How Insurance Can Meet the Challenge of Climate Change

By Pierre du Rostu

The world has always been dangerous. It’s why insurance has, since its emergence, been so crucial to the resilience of our societies. So to say that we once lived in times when everything was calm and there were no risks waiting round the corner isn’t true. But it is true that there was a time when the weather obeyed the rules of the seasons, and crises were more rare.

That time has gone. The planet is hotter and wilder, and the costs – human and financial – of the harm caused by the weather events related to this brutal fact are rising. Floods, fires and storms are battering even wealthy countries once thought to be robust and well-protected. This is the new normal.

Faced with this situation, insurers must accept that the old assumptions about risk, response, recoverability, and the sheer rarity of disasters don’t hold. Some may pull back, others to rethink how they look to cover regions particularly vulnerable to climate-related crises. But what none can afford to do, in every sense of the word, is wait for things to calm down.

The standard insurance model relies on probabilities. It assumes, in effect, that most years will be largely uneventful, that the big events will be few and far between. Disasters these days aren’t just more frequent and more serious, but overlapping and impossible to predict on the basis of old data. They disrupt everything, from logistics to labour markets to the power supply. One event bleeds into another, and the consequences go far beyond the initial damage caused.

Asked to underwrite a world they no longer grasp, insurers find themselves stuck on one side of a yawning protection gap, which describes the distance between the cost of a disaster and what can in actuality be covered. The bridge across that divide will not be made out of the stuff that worked in the past.

The future of insurance is not just in paying out after disaster, but in helping clients sidestep it before it strikes. In other words: resilience. And this shift is in fact already underway, thanks to technology. Integrated insurance systems exploit gains in satellite technology, artificial intelligence, cybersecurity, and other areas to provide holistic risk management platforms that can address all of the interlocking, overlapping risks companies are facing at the same time.

With respect to climate-related risks specifically, these platforms make use in particular of geospatial tech, which makes satellite imagery intelligible through AI, to provide up-to-the-minute information on floods, wildfires and more. The upshot is that businesses know their vulnerabilities with a greater level of precision than before; in some cases, businesses can be notified of impending disaster and then take evasive or preventative action. Clearing away brush has been shown to be effective in reducing the spread of wildfires, for example.

It almost goes without saying that the predict-and-prevent approach saves money. Some estimates put the amount saved by a single euro of investment in prevention at between €5 to €7. The human and emotional cost can’t be quantified, but it’s easy to imagine the distress. And this is part of the point. Insurance does exist, at best, as a public good, something that underwrites risk so that society can function smoothly. Here, withdrawing from the frontlines of climate change entails ceding ground to extreme volatility and condemning people to a great extent to living ever-more-cautious lives.

But this isn’t in fact a revolution in insurance. It’s more like a return to first principles. With our help, individuals and businesses can face risk, make calculated decisions about the future, absorb shocks, and carry on. The difference is that now, the risks are bigger, and the tools we use to address them must be more advanced.

Last year was the first time global land temperatures crossed 1.5°C above pre-industrial levels. That figure, once held up as a red line, was passed with little fuss or fanfare. It will be passed again. Until we can arrive at solutions actually to stop global warming and then to reverse it, we will need to lean on technology and strategies that mitigate the harm that it causes. Insurers must rise to the challenge of climate change. Increasingly, they can.