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Uninsurable": how urban growth and more hurricanes are making property insurance riskier

To avoid an insurance crisis, "we, as a society, have to prepare for this... everything has to change, says an authors of a new report by one of the largest reinsurance companies in the world. Otherwise, the risk will grow until some properties become "uninsurable".
12 Sep 2021 – 03:10 PM EDT
An electrical substation stands in the wake of Hurricane Ida on September 4, 2021 in Grand Isle, Louisiana. Crédito: Sean Rayford/Getty Images

The insurance industry is predicting potentially “uninsurable” growth in areas of high-risk for weather-related catastrophes, according to a new report by Swiss Re, one of the world’s largest re-insurance companies.

Property insurance is forecast to grow by 5.3% annually with global insurance premiums tripling from $450 billion in 2020 to $1.3 trillion in 2040, according to the study, based on the latest scientific data, economic studies and risk modeling.

Most of that is the result of economic development and urbanization, with the building of new homes, businesses and infrastructure exposed to climate risks.

Univision spoke to one of the authors of the report, Thomas Holzheu, the chief economist for the Americas at Swiss Re.

David Adams/Univision: The Swiss Re report talks about increased risk in the property insurance market. What do you attribute that to?

Thomas Holheu/ Swiss Re: If you talk about the property piece of the insurance risk pool, actually the largest part of the increase is economic development, it's urbanization. It's not the increased hurricane activity or a flood or whatever it is, but us putting stuff in nature's way. This is the biggest driver.

As a society need to prepare for this. And we know the exposures are here, that they are growing. We need to be smart about where we put our assets and we need to make our assets harder.

This is one of the key messages of the report, that we have this interaction between where is the economic activity and where we grow it. Where does economic growth happen and what are the implications of the bigger trends of climate change. There's a need that we don't just keep going the same way. It means we need to be smart about creating assets, infrastructure, buildings that are more resilient. We need to reduce the emissions to meet these climate change goals. Then we also need to think about zoning as sea level rise is a matter of fact. Even with a one and a half degree increase, sea level rise is baked in.

"It doesn't make sense to keep going with coastal development at the same pace than in the past, because obviously you will have disproportionate increase in risk in those areas." - Thomas Holzheu, Swiss Re

Univision: What was the motivation for this report at this moment. And what research went into it?

Holzheu: This rotates around whatever is pressing for the industry. And we really wanted to take a step back. The idea was to combine these very long trends and see what's beyond the current worries, what should we think about as an industry, as a society, as a regulator and policymaker. We have been working on that for over a year now.

We ran economic models of what drives property insurance premium growth and then we added the climate impact on top of that It's actually quite detailed in the report. It's scenario based. So, we look at what's happening in certain peak exposed countries for certain perils. We made assumptions that are based on some scientific research regarding higher frequency severity of certain perils in certain regions.

This input came from our catastrophe modeling experts. It's based on a very broad literature review that we do. We didn't make assumptions for perils where there is no clear agreement. So, there could be more [risk]. A lot is around flood where we have more confidence that we know that there is pretty straight causation and that we have a lot of data and have a better handle on the effects.

Univision: When the report says property coverage is going to triple, doesn’t that mean more profits for the insurance industry? Is there an irony that you are the ones warning society and governments of the risks.

Holzheu: We don't assume anything here about higher or lower level of profitability. We simply say the risk is growing. And there's an opportunity if we keep this insurable. Business as usual would not be a good idea. So, there is the opportunity for the industry to be a part of the solution. This is not per se comfortable.

"You don't want to be in a business where the need goes away." - Thomas Holzher, Swiss Re.

So, the need will be there. But it's something where we need regulation of the risks in terms of building codes, zoning and so on to make sure that this remains insurable. This is something where we can help our customers in managing this.

The risk in itself is scary. But for us, as insurance, it's an opportunity, but it needs to be within the confines of insurability. There's no guarantee that without a collective action of keeping risks in check and developing in areas where the exposures remain somehow predictable and rates remain in a way that insurers don't lose capital. Insurance was not an extremely profitable business for the last half decade based on these catastrophe losses.

Univision: I am guessing that you would agree then with what President Biden said on Tuesday when he was touring the damage from tropical storm Ida in New Jersey and New York. He talked about a code red and the urgency we face to do something about climate change.

Holzheu: There are two levels of mitigation. One is directly reducing the cost of climate change. We need to get emissions to net zero. We need a new way of producing energy, we need new means of transportation. Everything needs to change. Home emissions from heating need to be brought down, we need to have efficient homes.

This will span throughout our lives and it all will cost money. There will be a need for green infrastructure, green buildings, higher energy efficiency, less air conditioning, across every sector. Then there is also the hardening of our assets, our communities. I live here in Connecticut, we have summer and winter storms. We have snow pulling down the wires. Then you see the linemen with the trucks running around and putting them back up there, right in harm's way. And this is paid through the utility bills and these costs go up, if there are more storms.

We saw Ida in the Northeast, the floods in New York. We need to spend money on the drains. So that goes through the municipalities, the utility companies, and it somehow will end up with the consumer. If you get investment and help from the federal government (through the Biden infrastructure bill currently being negotiated in Congress), then it’s the general taxpayer who will pay for that. So, it's all part of the cost of living. Insurance is just a part of that. Insurance is basically redistributing the random losses into the population. If the losses go up every year, that's going to affect the cost of living in such an area.

Univision: You work for a big, capitalist company. Are you surprised that the insurance industry suddenly finds itself now on sort of on the progressive side of the energy debate.

Holzheu: I don't really see this as a political, partisan argument. There are some outlier opinions around some of the scientific evidence. There are political opinions about how to resolve it. But, as an insurance company, we are science geeks. Otherwise, we'd lose our shirts every year. We simply go with the facts. We look at science, it has biases too, so we don't just look at one opinion, we look at the mainstream. That's where we go for making these assessments when we do our call for action of mitigating emissions.

"We're just adding up the numbers and we see that this is happening and we need some counter steering here, otherwise the economy will suffer these losses; the risk will not be insurable anymore." - Thomas Holzheu. Swiss Re.

It's obviously a hot political topic, and so you can always fight around the details. I would assume that in Swiss Re have a very good cross cut of political leanings of the country. So, I don't think this is a partisan conclusion here. We try to make this really very science based. This is our business. We do this when we insure motor [vehicles], when we insure mortality risk and health. We cross-section life with our risks. But every year we are responsible to our shareholders.

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