How is the insurance industry being impacted by climate change?
TLDR - it’s bad.
Insurance has started a process of contraction - withdrawing coverage from policies and areas of high risk, like flooding, wildfires, and storm damages, in order to protect their own bottom line. Companies insuring high-risk homes have cancelled contracts with paying customers or reduced that their contracts will cover, cutting private insurance out of whole regions - leaving homeowners uninsured or dependent on state-sponsored insurance alternatives.
Meanwhile, Insurance as a whole is still growing. That isn’t because they’re covering more properties, but because they invest in stocks, bonds and mutual funds just like any other private equity, and they make good money more reliably doing that than they could from the increasingly unstable insurance sector. Just the life insurance sector alone reached 35 trillion dollars in assets back in 2022. They are making money from the money they already had, controlling somewhere around 8-10% of the global economy.
So insurance isn’t making money from insurance contracts anymore. Uhoh.
Reinsurance - the companies that insure the insurance companies - are also showing concerns.
That means insurance companies have less money to invest, which means the global economy is smaller and weaker than it could be.
And those houses that are no longer affordably insurable, those are about impossible to buy and sell, as only insured properties qualify for mortgages. That makes it even more difficult to buy homes, further contracting the economy.
The good news is that insurance wants to make more money. And some companies have realized that the most reliable way to do that is to reduce risks so that they can continue expanding their core business. Some insurance companies that focus on maritime, ports and coasts, for example, have started investing in mangroves which, when grown, directly reduce the potential damages to coastal properties they insure from flooding and typhoons.
Considering how much money insurance has to throw around, hopefully they’ll keep finding ways to help reduce baseline risks. What would that look like?
Health insurance paying for tree plantings, because they reduce air pollution and thus lung and cardiovascular diseases.
Property insurance working with land management and conservation orgs to make sure wildfire risk is minimized via traditional techniques like controlled burns.
Life insurance companies working with food access, nutrition, and healthy lifestyle projects to improve community resilience in food deserts and urban heat islands
Car insurance companies working with regional mass transit and rail to reduce traffic and road rage by opening up options for commuters
Crop insurance companies renegotiating contracts with incentives for polycultures, alley cropping, and regenerative agriculture practices, reducing risks for both farmers and insurers
https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/insurance-industry-outlook.html
https://www.mdpi.com/1911-8074/18/9/516
https://greencentralbanking.com/2024/12/10/increasing-climate-change-losses-insurance-industry-financial-stability/
https://actuaries.org.uk/media/g1qevrfa/climate-scorpion.pdf
https://riskonnect.com/claims-administration/5-ways-climate-change-can-impact-insurance-companies/
https://www.bis.org/publ/qtrpdf/r_qt2409b.htm
AI Summary of Ep 16:
This episode of the Climate Basics Podcast explores the complex relationship between the insurance industry and climate change. Hosts Ty and Greg discuss how insurance, a massive global sector holding trillions in assets, is increasingly forced to acknowledge climate risks as a fundamental business reality rather than a political debate.
Key themes include:
- Industry Contraction: Insurers are withdrawing from high-risk regions like Florida and California due to frequent wildfires, hurricanes, and flooding (4:30-7:05). This creates a cycle of instability where properties become uninsurable, preventing mortgages and stifling local economies (4:45-5:20).
- Economic Impact: As insurance companies retreat from high-risk areas, the global economy suffers. Because insurance firms reinvest their premiums, a lack of insurance contracts leads to less capital available for global economic growth and infrastructure projects (11:29-12:50).
- The Case for "Offensive" Insurance: The hosts argue that insurers could become powerful allies in the green transition by incentivizing risk reduction. They suggest:
- Coastal protection: Investing in mangroves and breakwaters to reduce storm damage (15:15-15:45).
- Health improvements: Funding tree planting and nutrition programs to lower pulmonary and cardiovascular disease claims (15:50-16:40).
- Sustainable agriculture: Renegotiating crop insurance to reward regenerative farming practices (19:15-19:55).
- Mass transit: Working with regional transit authorities to reduce traffic and road accidents (19:59-20:30).
