Climate change disrupts the insurance business

BarcelonaThe largest home insurer in the United States announced in 2023 that it would stop issuing new fire risk policies in California. Just over a year later, a wave of fires in that Pacific state destroyed thousands of homes and businesses, including large mansions owned by Hollywood stars. And despite climate change denialism, the truth is that this trend by some companies in the sector is repeated in other places with natural risks, such as hurricanes, strong storms and floods. "In a context of climate change and a more than foreseeable increase in risk, these difficulties pose the challenge of how the insurance sector can continue to protect society in a sustainable way," said Javier Caamaño, from the communications department of the insurer Mapfre, in a company communication a few months ago.

The risk director of Mapfre Re, Mapfre's reinsurance unit, Juan Satústregui, explains that climatic risk has always existed. But he points out that climate change causes a significant variation in the frequency and intensity of atmospheric phenomena that cause great damage. "More than a danger in itself, it is an accelerator of the danger that already existed," says this executive of the sector. That the issue is worrying is evident. Large companies such as Aon and Swiss Re have published extensive studies on the impact of climate changeAnd the Spanish insurance employers' association, Unespa, devotes an entire chapter to it in its annual report.

For now, in Catalonia and Spain there is no risk that insurers will stop providing coverage for certain risks, as happened in California, he explains in theCompanies Marisa Galán, deputy general manager of the Catalan insurance company Fiatc. But there may be an impact on the price of premiums, especially in places with higher risks, because "reinsurers do raise rates and this has to be passed on to premiums," she says. But the Spanish model, with the public participation of the Insurance Compensation Consortium (CCS) and Agroseguro, allows coverage of all risks. In this Spanish model, the Consortium, which is public and to which insurance companies pay a small part of the premiums, takes charge of compensation in cases of very large catastrophes, such as the DANA in the Valencian Community. Agroseguro, for its part, manages the policies of the insurers that are part of a pool make the peasants.

However, there are some incidents arising from climate change that insurers cannot transfer to the Consortium. For example, this body does not take responsibility for compensation for snowfall or hail, which are becoming more frequent and virulent. These incidents go directly to the accounts of insurance companies and, consequently, if the frequency and damage increase, the premiums paid by customers will increase.

More climate risk in Spain

This week the Climate Risk Index (CRI) was published. think thank Germanwatch. The document makes the situation clear: "During the three decades between 1993 and 2022, the frequency and intensity of storms, floods, heat waves and droughts increased, with devastating consequences for human lives and economies. in economic losses as a direct result of these phenomena," says the report. Spain does not come out well in the picture: between 1993 and 2022 it was the eighth state with the highest climate risk, ahead of countries such as the Philippines, for example, where typhoons occur on a recurring basis. If you look at 2022, it was the fifth state with the highest risk. The report does not yet include the DANA in the Valencian Community, which was in 2024.

This increase in risks "is already reflected in the premiums," explains Marta Marco, head of the actuarial function at Fiatc. The medium and long-term models show that there will be an increase in temperatures and "more severe hailstorms are expected," she says. There will be "an increase in adverse phenomena," adds Galán, which will affect all branches of the business, although in the life and health branches the consequences are expected to be longer term. "Where it is most serious is in the multi-risk branch and in agricultural insurance, with more claims," says Galán.

Some data give an idea of the impact of climate change on the insurance sector. In the latest report by the Spanish sector's employers' association, Unespa, published in 2024 with data up to 2023, it is indicated that in five years insurers have paid 2,416 million euros in compensation for meteorological damage in the multi-risk branch. A figure that will surely grow in 2024 due to the impact of the DANA. Aon, in its study, states that global natural disasters in 2024 caused economic losses of at least 368 billion dollars and were mainly caused by tropical cyclones, strong convective storms and floods. The most devastating event was Hurricane Helene, which is estimated to have caused direct damages of approximately $75 billion, mainly due to flooding.

One more fact: the number of claims recorded by agricultural insurance in Spain in 2024 amounted to 712 million euros, according to Agroseguro. This is the fourth consecutive year with more than 700 million euros in damages, although far from the 1,241 million in 2023. year of a historic drought in the Spanish (and Catalan) countryside. Among these compensations for 2024, 115 million stand out for the drought and 260 million for hail, storms and wind. The DANA of the Valencian Community meant the payment of 60 million euros in compensation to farmers in the orchards who had their harvest insured with Agroseguro.

The territorial director of Agroseguro in Catalonia, Xavier Joana, explains the changes that have occurred in recent years. The contracting of policies has increased in a "brutal" way. The increase in compensation for claims has grown even more. And in recent years more claims have been detected, of greater scope and of different risks. An example is in grape cultivation. Normally, what caused the claims were hail and frost. But in the last two years a new risk has appeared: the lack of water. "In two years, as many compensations have been paid for drought as have historically been paid for hail and frost," explains Xavier Joana. However, extreme phenomena can be very diverse. In April 2022, there was a frost that practically destroyed the entire fruit crop in Lleida. "It was the most important incident in history," says the director of Agroseguro.

Even new risks not covered by insurance appear. In April 2023, The Urgell canal closed its floodgates for the first time in its 160-year history. Insurance did not cover it, because no one insures the lack of water in irrigated crops.

Stressed agricultural system

All these changes have some consequences. "The system is under stress," says Xavier Joana, who clarifies that this does not mean that it is not "viable." In addition, the insured surface area has skyrocketed. And, obviously, premiums have also risen. The model, he says, has changed. "Claims now affect all productions, with greater risks, and the entire geography," he explains.

The year 2024 was the first in which the temperature exceeded the pre-industrial average by 1.5 ºC. Despite the difficulty of calculating the costs involved, the World Meteorological Organization indicates that economic losses due to climate, weather and water-related events have increased sevenfold since the 1970s to the 2010s. And the International Chamber of Commerce estimates that extreme weather events2 have been twice as high as 2 and that losses in Spain between 1980 and 2023 due to these climate-related phenomena were around 738 billion euros. These losses have accelerated in recent years: 22% of the total were concentrated between 2021 and 2023.

The same WWF report highlights that insurers can develop products to encourage the prevention of climate risks, such as lowering premiums for policyholders who take measures such as installing flood doors or early warning systems. But the sector faces commercial dilemmas. Thus, apart from the refusal to insure risks in California, other places in the United States such as Florida, Texas, Colorado, Louisiana and New York are in similar situations. For example, due to the high risk of hurricanes in Florida, many companies have given up on this market, which has made premiums almost three times more expensive than the national average.

The fact is that extreme phenomena that occur around the world end up affecting our pockets. There are many insurance companies, but very few reinsurance companies, because to provide reinsurance you need to have a lot of financial strength and solvency. The system means, for example, that with the devastating fires in California, these reinsurers have to face large compensation payments, providing coverage to the local insurers that have contracted them. Therefore, in order not to lose solvency, these large reinsurers will raise their rates, which will end up raising the price that insurers around the world pay them and, even if it is by a very small percentage, will inevitably end up increasing the premiums paid by end customers.