Climate Change Is Forcing the Insurance Industry to Recalculate

Insurers are at the vanguard of a movement to put a value today on the unpredictable future of a warming planet

When a wildfire engulfed the Canadian oil-sands boomtown of Fort McMurray two years ago, it hit insurance company Aviva PLC out of nowhere.

The British firm had been active in Canada since 1835. Its actuaries long believed wildfire risk to homes in the area was almost nonexistent, it says. Yet flames on the town’s outskirts roared across an area larger than Delaware, forcing 100,000 people to evacuate and leaving insurers with $3 billion in damages to cover.

“That is not a type of loss we have experienced in that part of the world, ever,” says Maurice Tulloch, the Toronto-based chief executive of Aviva’s international insurance division. “The previous models wouldn’t have envisioned it.”

Aviva studied the incident and concluded the wildfire was an example of how the earth’s gradually warming temperature is changing the behavior of natural catastrophes. Aviva increased premiums in Canada as a result.

The price of homes on the U.S.’s eastern seaboard battered by fiercer storms and higher seas is lagging behind those inland. The price of farmland is rising in North America’s once-frigid reaches, partly because of bets it will become more temperate. Investors are turning fresh water into an asset, a wager in part that climate change will make it scarcer.

.. After the Canadian wildfire, Aviva’s changes to its risk models filtered into its home-insurance premiums in Canada, which increased by roughly 6% since 2016, partly because of its research into catastrophe risks.

For most insurers, rates aren’t rising—yet. A flood of capital into the industry from pension and hedge-fund investors, driven by low interest rates, has increased competition and pushed down property-catastrophe reinsurance prices in the past decade.

And property insurance and reinsurance contracts typically last one year, so an insurer can recalibrate yearly as risks change. “Global warming may be occurring. Probably is,” says Warren Buffett, chief executive of Berkshire Hathaway Inc., which has a major reinsurance business. “But it hasn’t hurt the reinsurance industry. And people are pricing still as if it won’t, on a one-year basis.”

If reinsurance contracts covered 30 years, he says, “I’d be crazy not to” include the risks.

.. Insurers such as Swiss Re Group say hurricanes like Harvey and Florence, which caused widespread flooding, could represent a more common occurrence in the coming decades.

.. The insurance industry has historically changed after big disasters. Natural-catastrophe modeling took off after Hurricane Andrew struck Florida on Aug. 24, 1992, causing an estimated $15.5 billion of insured losses. Thirteen insurance companies were ordered liquidated

.. The climate has grown about 1.8 degrees Fahrenheit warmer since the late 19th century. A consensus of scientists puts blame substantially on emissions of greenhouse gases from cars, farms and factories.

.. Munich Re researchers found a significant increase in storms with hailstones larger than a penny in diameter between 1979 and 2016 in central and southern Europe, causing higher losses during that period.

.. A 2015 study from professors at Princeton University and the Massachusetts Institute of Technology found the warming planet is increasing the chance that a major hurricane could enter the Persian Gulf, home to hundreds of billions of dollars of petroleum equipment and assets.

Such cyclones periodically hit Oman and Yemen but have never been observed in the Persian Gulf, climate researchers say. The researchers found that, with new conditions due to warming, some cyclones could enter the Gulf in the future and could also form in the Gulf itself.

.. A 2013 study in the journal Nature projected average flood losses for the world’s 136 biggest coastal cities could rise from $6 billion a year in 2005 to $52 billion a year by 2050 due to increased population and development. When taking climate change and a sea-level rise into account, flood losses could exceed $1 trillion a year by 2050, the study concluded, unless the cities invested about $50 billion annually in adapting.

.. But Hurricane Harvey, which hit Texas in August 2017, spent weeks absorbing 33 trillion gallons of water, according to the National Oceanic and Atmospheric Administration. It dumped more than 60 inches of rain and caused tens of billions of dollars in flood damage.

.. The probability of a Texas storm dropping about 20 inches of rain was about 1% a year between 1981 and 2000, but will likely increase to 18% a year by 2100

.. Increased flood damage also presents an opportunity to insurers. As more regions become exposed to flooding, insurers expect the market for flood insurance to grow.

.. Allianz, one of the world’s largest insurers, says it sold the retail business of U.S. insurer Fireman’s Fund Insurance Co. in 2015 in part because climate change is increasing the risk of losses to coastal homes in California and Florida.