Ultimately, the hosts posit that because insurance is built on mathematical forecasting and risk management, their move away from vulnerable areas serves as a powerful signal that the climate crisis is already impacting our financial systems (2:59-3:25).
Materials Related to / Referenced in Ep 16:
- https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/insurance-industry-outlook.html
- https://www.mdpi.com/1911-8074/18/9/516
- https://greencentralbanking.com/2024/12/10/increasing-climate-change-losses-insurance-industry-financial-stability/
- https://actuaries.org.uk/media/g1qevrfa/climate-scorpion.pdf
- https://riskonnect.com/claims-administration/5-ways-climate-change-can-impact-insurance-companies/
- https://www.bis.org/publ/qtrpdf/r_qt2409b.htm
Transcript of Ep 16:
For me, honestly, it gives cause to revisit my assumptions about some of these for-profit industries because now it means just because of the concept of risk management, uh, financial sectors that have historically been totally aligned with the oil industry are now emerging as active players in the transition because it's the financially sound thing to do. So, more allies in the green transition. Honestly, welcome to Climate Basics, a podcast about the global energy transition and the challenges countries face, presented in an optimistic and realistic light. Here are your hosts, Tai and Greg. And please remember to like and subscribe. Hey, how's it going, Greg? Great. It is March already. Where does the time go? I have no idea. But we're back and we're excited and we've got a bunch of new content in the pipeline. Starting with today talking about insurance. Insurance. Insurance. I mean, you know, on the one hand, On the one hand, uh you know, it it it there could not be more state or or dull topic. And yet, insurance is just so very critical to the modern economy, It is important. Uh anyone that owns a home or a business or even an automobile knows that insurance is uh well required not sometimes legally always uh reasonably because if you have a large asset something that you couldn't afford to replace even for appliances we have insurance uh I think probably the most pressing issue though speaking as an American it's the h word health insurance this is uh h how each nation does health insurance and how each industry is built around it is a huge critical issue that affects so many people's quality of life. Yeah. Yeah. The Americans certainly um unlike some other economies uh the Americans have this everpresent issue of health insurance where if you can get health insurance through work then that job becomes extra valuable to you as opposed to moving about. But also unfortunately for the Americans annually they have wildfires which insurance pops up and then they also have hurricanes in some locations, tornadoes where insurance also pops up and then unfortunately with the coastal areas they also have flooding and insurance pops up and in fact just to be you know contemporary here um when you date stamp our pod today in the middle of March 2026 insurance is everywhere because the straight of Hormuz has come into everybody's consciousness and No tankers are moving through because insurance refuses to insure. And so insurance is all around us. But it also has a role to play in trying to continue to educate that very last group that maybe is resistant towards understanding and believing that climate change is here. It it it helps us because insurers are so important and so clever that they can lead the way and shine light into that those last bastions of deniers, right? Because these are people uh perfectly rational actors. so to speak. These are people who live and die by formulas predicting the economic trends. There is too much risk. You don't insure. And then insurance in this way because it is absolutely a purely straightforward business structure. Private interests acting in every sector. If they are acting like climate change is real, what does that tell you? Absolutely. If if the people insurers or militaries of the world, but let's forget about military. If the insurers of the world, as you say, if they are just interested in making a dollar, if they do not want to provide you with insurance unless they know that the premiums that you give them, they're not going to give you back. If they are looking at the world in specific areas and they're saying that's not a good risk, we're not going to ensure because of climate change issues, then how would you ever argue against that? Right? Because we're talking about a pretty important sector. This forget these guys hold as much capital as most of the financial sector globally. We're talking about at its peak a few years back up to $40 trillion in assets was held by the insurance sector. That's all the health insurance, all the real estate, everybody insuring all the ports. It's a really big industry. They're like a quarter of the entire global system. So they're they have that power for a reason. It's because they're very good at math and they're very good at applying that math to real world scenarios. Right. Uh but let's get into it. Give people some examples. Right. Uh you mentioned flooding. Uh if anyone here listening has tried to get their house insured for flooding in say Florida or any of these other coastal regions with the ocean coming in more aggressively every year, you'll know how difficult it is. There are sectors where there are regions just in real estate where you can't get your house insured for wildfire anymore. and you have to go either through a state