Insurers and reinsurers in Dubai are expected to bleed in the aftermath of the recent floods. Could they have predicted and priced this risk? That is only one part of the challenge insurers are facing; the other part is about places already becoming uninsurable under heightened climate risks.

In 2015, the then chairman and CEO of AXA Group stated that most assets would be uninsurable if global warming rose 4°C. In 2018, the current CEO of AXA SA said that basement shops in New York or Mumbai will not be insurable with 3-4 degrees warming.

The world is quickly finding out that it may not take even that to make places uninsurable. Global average surface temperature rose 1.45oC in 2023, the warmest recorded year, according to the World Meteorological Organization. And it is wrecking lives, property, and insurance companies.

According to Climate and Catastrophe Insight reports by Aon, a risk advisory firm, global economic losses from climate and catastrophe events are increasing. Reported losses for 2022 and 2023 stand at $355 billion and $380 billion, respectively.

More importantly, only $151 billion and $118 billion respectively in 2022 and 2023 were covered by insurance, indicating an insurance protection gap of 57 per cent and 69 per cent respectively.

A big divide

A geographical breakdown of these numbers shows the divide between the developed and the developing worlds; the insured and the insurance losses are mostly in the developed world while those in the developing world are largely uninsured and thereby extremely vulnerable to climate change and (natural) disasters. In 2023, of the estimated $114 billion losses reported in the US, insurance protection gap was only 30 per cent.

In the Asia-Pacific, that gap stood at 91 per cent of the $65 billion reported losses. The estimated losses in India in 2023 stood at close to $6 billion, made up mostly of crops, houses, and animals; however, very little of that was protected through insurance. India also lost a great number of human lives.

Insurers and reinsurers are taking unprecedented hits because of climate related events. Global insurance losses exceeded $100 billion in each of the last four years. The unprecedented wildfires in California during 2017-18 have reportedly wiped out twice the underwriting profits for the past 26 years for California home insurers. Many insurers have gone bankrupt in Florida due to increased hurricane claims and litigation.

Insurance companies are waking up to this reality. However, they face significant challenges in predicting climate risks and pricing them. During a US senate hearing in 2023 on climate change and insurance market, Eric Andersen, President of Aon, stated that ‘you can’t insure what you can’t predict’.

He also stated that the old models of looking backwards to predict risk are not very valuable in predicting climate risks. Despite these challenges, insurers are responding by increasing premiums and even declining insurance.

According to S&P Global Market Intelligence data, cumulative home insurance premiums grew 4.5 per cent to 36.4 per cent across the US during 2022-23. The high premiums are forcing the poorer to drop out of coverage, risking everything they own. This is also laying the path for some areas (that are highly prone to climate events) within states such as Florida and California towards their uninsurable future.

This could be true for many other climate risk-prone areas across the world. However, in countries like India, where homes, crops, animals and even lives remain largely uninsured, there is no strong insurance baseline or pricing action from the insurers to witness that.

The writer is Senior Director – ESG, Cyril Amarchand Mangaldas