Climate change hits insurers
Aftermath of a flood in Henan province, central China.Noel Celis (AFP)

“Four of the five biggest future risks for insurers are related to the environment. No country can escape the problem of climate change that is already hurting the sector’s income statements; in some cases, it is wiping out the profits of important companies so they will have to raise policy prices to compensate for this situation ”, explains José María Carulla, CEO of Marsh, the world’s leading insurance broker and risk advisor.

News about natural disasters is becoming more frequent. And the insurers that are behind, especially in developed countries and urban areas, which suffer enormous damage. From the international vantage point of a company like Marsh, the matter is clearly seen. Carulla considers that meteorological phenomena “are becoming more frequent and more aggressive, which translates into more damage to property and people.” This expert considers that the firms in the sector are pushing in world forums to fight against the rise in the temperature of the planet. In addition, he believes that they can play a relevant role by selecting (and rewarding) the greenest customers to the detriment of pollutants.

Up to 158,000 million more in expenses

A recent study of Swiss Re, one of the world’s leading providers of reinsurance and insurance, entitled More risk: the changing nature of insurance and opportunities by 2040, it’s overwhelming. It states that the insurance sector had suffered losses of 34,000 million euros up to June due to climatic reasons, 27% more than the average of the last decade. For the next few years, they consider that the increase in losses due to climate-related disasters will translate into a premium expense of between 121,000 and 158,000 million euros, which will increase the prices of property insurance between 33% and 41% by 2040.

This situation will lead to some areas of the world, especially those in which these phenomena are recurrent or those in flood areas, see how their insurance is addressed to the point that it is impossible to contract them for a part of the population.

After the last damages (previously called cold drops), frosts in unexpected areas, and the Filomena storm last winter, this problem is also seen with concern in Spain. According to the latest data available, in 2019 climate damage exceeded 400 million in extraordinary costs for the sector. A figure that will remain small considering that only the aforementioned Filomena, who left a gigantic snowfall in the center of Spain, has meant more than 300 million extra costs for private insurers.

Invoice distributed in the insurance and the Consortium

These firms recall that they are responsible for the damage caused by snow, winds of less than 120 kilometers per hour, those caused by rain up to a limit of liters per square meter, hail and lightning. Despite this situation, Spain is a privileged country in the world because it has two private public companies that take charge of extraordinary risks: the Insurance Compensation Consortium (CCS) and Agroseguro, which assume most of the problems generated because of the weather.

The Consortium covers damages caused by natural phenomena such as floods, storms, volcanic eruptions or earthquakes for those affected who have insurance in force. This coverage is possible thanks to a surcharge that is applied to practically all insurance policies in Spain. Agroseguro, for its part, manages agricultural insurance against damage to crops and cattle ranches due to weather events (frosts, droughts, floods …). Agricultural insurance in Spain is based on the joint intervention of public and private institutions, it is voluntary, it is carried out under the formula of pool coinsurance (currently 18 insurers are part of it) and has state subsidies to the producer for the payment of the premium.

Negotiation with the Government

However, the increase in the frequency of major climate damage and the enormous expense they entail has led the sector to call for a change in the rules. The employers’ association Unespa has requested that a negotiation be opened with the Ministry of Economic Affairs so that the Consortium covers more damages than it now has in its regulations, as explained last week by Manuel Mascaraque, Director of the General Insurance Area at Unespa, who brings together almost 200 insurers and reinsurers, 96% of the sector. Unespa has just created the naturally protected portal to guide policyholders in the event of rain, flood, storm, drought, snow, etc. In the sector they are convinced that the worst is yet to come, so they want to have more protection against climate change.

From Mapfre, Santiago Martín, Deputy Director General of Companies, comments that insurance faces extreme atmospheric phenomena “as a future challenge that must be taken into account, measured and properly assessed. It is true that in recent years they have also intensified in Spain, but we still do not have enough time to know how it will impact in the coming years ”. This insurer points out that, for now, “it has not had a significant effect on the premiums we charge our clients” and adds that “it will be necessary to see how the atmospheric loss ratio evolves in the coming years.”

Avoid catastrophes before they happen

Juan Closa, general manager of traditional business of the Catalana Occidente group, admits his concern about the issue and recalls that they have a free weather alert service for their clients that informs them of an orange or red alert due to meteorological phenomena. Catalana calls for “a reflection to mitigate the impact of these phenomena with the cleaning of river beds, strict building regulations against earthquakes, favoring sustainable and energy-saving building, etc. The insurance sector will do everything in its power to avoid disasters or minimize damage ”. Closa admits that the renewal of reinsurance contracts is impacting his accounts because prices rise.

The multinational AXA (present in 54 countries), explains that natural disasters have caused extraordinary damages of 502 million in 2020. Nuria Fernández, director of Private Clients Offer, explains that “the population may have the feeling that the frequency of Climate events have increased now, but this is a fact that AXA has been observing for years. Spain has a vital figure, which many other countries lack, such as the Consortium, which minimizes these impacts on insurers ”.

Nuria Ibáñez, head of the Generali Spain Risk Office, points out that “the intensity and frequency of natural disasters, which are increasing, show that we are facing an absolute emergency and we have to put measures to prevent or mitigate the impacts in people’s lives and in the economy without seriously affecting the solvency of our business ”.

In Generali’s accounts, these phenomena have had a strong impact in the first half of 2021 with expenses that have almost doubled those of the previous year. “Climate change will be a determining factor in the evolution of the economy and, therefore, of the insurance sector in all its lines of business”, concludes Ibáñez in a perfect summary of the situation.

The financial strength of the Compensation Consortium

The Insurance Compensation Consortium is an almost genuinely Spanish invention that other countries, such as France, are analyzing to clone it. Nowhere else is there a body of the same size and financial strength, although there are some smaller or sectoral ones. It is the last resort for hit and run uninsured car accidents, victims of terrorism and, above all, those who suffer major climate catastrophes and are insured with private companies. In the last five years the floods have caused payments of 1,296 million to those affected and now he faces the challenge of paying for houses and land that disappear as the lava advances on the island of La Palma.

It is financed with a small surcharge on each policy. According to the 2020 Report, it has reserves for the coverage of insured risks of 9,159.6 million for general activity and 857.8 million for agriculture. In addition, it deals with the liquidation of insurance companies that may fail, for which it has another 2,260 million.

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