There is a risk crisis affecting the insurance industry.
Hurricanes Helene and Milton left a trail of tens of billions of dollars of destruction across the southeastern United States. These latest storms have shown that no region is safe from impacts of climate change, as hurricanes, storms, flooding and wildfires increase in strength and frequency.
As a result, updated risk model and rigorous portfolio rebalancing in the insurance industry have shown that in some highly exposed markets the price of risk is outpacing the ability of consumers to afford that price. That's leading to market disruptions as insurers, state regulators and others explore new approaches to managing climate risks.
Related: Senate Says Climate Is Causing Insurance 'Crisis'; Industry Strikes Back
This response is hardly surprising.
So far in 2024, there have been 24 $1billion-plus events in the U.S., according to the National Centers for Environmental Information. In the last five years we averaged more than 20 billion dollars disasters annually, almost triple the number of the past 40 years. Not only are there more large-scale events, the historic water and air temperatures are changing the physical nature of these events, with severe thunderstorms generating almost 70% of global insured losses in 2023, a 62% increase over the 10-year average
And it's only going to get worse.
The global modeled insured average annual loss from natural catastrophes is estimated at $151 billion, up from actual annual insured losses of $106 billion on average between 2018 and 2023, according to Verisk Extreme Event Solutions.
Clearly, this is not business as usual, and industry-wide action needs to be taken. The industry needs to be at the forefront of finding new ways to reduce exposures, not just transfer them something we have done many times before.
Related: Senate Committee Reveals Climate Change Danger to Financial System
Take the 1892 Chicago World's Fair as an example -- it was the first time electricity was deployed on a large-scale basis. Insurance industry representatives tasked with assessing this revolutionary new technology had significant concerns about the safety of its untested use. They faced a choice: discourage its adoption due to the risks or find a way to support its safe integration into society. Instead of retreating, they embraced the potential of electricity as a public good and focused on reducing risk, establishing Underwriters Laboratory and becoming the de facto regulator of electricity safety standards across the world. Imagine the number of lives that have been saved.
We need the same spirit of insurers working together for risk management today. We need to improve long-term climate modeling. We need to expand beyond individual incentives and champion risk mitigation at the eco-system level. We need to redefine what it means to build safely. And we need to partner with those public and private stakeholders, including local governments and community groups that understand the valuable role we can play, while also recognizing the roles we can't. In short, we need to reframe how we view climate change and our role in addressing it.
Ceres recently released a 10-point plan that aims to help insurance companies develop a roadmap for "resilience against escalating catastrophes." And while even the authors don't fully agree on every nuance or suggestion in the plan, we are in complete agreement that the insurance sector has an opportunity to lead in this brave new world of heightened catastrophe risks.
In particular, a renewed focus on predictive climate modeling is key, and we congratulate NOAA for making it a funding priority. Similarly, pursuing stronger building codes would essentially institutionalize climate resilience at the home level. And doing more to systematically leverage insurers' massive municipal bond holdings could transform municipal funding for long-term community protection projects, whether they be a few thousand acres of restored wetlands upstream or a levee system to divert water away from town.
Other Ceres-recommended actions -- heightened disclosures, stronger incentives or a federal catastrophe backstop -- are well-intentioned but most focus on treating the symptoms of risk finance rather than the core vulnerabilities and exposures of climate risk itself.
The insurance industry did not cause the climate crisis. However, how it chooses to respond to it will significantly impact the future of the economy, the industry, and consumers who rely on its underwriting services to protect their most valuable assets. By taking bold steps to reduce climate risks they can secure their future and address the multifaced challenges presented by a changing climate.