normal” on cornerstone personal insurance policies. Climate change is a hot button issue for the insurance industry too, as new regulations and new ecosystem threats have decision makers taking climate change insurance seriously in the second half of 2021. They both have good reason to do so.

In a new report by the Deloitte Center for Financial Services entitled Insurance Regulator State of Climate Risks Survey analysts say the threats from climate change are real and are expanding into dangerous territory.

“Climate change = insurance risk,” the study noted. “The escalating frequency and severity of extreme weather-related events—from wildfires in the US, to record heat waves in Europe, to floods in Japan—have shone a brighter regulatory spotlight on insurance risk and climate change.”

“One federal regulator in the US went so far as to suggest that the potential damage from climate change could end up being as severe as the fallout from the mortgage crisis triggering the 2008 financial crisis,” Deloitte stated.

The report also draws two conclusions that may keep insurance industry risk managers up at night:

  • A majority of US state insurance regulators expect all types of insurance companies’ climate change risks to increase over the medium to long term—including physical risks, liability risks, and transition risks.
  • More than half of the regulators surveyed also indicated that climate change was likely to have a high impact or an extremely high impact on coverage availability and underwriting assumptions.

Already, climate change events have escalated, triggering sky-high economic damage. For example, in 2017, Hurricane Harvey caused over $125 billion in damage. Two years later, massive Australian bushfires destroyed farmlands and killed one billion animals – and the financial damage amounted to $4.4 billion.

With more climate-linked issues expected over the next decade, insurers may need to change their business models on the fly to protect individuals and businesses, as humans and climate interact on historic levels.

The Impact of Climate Change on Consumer Insurance

weathering climate change

How will climate change the insurance landscape going forward, and what will a climate-tinged “new normal” look like for the average insurance consumer? Experts say big changes are on the horizon.

“Natural disasters result in billions of insured losses, and that’s a big problem, as climate change has led to unfavorable weather conditions leading to disasters like forest fires, floods and other disasters,” said Rasti Nikolic, a finance specialist at Loan Advisor in San Francisco, Cal. “Increased frequency of these disasters means insurers have to bear more claims and losses.”

Insurance specialists say climate change is expected to have a significant impact on multiple consumer insurance fronts.

Homeowners Insurance

Climate change is already changing usable property and insurance rates. “With climate leading to more floods, many properties near water are becoming more dangerous and liable to own,” said Darren Nix, founder of Steadily Landlord Insurance, in Austin, Tex. “For instance, much of New York City is in a floodplain and much of the properties here are more expensive to own due to higher insurance premiums.”

According to Nix, home insurance can cover many disasters including hurricanes if the house is damaged, but that’s only for the structure. “Practically everything in the house is not covered,” he said. “In some instances, you need flood insurance in addition to house insurance. Flood insurance can cover damages from floods that don’t damage the house structure.”

U.S. homeowners who embrace alternative energy sources like geothermal, wind, and solar energies can save significantly on many homeowners insurance policies. Similarly, insurers are now offering home insurance policies that help owners install green energy sources and renewable construction materials into their homes after a natural disaster, like a fire or hurricane.

According to industry sources, about 33% of greenhouse gas emissions come from buildings and structures, while green building sources can curb emissions by up to 50%.

Health Insurance

The pollution that causes climate change has led to more disease and more need for health insurance. “If you have any respiratory diseases, you may need to be sure your insurance covers that,” Nix said.

“Additionally, heatwaves, droughts, and floods put an additional burden on climate-vulnerable populations like the
seniors, the poor, and people with pre-existing medical conditions,” said Fred Hoffman, co-founder of Seniors Life Insurance Finder, in Los Angeles, Cal. “Further, into the future, climate change will likely raise healthcare costs for climate-vulnerable regions through a variety of mechanisms, including:

  • Rising sea levels contaminate drinking water increasing rates of infectious diseases; – extreme weather increases hospital admissions including heat stress.
  • Higher average temperatures lead to more air pollution which in turn leads to a greater incidence of acute respiratory diseases.
  • Climate change will place increasing demands on basic food supplies and distribution systems, leading to further health-related maladies.

Life Insurance

According to Hoffman, climate change doesn’t directly affect life insurance, but climate change has an indirect impact on life insurance because the climate is affecting natural catastrophes—earthquakes, hurricanes, and tsunamis—that can reduce the value of the property and cause death.

“Since climate change also affects human health in various ways, it indirectly impacts life insurance as well,” he said. “For example, in hot weather, people may be more likely to die from heat stress or dehydration or from the overuse of air conditioners. Climate change could reduce agriculture output around the world which would make people more vulnerable to malnutrition or starvation.”

Climate change has also impacted life insurance because climate change itself is impacting financial markets worldwide. “This climate-financial market link is yet another indirect way climate change affects life insurance,” Hoffman added.

Travel Insurance

The US is hardly alone in battling climate change – other countries have been impacted by climate change, “That includes Japan and Canada, both of whom have suffered climate catastrophe events,” Nix said. “Travel insurance premiums have increased significantly, as a result.

Scientists say that popular travel destinations that are especially vulnerable to serious climate events and natural disasters. In fact, weather-related events have surpassed terrorism as the number one reason that trips are cancelled.

Consequently, more consumers are buying travel insurance and “cancelled for any reasons” policies. Such policies tend to cost up to 40% more than standard travel insurance policies, but with demand on the rise, expect travel insurance policies to adjust to climate change events and allow travelers to cancel their trips if it proves too risky to jet to an at-risk vacation destination.

“Climate change has tremendously increased the risks involved in travel,” said Greg Rozdeba, president of Dundas Life, a digital insurance brokerage in Toronto, Canada. “As such, travel insurance premiums will go up to cover the increased risks. When shopping for travel policies for high-risk locations, look out for policies that cover trip cancellations and that offer high coverage for emergency evacuations.”

Auto Insurance

Drivers haven’t seen big changes in their auto insurance policies due to climate change, at least compared to other consumer insurance categories. But change is in the air for auto insurance consumers. “I can definitely see auto insurance impacted, especially in high-risk areas,” Nix said.

That’s one reason why auto policies now come with features like Pay-As-You Drive, or usage-based insurance. With PAYD, insurers are offering drivers lower premiums for driving fewer miles, which can help reduce air pollution. That’s a big deal, as auto emissions cause approximately 25% of all U.S.-based greenhouse gases.

Climate Concerns in Some Insurance Policies Are Here to Stay

No doubt, climate change is fueling big changes in consumer insurance markets, and that change will expand significantly over the next decade as climate events grow more severe.

“To properly protect yourself your family and your assets from extreme weather events, talk to an insurance expert and discuss how climate change can impact you,” said Nate Tsang, founder of Wall Street Zen, a digital-based financial services firm. “Your insurance agent may advise you to get other policies outside of your normal insurance experience, as general insurance doesn’t usually cover extreme weather conditions.”

As a side note, shopping for insurance quotes frequently can also help you find the best deals, and keep your monthly premiums under control.