program or some type of alternative financing even to be able to make your house insurable or uh rentable or salailable. And that means this direct impacts of climate change general industry of insurance is now rippling in and affecting individual people's lives. If you want to buy or sell a home and you want a mortgage for that, you can't get a mortgage for a property that isn't insurable, right? And so this really matters, especially for people living in places where there's wildfire risk or flood risk or hurricane risk or tornado risk. All of these things are exacerbated by climate change and all of these storms are getting worse lately. insurance is scared and that's why we've seen for the first time in history well except for one or two moments like the 2008 2009 financial crisis co but stronger than either of those a contraction of nearly $10 trillion from 40 trillion down to like more like 32 or 35 right now the insurance industry is reeling back they are closing out contracts with customers they've had for decades because it's too risky to insure for those in those well you're absolutely You're right. There are certain areas of the United States where the residents must feel like it's a it's a episode of Twilight Zone because of how quickly the changes are happening and and how really the ground is shifting under their feet. So you talk about hurricane sometimes. That's right. You talk about for Florida for example, hurricane and water flooding. So it's been happening over the past decade, but really over the past quite literally 2, three, four years, it's been a massive shift. you have like half a dozen major insurers who say we're not writing any new policies. And so then all of a sudden these Florida people are relying upon government insurance, but they're realizing that there are lots of exceptions. There are certain things that don't get insured. And that affects you directly and immediately because if you have to stay in the area, if your job, if your life is there, your property values are going to be affected and affected quite severely. And there is no particular option. And and the reason is climate change is because the climate is changing. The world is heating up and the weather is getting Yeah, absolutely. It climate change hits everybody differently, but it hits everyone. You know, if you're in Sudan, you might be dealing with uh society in freef fall and not enough water and not enough food because of severe heat and drought. But if you're in New York, you might still be affected because all of a sudden your insurance has gone crazy expensive and all of a sudden that house in Long Island that seemed like the shest type of fortune that somebody could own is now a fleeting resource that needs to be put on stilts and reinsured under new policies you maybe Yeah. Yeah. And there are examples in the United States uh over and over. Unfortunately, uh California is a very visible example. The wildfires there have caused insurers to pull back. Um, and you know, famously, there are some insurers that have that have even gone bankrupt simply because there are just too many claims. Um, Louisiana, for example, is subject to tornadoes and hurricanes. So, they've got a problem. And with all of these locations where there is a problem and private insurance pulls away, then you are left with government insurance. So, it's it's no longer the cost of user pay, um, but it's instead everybody ends up paying for it. The cost of living goes up. Yeah. Because for example in California they had a emergency system for people experiencing this type of problem where insurance won't pay for a large-scale wildfire and that was not designed to carry 20% of the real estate in California. It just literally doesn't have the scale of assets required to remain solvent for that. And so sure if we had built towards that for 50 years and Californian uh stateowned insurance was a major player with billions to spread around. Sure. But it's not. It's a tiny program compared to the huge amount of real estate value in the state, right? So in this case, it would have been fine if we had had a plan, but we didn't. And so this transition is is hurting a lot on both ends cuz private insurance would love to have more money to reinvest and state insurance would have loved to have been warned about this 20 years ahead of time and been Yeah. Well, you're absolutely right. I mean, the speed of change is what is jarring. If you are not in an affected area then and if you're not scanning the headlines then sure this doesn't really affect you but if you are in certain locations where this matters it's it's a little bit like you know the transition just using another totally different example the transition of AI AI for a lot of non-computer people has just come on like nobody's business and it's it it's suddenly appeared and it's just racing through but unlike AI which has positive benefits um you know this whole we'll see yeah exactly Exactly. But but but you know like insurance and this this nastiness which is the realization that climate change is changing certain locations permanently in a negative way so that these major insurers who want to make money who want to turn a profit say forget about this location. It's happening very very quickly and like you said insurance is based upon just forecasting in the future and so I take in $10, I pay out $850. Life is doing well. But insurance is predicated upon, like you said, having a 30 or 40year run so you can build your nest eggs so that the once in a lifetime or once in a