"A planet with a rise in average global temperature of 2 degrees Celsius, by the end of the century, could still be insurable. At 4 degrees, it will become impossible." It was 2015, and the twenty-first United Nations world climate conference was about to begin — COP21, at the close of which the Paris Agreement was reached. The text of that agreement identifies precisely 2 degrees as the maximum limit (while remaining as close as possible to 1.5 degrees) for global warming relative to pre-industrial levels. The speaker was Henri de Castries, at the time chairman of one of the world's leading insurance companies.

Floods, droughts, wildfires: climate-related risks are multiplying

Climate change will, in fact, upend the insurance policy sector too. The rise in sea levels caused by the melting of polar ice will put vast coastal areas at easy risk of flooding — for example, in numerous parts of South-East Asia. Extreme weather events will also become increasingly frequent and violent, posing a direct threat to all homes located in areas exposed to hurricanes and tropical storms. This is the case in the Caribbean and in Asian nations hit by typhoons. Extreme heatwaves and droughts will, in the same way, exponentially increase the risk of wildfires in certain areas.

Faced with this scenario, numerous insurance companies are already beginning to refuse to grant policies. This is happening in Florida: according to reports from the Reuters agency, many families say they can no longer insure their properties. In the same US state, moreover, at the end of June the collapse of a residential building in the city of Surfside appeared as a warning of what may happen in the future. The investigation into the causes is still ongoing, but the region is particularly at risk in the face of the climate crisis: sea levels have already risen by more than 20 centimetres in southern Florida.

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Drone footage shows the aftermath destruction of a partially collapsed condominium building in Surfside, Florida. bit.ly/3vVz1bI

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From California to Florida, insurance companies reverse course

Due to wildfires, also in the United States, in California "insurers have begun to abandon the areas most exposed to wildfires," reports the New York Times.

But in Europe, too, the situation in the sector is becoming increasingly tense. The floods that between 12 and 15 July struck Germany and Belgium, following the passage of storm Bernd, claimed 242 lives and caused damage of more than 10 billion euros. Jörg Asmussen, director general of the German insurance industry federation (GDV), initially indicated that the costs for the latter amounted to between four and five billion euros. The total was subsequently revised upwards: the figure now cited is between 5.3 and 6.5 billion.

This is, moreover, a considerably lower figure than what the companies would have had to pay out had all the affected homes been insured against natural risks of this kind. Only 46 per cent of them were, in fact (compared with the far more common policies linked to hail).

Soaring costs from the floods in Germany and Belgium

Similarly, in France in October 2020, a violent storm had struck, with its worst consequences recorded in the Roya valley. The damage in that case amounted to 200 million euros. Meanwhile, the frost that hit the prized vineyards across the Alps in April of this year cost approximately one billion.

Steve Bowen, director of the specialist firm Catastrophe Insight, explained that — taking floods, droughts and other extreme events together — losses for European companies, as of 10 August, were already approaching 12.7 billion euros. Globally, the economic cost of natural catastrophes in the first half of 2021 amounted to 77 billion dollars, according to estimates by reinsurer Swiss Re. A colossal figure, and yet markedly lower than the previous year (when 114 billion was reached) and below the average for the last decade, which stands at around 108 billion dollars.

In the first half of 2021, insurance companies paid out 42 billion dollars

Of these immense costs, those borne by insurance companies were particularly high. In the first six months of this year they amounted to 42 billion dollars: the highest figure since 2011, the year of the tsunami that devastated Japan and also triggered the Fukushima nuclear disaster. The worst catastrophe in terms of damage was winter storm Uri and the cold snap that hit the United States in February: costs for insurers amounted to 15 billion.

Climate change will not stop: should the world act decisively and immediately, it can be mitigated, but numerous impacts are by now inevitable. And if insurance companies were to deem the risks too high, they could begin to demand exorbitant premiums. Or to refuse coverage. At that point, the entire burden would fall on individuals: a further consequence of the ongoing climate crisis.

The threefold role of insurance companies

But insurance companies, faced with climate change, play a threefold role: that of risk carrier role (management of technical insurance risk), that of risk manager role (management of physical risk), and that of investor role (institutional investors). Their role is therefore not limited solely to the more traditional processes of risk transfer, in particular through the offering of insurance products (risk carrier role), but is also fundamental in supporting other actors (both public and private) in implementing actions that can reduce climate risks and at the same time foster greater resilience (risk manager role) and, finally, in mobilising the resources needed to finance adaptation to climate change and the resilience of local communities (investor role). Everything, naturally, depends on the concrete choices made by the management of insurance companies: change must also start from there.

For example, the position paper "Unipol per il clima" by the Italian company of the same name proposes a model of prevention and management of natural disasters based on collaboration between the public and private sectors, one that adopts the mutualistic mechanisms of an insurance nature to manage the growing risks arising from climate change and to meet compensation claims. The insurance system, in short, if it rises to the challenge of climate change, could represent a driving force for the transition.