How insurers are adapting to climate risk
Extreme weather events exacerbated by climate change are testing the insurance industry. E&Sconsultants can be part of the solution
7 February 2025 | BY CAMERON FRANSSEN
In summary: the recent Southern California wildfires will cost insurers up to $30bn, with billions of dollars of property in the region uninsured; innovative work from the private sector and consultants are leading to some solutions; governments can do more to make communities resilient, but some positive initiatives exist; and nature-based carbon removal projects are particularly vulnerable to climate change.
The recent wildfires in Southern California, stoked by high winds, have claimed at least 29 lives, burned almost 58,000 acres and destroyed over 16,000 structures, Cal Fire has reported. Insurance companies face payouts in the region of $30bn in the area, according to analyses fromMorningstar DBRS, a credit rating agency, and Verisk, which provides analytics for insurers.
For thousands, premiums have become prohibitively expensive, resulting in billions of uninsured losses too, analysts say.
In its Future Risks Report, insurance company Axa lists climate change as the biggest risk to thesector. Not renowned for climate activism, the Institute and Faculty of Actuaries (IFoA) warns that global GDP could contract 50% between 2070 and 2090 without immediate action on climate risks.
Fresh thinking from insurers, governments and environmental consultants, has never been more important.
Innovations
Dr Katherine Ibbotson, director for transformation advisory at WSP, tells Environment Analyst that insurers are “adapting quickly to the escalating risks associated with climate change”. A key focus has been on enhanced risk assessment by using “advanced analytics, satellite imagery, geospatial data and climate modelling to better forecast future risks.”
Insurance firms “frequently engage with environmental and sustainability (E&S) consultants to better understand the implications of climate change on risk models and disaster insurance strategies”, Ibbotson notes. Some of the skills sought from E&S consultants are climate modelling, data analysis and resilience planning.
For instance, following the recent wildfires in Southern California, NV5 released Lidar data, a form of remote sensing, to assess the damage and find possible remaining fire hazards. The company was sponsored by ALERTCalifornia, a public safety programme.
Alastair Baglee, director and global lead for risk and resilience at Anthesis, explains that many major insurance firms have in-house natural catastrophe teams with climate modellers and actuaries already operating at “a high level of expertise”. But there is “increasing collaboration between insurers and environmental consultancies to enhance climate risk assessment, integratenature-based solutions, and develop strategies for long-term resilience”, he adds.
Baglee notes that sustainability specialists offer a broader perspective and can help with “bridging the gap between financial risk management and long-term climate resilience”.
He also explains traditional indemnity insurance is becoming less viable in many high-risk areas, and that as a result: “We are seeing insurers withdraw coverage, leaving many communities without adequate protection.”
Other innovations come in the form of novel insurance models. Parametric insurance, which Ibbotson defines as paying out “based on predefined criteria like rainfall levels or wind speeds”, and “catastrophe bonds, which transfer risk to investors while funding disaster recovery”, are now more common.
A joint effort between the public and private sectors is also essential. The Swiss Catastrophe Fund, for example, is a state-funded reinsurance programme which “helps stabilise the market andensures policyholders remain protected”, Ibbotson explains. Similarly, Flood Re, a public-private reinsurance scheme in the UK, helps keep premiums down for households with high flood risks.
Large scale infrastructure projects are often the product of private-public sector partnerships, which need insurance to go ahead. A stable insurance market will be essential to realising these ambitions in the US, for example.
The industry is also working at a more local level, engaging communities and governments to create more resilient infrastructure. Ibbotson says it is being proactive, by “developing partnerships, incentivising resilience and educating policyholders”. For instance, insurers will often offer lower premiums to households or infrastructure that have adopted risk-reduction measures, she notes.
In some cases, the private sector is also including resilience to climate change in initiatives like Corporate Social Responsibility (CSR).
The role of government
Chris Slater, CEO of Oka, a carbon insurance company, tells Environment Analyst that regions with challenging insurance markets leave a difficult task for governments because insurers start pulling out of the area. He says governments will often offer subsidies and act as “an insurer of last resort but this doesn’t accurately price the risk and, as we are showing, doesn’t deal with the risks over time.”
Anthesis’ Baglee adds that in California: “Homeowners who invest in fire-resistant materials ordefensible space measures do not necessarily benefit from lower insurance premiums or improved access to coverage.”
The California Fair Access to Insurance Requirements (Fair) plan, the insurer of last resort in the region, faces financial strain following the recent devastation. A report from Fitch Ratings, a credit rating agency, says the Fair plan faces $6bn in losses, and has only $2.6bn in reinsurance and $200m in capital available. As its insolvency looms, the state legislature has introduced the Fair Plan Stabilisation Act, which proposes issuing catastrophe bonds to the plan.
WSP’s Ibbotson advocates for government incentives, like tax relief, for “homeowners and businesses that invest in mitigation measures like fire-resistant materials or flood defenses.”
She says: “While governments have introduced policies such as building codes and land-use regulations to address resilience, there are still significant shortcomings.” Lack of funding, fragmented efforts and short-sightedness tied to election cycles, make the approach piecemeal and reactive, Ibbotson says. More investment in wildfire prevention technology and water management, and a “coordinated, long-term approach”, will be needed in regions like California.
Baglee believes the private sector must also shoulder more responsibility. While he notes it must work with governments to fund local adaptation, he explains that private investments and financial decisions should better consider climate risks.
He concurs with the idea while existing initiatives for those most at-risk offer short-term solutions,”they do not address the fundamental issue of growing climate risk.”
A carbon insurer’s perspective”
Another cruel consequence of climate change is that even projects trying to mitigate its effects face higher risks. Oka’s Slater tells Environment Analyst the risks to carbon projects posed by climate are “far reaching”. Wildfires, floods and earthquakes can all affect nature-based projects, and even engineered solutions to some degree, Slater explains.
Over half of the world’s largest 100 companies intend to use carbon offsets, according to CarbonBrief, a news outlet. Environment Analyst reported in August an estimated 88% of large UK businesses have bought them.
Slater notes that carbon insurers do use catastrophe models to “price and manage exposures” to climate-related risks. But with climate change having effects now, the industry needs to move to an”adaptation model”. Policies can include conditions that manage risks, like controlled fires during large reforestation projects, he adds.
Oka does not currently work with any environmental consultants to understand climate-related risks to carbon projects, but does use the expertise of insurance consultants.
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