century event, if it comes, it doesn't bankrupt you. And so when government has to step in and ramp up all of a sudden, they don't have any sort of nest egg built in. It's just the people who are So that's the direct impact. But there's another layer to insurance that I think is important to mention. Remember how I said that they're holding more than 30 trillion globally as a sector? They're not just sitting on that money. That would be silly. They're business people. They reinvest it. That's why insurance can actually work as an industry at all. It's not it's not as much that you end up paying over your lifetime more, say, you know, $10 and they pay back $850. They might pay back 30 if they need to out of your 10, but they're still they still will have made money because that $10 was reinvested continuously and has now turned into a hundred or $1,000. So having to give you 30 for your expenses is fine. It it's really a type of of of debt based economy like banking. Banks don't just hold your money. They reinvest it for themselves and keep the profits and still charge you, you know, for the services. Insurance is kind of like that. They charge you the premium. they charge you monthly and that monthly payment is itself an asset that they can leverage to do more investment. So this is this is the second almost bigger impact on the global economy. I want to mention when insurance has less money coming from all of those clients, has less of those little $10 here and there, that means they have less to invest in the rest of the global economy, which we're feeling right now. A lot of the developed world is stagnating. uh economically we're looking at being happy to have maybe one or two or 3% growth whereas in some other decades that would have been uh unimpressive right a lot of major economies that are themselves sound basic basically sound you know they're producing unique goods they're exporting them globally they have enough food and yet the economy cloud over it part of that is because there's there's not as much money going into it being reinvested in new businesses and new uh infrastructure in new investments as there should be and that's because insurance again which is holding like a quarter of the global assets doesn't have as much as it should. It should it should have like an extra trill extra 8 to 10 trillion sitting around by now. Maybe 10 or 12 trillion sitting around being reinvested turning into new businesses in Africa, new water treatment plants across Europe and America. Even more solar panels, some crazy how than China can produce right now. There should be more out already. And there isn't because some of those industries, some of those big players that would be making those investments instead are contracting their wealth and getting scared and uh looking at uh bonds or or even minerals instead. So, first impact is you can't sell or buy your house anymore if you're in one of these spaces. But the next big impact that every single person feels even if they're completely protected from climate change, not that that exists, uh you're feeling it because the global economy isn't as strong as it should be. And this is one of those long-term impacts that we don't really directly feel, but it is a cloud hanging I swear we're going to get to the optimistic part soon, folks. We'll get Well, and and so when it when it comes to um you know, when it comes to these things and for anybody who still is sitting on the fence and thinking, well, this past winter was very cold. I mean, surely climate change isn't a real thing. or when certain prominent US uh politicians say that windmills windmills are a scam and that China and and the UK and other places are not putting up windmills and we should burn more coal and more coal and more coal. I guess the response is that other than you know sort of open your eyes is well wait a second even if you are really that intrigent even if you really shut your mind off to sort of basic facts just look at the insurance companies are the insurance companies more clever than you I think most people would say for sure they're more clever than you are the insurance companies solely interested in making money yeah and if those insurance companies are deeming certain areas as just untenable we can't make money no how no matter how hard we try because the weather has changed, then maybe that should give you some cause to revisit Yeah. And and for me, honestly, it gives cause to revisit my assumptions about some of these for-profit industries because now it means just because of the concept of risk management, uh financial sectors that have historically been totally aligned with the oil industry are now emerging as active players in the transition because it's the financially sound thing to do. So, more allies in the green transition, Right. Right. Well, okay. And so in terms of this then um how about then Okay. So basically what this is is anam is an opportunity for everybody that is in insurance examining where to invest. The answer is green solutions. For example, if you hold a lot of coastal land investment or you are involved in shipping and international trade and you've got giant docks that are worth hundreds of millions at least and very important infrastructure for local trade, you can protect those by planting mangroves, break walls, wave energy collection, wind energy collection to reduce the amount of kinetic energy coming in and potentially damaging your investments every time there's a century storm typhoon every few years. now, Uh likewise, if you're