Too risky to cover?

As extreme weather events increase in frequency and severity, insurance losses continue to mount. Some areas exposed to the worst climate risks are now seen as too risky to cover. Michael Yamoah, Navishka Pandit and Judi Tseng assess the implications.

For decades, physical risk insurers and reinsurers have priced their premiums using complex probability models informed by past events. In some years, earthquakes and hurricanes might lead to bigger claims than expected, but over the long term, the pricing models would ensure that profits and losses were smoothed out.

Yet the rapidity with which the global climate is changing means that relying on historic weather patterns to model risk is no longer prudent. Insurers are withdrawing from certain markets because the probability of loss is deemed too high. In other areas, premiums have shot up, squeezing householders and small business owners. And losses from climate-related events continue to climb.

EOS engages with global insurance companies to understand the climate-related risks and opportunities they face, as well as their strategies for addressing these over different time horizons. We are asking insurers to demonstrate how they embed climate-related considerations into their product design and pricing, as well as their capital adequacy decisions.

But the impact of physical climate risks on insurance underwriting goes beyond the obvious property and casualty segments. The life and health segments also face significant challenges. The World Health Organization expects deaths from vector-borne diseases to rise, although it acknowledges the challenges of attributing specific increases in morbidity and mortality to global warming. But in developed countries, unprecedented temperatures in cities and towns ill-equipped to cope, are already leading to more people dying in their overheating homes.

Read the full article in our Q3 2024 Public Engagement Report.