Amid the daily 8 a.m. to 5 p.m. grind in the Square Mile, it can be easy to forget how much insurance matters. Not just to individuals and businesses, but to entire communities, economies and countries. This is especially true in the face of climate change.
The Los Angeles wildfires are just the latest prominent example of how the ability to recover from disasters depends on insurance, and how a lack of affordable property insurance will have long-lasting implications for individuals, businesses and economies.
It's against this backdrop that we as an industry need to carefully consider our approach to property insurance.
The decisions we make about what's insurable have begun to dictate whether people and companies can harness private property insurance as a tool for adapting to extreme weather and climate change.
Without greater awareness and engagement, we risk private property insurance becoming irrelevant to all but the wealthiest homeowners and most-profitable, best-capitalized companies. And we run the risk that government intervention in property insurance will transform markets in ways we are ill-prepared to cope with – with significant implications for our books of business and profitability.
Government and industry: Who will be responsible for risk?
Local, regional and national governments care deeply about the availability and affordability of property insurance. A lack of affordable insurance can force the need for greater government spending on recovery in the aftermath of disasters. It can also affect where investors decide to invest and lenders decide to lend, and on what terms. It is entwined not only with disaster preparedness and recovery but also with housing affordability and economic development on local, regional and national levels.
Governments also care because property risk is an increasingly political issue. Constituents are complaining as insurers worldwide respond to more frequent and severe extreme weather events by increasing the cost of property insurance or withdrawing from vulnerable geographies entirely. As we've recently seen in California, governments often respond to these kinds of complaints by imposing new regulations, especially around data, ratemaking and pricing. In some cases, quasi-governmental entities step in as (re)insurers themselves: For instance, Canada is setting up a flood insurer of last resort, Italy recently launched a multi-peril reinsurer of last resort, and the U.S. state of Colorado is creating an insurer of last resort for individuals and businesses facing elevated wildfire and hail risk.
At the heart of these efforts is a question of responsibility. As climate change intensifies extreme weather hazards, who will bear the risk? Also, what roles should the insurance industry and government each play in addressing property insurance affordability and risk challenges?
With the answers to these questions being worked out in real time at local, regional and national levels, it would be dangerously short-sighted if we as an industry did not meaningfully engage in these conversations as a partner for the long haul and in good faith.
Resilience and insurability: a two-way street
The insurance industry must urgently work to reduce the emissions that cause climate change, by encouraging and supporting fossil fuel clients in their transition to zero emissions. We are key to bringing lower-emissions energy sources to market, through our investments and by underwriting technologies such as wind, solar and nuclear power.
But climate change isn't just about decarbonization and fossil fuels. It's also about physical risk and helping homeowners, businesses, communities and economies become more resilient to extreme weather and natural hazards.
As an industry, we stand to benefit from reduced losses when homes and businesses have been fortified against floods, wildfires and hurricanes. We need to do more to encourage risk mitigation, through bursaries and other incentives that foster investments in adaptation and resilience. We can push governments to include funding for risk reduction as a priority alongside other regulatory reforms designed to bring down insurance costs. We should also ensure that our models properly account for investments that homeowners, businesses and governments have already made, at both individual and community scales.
Most of all, we need to recognize that resilience and insurability are critically linked. Helping insureds and communities become more resilient will mitigate their risk, increasing the likelihood that we can sensibly continue to underwrite them for years to come. Simultaneously, when we choose to continue underwriting (within reason) places where climate change is intensifying natural hazards, we ensure those communities can continue to attract the investment they need to adapt to climate risk.
Insurance is a for-profit industry, and no one is suggesting that's likely to change anytime soon. But it's illogical to focus solely on short-term financial value when insureds and governments are desperate for assistance protecting multiple different forms of value – embodied in homes, neighborhoods, communities and ecosystems – over multiple time scales.
Property insurance's existential question
For hundreds of years, the insurance industry has been able to make a profit by providing a social good: the funds homeowners and businesses need to recover, rebuild or relocate after disasters. However, climate change and extreme weather, insufficient investment in adaptation and risk reduction, alongside continued development in areas vulnerable to natural hazards, make it unlikely that property insurance as we know it will continue indefinitely.
The balance of responsibility for property risk is shifting, with governments, businesses and individuals each having a new role to play. For the insurance industry, the question is whether we want to be a supportive partner in deciding what the future of property insurance looks like or stand by while others make the choice for us.