in insurance, if you're in health insurance, yeah, you could invest in a standard stock portfolio with those assets, or you could invest back into the communities you're insuring, making sure that you have to pay out less because you planted trees in those neighborhoods and there's less uh pulmonary disease, less heart heart disease because those people were breathing fewer fumes and less smog and end up having better health results long term. You can invest in even uh getting the locals doing running or taichi or something healthy that's outdoors in the and uh active. This is investing in community gardens and community supported agriculture subsidies for people to be able to get access to highquality local produce. That is a huge indicator for health and that's something insurance companies could could get returns on dollars to the if they chose to get involved at that level. I think that the big solution here in general is that whatever you're insuring that money, that investment could be going to stabilize those specific aspects of human life. And if we do that, then we've got a quarter of the global economy working on improving things. climate change mitigation for say for example companies involved in trying to ensure against fires. You can pay for better land management and have things like prescribed burns and traditional water management rights. These are things that you can get invested in at the local policy level that end up paying out on on your So so this is an opportunity for that sector to get more involved in a more direct way with their own investments. Right. And and so and even if the insurers are uh reluctant such because they generally are to forego the immediate profit because they are quarterto quarter they are annually sort of forecast and annual results based you know certainly they are an important lobby voice and if they are a very visible uh tip of the spear type of lobbying saying to jurisdictions that we can't we as the global we can't change the fact that uh the world is heating up and you're going to get more dramatic weather, but you can do certain things that might allow us to remain in in your jurisdiction and ensuring like the breakwaters as you said, reducing the kinetic energy, like creating sponge city type of infrastructure so that when the water comes, because we know it's going to come that it doesn't flood everything and then make your city make your area completely unmanageable financial risk. So, it it is sort of the tip of the spear from my perspective because the insurers are only interested in one thing. They want your money. they want to earn a return on, they don't want to give it back. And so if they leave, then that creates problems that jurisdictions are not yet ready for because you you you can't go a century relying on private insurers and then have them flee without there being a negative effect. You you might need more time to build it up in terms of, you know, a state type of insurance. But in the meantime, if they are the ones who are also lobbying saying there are certain things you can do to make your city, your jurisdiction more insurable, well, I think that's very persuasive. Yeah. Yeah. Because at the end of the day, we're all in the same boat and it That's right. Yeah. Yeah. Medical insurance is in the mix. And uh any other examples or any other uh ideas for the listeners to be optimistic in terms of this issue. I suppose there's a large sector for insuring crops. It's actually one of the principal sectors that the government is very active in already. Uh the US government has a lot of programs helping out farmers in case of a bad yield. Uh that could be expanded and that's honestly that's a place private insurance could step into more if they wanted. You could proliferate sustainable and regenerative agriculture techniques and use those uh use those practices, incentivize them to give uh lower premiums and then you end up having more clients with more reliable and diversified incomes to make sure that you keep getting money from them. Right? There's there's a lot of everybody wins scenarios available to us, but there's fewer the longer we wait Uh, and one more for example, insure car insurance. Car insurance companies have figured out uh decades ago how to try to encourage people to be responsible drivers and that that actually saves money for them. We could go a step further. You could there could you could be in a position as as a car insurance company where you're trying to work with the local mass transit companies to try to reduce traffic overall and have fewer accidents so you have to pay out fewer Right. Yeah. Yeah. You're you're right. I in in certain ways it's just much easier to look at, for example, the car industry in terms of driving and everything that's related as opposed to say the big issue of climate change. But you're right, what what is good for one aspect of uh the car driving industry is also good for the rest. So for example, you know, the the car industry or the insurers, they want to make money, they want to pay out less. So then lobbying for some safety features like seat belt use in decades past, like say from road construction or what have you. So that's that's to their benefit. It leaves more profit in their pockets, but it's also obviously a good benefit to the government, but also to the people at large. I mean, you know, so you don't have They're paying fewer premiums and Exactly. Exactly. Less strain on the health insurance industry, less strain on physio and occupational therapy and all that