Human-caused climate change has accounted for a third of weather-related insurance claims made this century, the bill is rising quickly, and insurers are underestimating climate risks, new research has warned.
Global warming has led to losses totaling about $600 billion over the last two decades, and climate-related insurance losses have jumped from 31% to 38% in the last decade, according to the report from the Insure Our Future network, which represents dozens of non-profit organizations.
In its analysis of 28 major global property and casualty insurers, Insure Our Future found that “climate-attributed losses” totaled $475-720 billion between 2002 and 2022. The researchers determined that in 2022 alone, $52 billion in losses out of a $132 billion weather-related total were attributable to climate change.
Moreover, the report found that the $10.6 billion in climate-attributed losses estimated by 28 major insurers in 2023 rivaled the $11.3 billion in premiums those firms underwrote for corporate fossil fuel clients that same year.
“The impact of climate change is not just a present and future problem—it has already been driving up risks and causing major losses throughout this century,” said researcher Ilan Noy of Victoria University of Wellington, New Zealand, commenting on the report. The research, Noy said, ought to make reinsurers—the firms that insure the insurance companies—update their understanding of climate risk.
Earlier this year, reinsurer Swiss Re released a report showing that climate impacts were causing insurers to pull out of some states altogether. In that report, Swiss Re urged countries to increase global spending on cutting greenhouse gas emissions, stating that to avoid much higher losses, “this is money well spent.” But the Insure Our Future report suggests that even this framing understates the urgency of the crisis.
“Lloyd’s and Swiss Re’s framing of the drivers behind rising insured losses show a fundamental misunderstanding of causality, and what climate attribution science has identified in the past 15 years,” said Noy. “Financial regulators should ensure that independent climate science informs their view of the true costs and risks of the climate crisis before they overwhelm insurers and economies.”
The report authors said insurers should take specific steps to reduce risk and ensure that rather than being part of the problem, they could be part of the solution.
“The insurance industry has historically helped make societies more resilient,” wrote former California insurance commissioner Dave Jones and senior actuary Louise Pryor in their foreword. “Now it must embrace its power and accelerate the transition to clean energy, stop underwriting new fossil fuel projects, and rapidly align with credible 1.5 degrees Celsius transition pathways.”
Doom Loop
Welcoming the report, Laurie Laybourn, director of the UK-based Strategic Climate Risks Initiative, told me that climate change represented an existential risk for the insurance industry, and that if it was to survive, it would need to change.
“Because insurance impacts are mounting and because we don’t have an insurance system built for the way that climate change is evolving, this dynamic is only going to get much worse,” Laybourn said. “As we’re already seeing, governments are having to step in to effectively ensure that insurance can still exist in certain places.”
Laybourn told me that recent extreme weather events in the U.S. and the U.K. had revealed that the insurance sector was extremely vulnerable to climate risk—and that while firms continued to reap profits, losses were increasingly being covered by the state.
“In Florida, you have a situation where flood insurance is increasingly receding and the government is having to make decisions about how and what to cover,” he said. “It’s the case as well in the U.K., where major flooding events led to the creation of Flood Re, a government-backed reinsurance agency to cover places that are effectively uninsurable through private markets.”
Laybourn said that the situation threatened to create a “doom loop,” in which climate impacts cause increasing financial and social instability, which in turn prevents the rapid action action to prevent further climate change.
“We need systems that are more resilient so that we can continue to remain focused on decarbonization, even as things get more unstable,” he said.
Seven-Point Plan
The Insure Our Future report includes a list of seven policy actions that the authors say governments should take in order to safeguard communities and to ensure a future for the insurance sector. These are:
- Take precautionary action by integrating climate risks into supervisory frameworks and capital standards.
- Oversee insurers’ management of climate risks and corresponding mitigating measures to ensure the safety and soundness of insurance undertakings and ability to provide coverage.
- Implement policies that support just allocation of climate risks and costs to protect individuals, entities, and communities from shouldering risks and costs they did not create and have limited capacity to manage.
- Mandate data transparency by requiring insurers to disclose comprehensive and accurate data on both physical and transition risks, sectoral composition of investment portfolios, insurance accessibility, and fossil fuel expansion underwriting.
- Mandate the use of scientifically robust climate scenario analysis that captures the full complexity of climate-related risks, including tipping points.
- Require insurers to develop, implement and disclose 1.5°C-aligned transition plans aligned with limiting warming to 1.5°C with the least possible overshoot.
- Require higher capital requirements for fossil fuel exposure to ensure insurer’s own safety and soundness and to account for risks insurers are creating for the financial system.
The full report can be viewed here [PDF].
