Could Climate Change End Property Insurance?

The insurance industry has begun to react to the fact of climate change. Whether you personally accept the scientific consensus on climate change or you don’t, your homeowner’s property insurance against the weather-related damage that climate change is beginning to cause—like more frequent and heavy flooding—may be gone in the future.

The actuarial industry has depended on a statistically fairly predictable limit to the likelihood of catastrophic events over time, in order to not lose money. For centuries, that has worked fairly well, because the odds of disaster could be bet on, based on experience. The past likelihood of disaster was a good bet on its future likelihood.

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Historically, when the expenses of covering catastrophic losses rose, then insurance rates were raised. When more people with more money moved to dangerous wildfire regions, for example, their insurance rates were raised.

But in a future world of increasingly bizarre and unpredictable extreme weather events, there could come a point where claims cost more than the premiums that insurers could reasonably charge over that time period. At that point insurers would have to close up shop. Insurance, which depends on statistical predictability, could no longer be offered in a completely bizarro world.

You might think that won’t happen. But in many little ways, and in region after region, that is just what is beginning to happen already.

After Katrina, which cost insurers $62.2 billion, home insurance rates for some coastal areas shot up 30 percent or more. Up and down the Atlantic, some insurers already have stopped offering coverage for damage from high winds, storm surges or flooding.

More and more insurers in the U.S. are passing the costs of climate change on to the taxpayer. But an increasingly risk-averse U.S. Congress is unlikely to fund an ever increasing Federal Emergency Management Agency (FEMA) burden. Already, in 2011, Congress refused to raise FEMA funding in response to the unusually high number of disasters last year.

In the U.K., insurers have been saying for years that property insurance rates could rise well out of affordability range, as the number of climate catastrophes increases. Following Britain’s unprecedented flooding, for instance, property insurance jumped more in one year than in the previous decade and a half. Insurance on homes jumped 9.5 percent and on contents 11.2 percent according to the latest Insurance Premium Index.

Flood risk maps are being redrawn in Britain. For 200,000 homeowners, in what is now seen as a flood risk area, flood insurance is no longer to be offered at all, by as soon as June of 2013.

In 2011 alone, the U.S. experienced 14 extreme weather events. Each one did more than $1 billion worth of damage.

“There is still a widely held assumption that insurance will be available for flood risk,” Jackie Newstead, partner at Hogan Lovells, a British insurer, told a meeting of the British Property Federation. “But with insurers being increasingly reluctant to insure high risk locations, we need to consider the implications for our transactions if it is no longer available”.

Back in 2009, the Association of British Insurers (ABI)  looked at the risks associated with climate change. Basing their calculations on the 2007 IPCC report, they said that a 2 degrees Celsius rise would increase average annual insured losses in Britain from inland flooding by 8 percent.

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The study assumed that crossing 2 C was a “when” not “if” question: that the 2 C global average temperature rise was likely to be breached by as soon as the 2030s or the 2040s.

Nick Starling, the director of General Insurance and Health for the ABI, said at that time that keeping temperature rise within the 2 C range was essential for the continued widespread availability of property insurance in the future.

Now, three years later, many scientists believe that we may have now passed the ability to reign in climate change to just 2 C.

“I think two degrees is out of reach,” said Yvo de Boer, former executive secretary of the UN’s Framework Convention on Climate Change(UNFCCC), on the sidelines of a conference on June’s 2012 Rio+20 summit, at the end of March.

“We have to be honest with each other that we will not reach the two degrees target,” said former IPCC head Bob Watson, now a scientific advisor to the British government.

We are now moving completely outside of risk levels we’ve faced through human history.

Many seem to believe that they can make the facts of the climate change go away by refusing to believe it is happening. Insurers see the facts. For property owners in the catastrophic aftermath of civilization’s brief fossil age, security could be a thing of the past. In the future, you could be on your own.

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