sort of jazz. So, so yes, that's right. And and it's but it, you know, but every once in a while you'll get someone yelling from the rooftops, windmills are trash and coal is the way. And then that that allows the very willing who close their eyes to say, yes, that's right. That sounds about right. And then that exasperates the Yeah. Unfortunately, uh it's going to look like such a ridiculously one-sided issue in another decade or two, but it at the time right now in 2026 as we're talking about it, it still has to be taken seriously because there's still that many people saying it. It's amazing And so change is happening quickly. Um with climate change, even though for the people who have paid attention in this area, it seems like a 30 35 40 year odyssey or longer, but but you know, it's like the the car industry. Um, at first there were no seat belts. At first, um, there were no speed limits. At first there weren't laws that protected people. Generally, I think drinking and driving was a cool thing to do up until about four decades ago. So, you know, the but change happens quickly and when it does happen and finally does happen, then people look back and say, "Wow, that was a crazy time that we allowed that." And I think climate change, as you've said, as we all know, I think climate change is going to catch up with us obviously, but insurance moving this quickly over the past few years in Florida and California and other states really is bringing home Yeah. Yeah. Right now, insurance is moving defensively. I hope that they start moving offensively, that is to say, attacking the actual target of their wos, climate change and its direct impacts. I really like your analogy about early cars. You know, if we had traffic and then we had jaywalking rules and pedestrian crosswalks, we had traffic and then we somebody invented the traffic light and that did a you know, huge huge amount for us, right? So, it's almost like there's this pattern where we develop the technology and implement it and spread it around and then we figure out what has to be regulated and what has to be protected to so that it's not a huge huge risk for everyone. And then all of a sudden we have all these rules and seat belts and lights and insurance and now fewer people are dying in the streets just getting randomly hit by for back then Ford Model T. Right. Right. But it we see that with other sectors too. You could argue that the entirety of modern climate change is essentially our 250 year long relationship with fossil fuels. Implementing them getting them out and then whoops forgetting to ever actually regulate them for our collective safety. And the biggest example right now that people are thinking about if you say oh the technology that has huge potential impacts and got implemented just widescale and now we're realizing there's maybe some safety risks and we Right. From how people are using it and it's affecting their mental health to how it's disrupting a lot of traditional uh work uh labor sectors, you know, programming, uh organization management, all of this and even just how we create it. Those data centers are being put up faster than the local communities can regulate or tax or check on impacts on water and energy cost. So yet again here with AI we see that first we just start doing it then we see what the implications are and then we start Well yeah the absolute computer boom which happened in real time during our lifetime and then Silicon Valley creating just you know billion and billion dollar companies out of software out of nothing. The act fast break things and ask for forgiveness later. That's exactly what happened with fossil fuels. Now fossil fuels did improve our lives immensely. Um however um you know they have been unchecked and they've created this problem. So yeah I agree with you. Now you did mention and this may confuse non-native English speakers you know you hope that uh we hope that insurers do act offensively. So with just a different emphasis same word I mean I think all of us do feel that insurers are offensive in every sense of the word. However however you know their actions I think are useful because they force everyone around them particularly governments. they force them to act and we just need to act like you said. I mean we just need to act very quickly because it's all visiting upon us very Yeah. And the faster we put together a plan and implement it the less severe the impacts of the previous generation's decisions will be on the future ones. Right. So, do you think uh the straight of Hormuz and $4 a gallon gasoline, you think that'll lead us towards more of an EV push despite what certain administration figures in the US say about EV vehicles being ridiculous? My favorite meme about this, it's the it's a picture of a ship burning in the straight of Hormuz and it's a picture of a bunch of solar panels and windmills and it says energy trapped in the straight of Hormuz, energy not trapped in the straight of Hormuz. that's I think all that needs to be said I do believe so. Well, excellent. Thank you. Thank you for this, Dy. Thank you, Greg. And thank all of you listening uh in the US and Canada and everywhere around the world, wherever you are. Uh we're going to be back on regular production now. Uh don't worry, more episodes are coming out soon. Thank you for listening to this episode of the Climate Basics podcast. Please remember to like and subscribe and leave us your comments. We look forward to seeing you next time. Goodbye.
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