The climate is change. Insurance must too

By Pierre du Rostu

COP30 is now on the horizon, and Ana Toni, its CEO, has warned the climate is ‘our biggest war’. It would be hard to disagree with her. At this very moment, Europe is sweltering in record 42°C heat, and wildfires are tearing across the US and Turkey. Over the past 12 months, we’ve seen our world burn, flood and break down in ways we never thought possible. In response to the enormous challenge posed by the climate crisis, some insurers, even major ones, have stepped back. In California, for example, insurers have said they just can’t cover climate-related risk.

The protection gap – the divide between the total losses from an event and the amount of those losses covered – is widening. The blame for this doesn’t lie with any individual insurer. The problem is the model. In fact, what’s now beyond doubt is that the traditional approach to insurance is no longer enough to deal with the threat posed by the climate. Picking up the pieces works only when the disasters are infrequent and the damage limited. Floods and wildfires take place too frequently, and are too destructive, to be covered. There are two options left to insurers: change with the times or fade into irrelevance.

What would it mean to change? It would mean not just getting to grips with the changing climate, but with the changing risk landscape on the whole. In the past, risks were treated in isolation. But that won’t cut it anymore. We’re living at a time of polycrisis, coined by the French sociologist Edgar Morin. Morin’s insight, which was informed by emerging concepts in complexity science and systems theory, was that modern crises interweaved and amplified each other, creating a cascading effect if addressed piecemeal rather than holistically. The climate crisis is a major challenge, but it has implications for geopolitics, supply chain disruption, even cybercrime. The conventional insurance model needs to change. But so does its mentality.

The good news for insurers is that they can change. The tools and technology they need to do so exist. Satellite data is coming on leaps and bounds, artificial intelligence is improving by the day, and predictive modelling, able to anticipate threats, is growing rapidly in accuracy and detail. These are driving an evolution in insurance: from response and compensation to prediction and prevention. It sounds like the stuff of science fiction. But thanks to advances in technology, geospatial intelligence wielded by insurers can predict flood or wildfire risk with astonishing accuracy, right down to the asset level. Those who own the asset can be warned so that they can take action to prevent damage to property and harm to people. A sea-change is underway – and insurers should embrace it.

There is a positive case to be made for this. In fact, the commercial case is airtight. The European Investment Bank, one of the world's biggest financers of climate action, estimates that every €1 spent on prevention avoids €5–7 in recovery costs. This is intuitive: if I periodically carry out repairs on my house, that will cost me a lot less than having to rebuild it should it collapse. But few are really seeing the opportunity that lies here for insurance. Those that do, and those that evolve stand to gain a competitive edge over their rivals.

This is also about what insurance as a sector represents. Our role is to safeguard societal resilience. That you know that should a disaster happen, it won’t cripple you financially is very empowering. It allows you to take more risks. Now, insurers have the opportunity to evolve into something even more critical to the functioning of our societies. Being there in the wake of a catastrophe is hugely important. But helping to prevent one from happening, or to limit the damage, is even more so. This is why what I’m talking about here shouldn’t be thought of as insurance turning into something new. It’s really about insurance becoming more of what it already is.

World leaders day face a range of crises. I don’t envy them. But the climate crisis is going nowhere. In the last two years, for the first time, global land temperatures climbed to more than 1.5C above pre-industrial levels, passing the limit that governments have promised at numerous climate meetings to keep to. Given this, insurers have little time to spare. We need to lean into the future, face into risk, and embrace the technology of tomorrow so we can protect our clients today.