78 Finance & economics The EconomistSeptember 21st 2019
2 number of properties being built on flood
plains and coasts. Annual insured losses
from catastrophic events have grown 20
times, adjusted for inflation, since the
1970s, to an average of $65bn this decade.
That excludes knock-on effects such as
business disruption. Last year the global
figure totalled $85bn, even though it was a
year with no mega-disaster.
Climate losses can also come from the
other side of insurers’ balance-sheets: the
investments they hold to cover payouts
and park any spare funds. Insurers (includ-
ing life and health as well as property and
casualty) are the world’s second-largest in-
stitutional investors, with $25trn under
management. They often place chunky
bets on multinational firms, infrastructure
and property—which are becoming riskier
propositions as the climate changes. More-
over, structural changes in the economy,
such as the move away from fossil fuels,
could leave insurers’ portfolios exposed.
In the face of these threats, insurers are
seeking to future-proof their businesses.
Part of this is about financial resilience.
Most general policies are renewed annual-
ly, meaning firms can raise premiums
promptly (within regulatory limits). Since
a spate of mega-disasters caught them off-
guard in the 1990s they have fortified their
capital reserves. According to McKinsey,
the policyholder surplus (crudely, the ex-
cess of assets over liabilities) available to
pay claims in America’s property and casu-
alty sector doubled in real terms over the
past 20 years. In 1992 Hurricane Andrewsent 11 insurers to the wall. All survived the
record hurricane season of 2017-18.
Regulators are doing more to prod in-
surers to hold sufficient capital—typically
the aim is to ensure they can withstand
losses caused by the worst imaginable year
in 200. But putting a figure on this is hard,
because nobody has thousands of years of
data. And the worst possible year is getting
worse every year. The risks will keep rising
long into the future, says Paul Fisher, a for-
mer supervisor at the Bank of England. A
cataclysmic year could also hit markets,
hurting insurers’ investments just when
they need them most. Some could be
forced to sell assets to cover giant payouts,
pushing asset prices down further.
Most probably, payouts will continue to
rise without capsizing insurers. But that
still creates a problem. To absorb bigger
losses, they must charge higher premiums.
According to Marsh, a broker, global com-
mercial-insurance prices rose by 6% in the
second quarter of this year, compared with
the previous quarter. That was the largest
increase since records began. In America
property rates jumped 10%; in the Pacific
region they soared by nearly 18%. The rise
is to meet the demands of reinsurers. Aver-
age reinsurance rates are set to rise by 5%
next year, according to s&pGlobal, a rating
agency—and in California, after the huge
recent wildfires, by 30-70%.
A few calm quarters could see some of
those increases unwound. But there is no
doubt about the trend. And it cannot con-
tinue for ever without some customers re-thinking whether to buy insurance at all.
Insurers may seek to keep rates lower by
adding exclusion clauses or capping
payouts. Or regulators may set maximum
premiums—which could mean some in-
surers quitting altogether. Swathes of the
economy are likely to become uninsurable,
leaving a growing number of people, firms
and states exposed to catastrophic losses.
The global gap between total losses and
insured losses is already wide and growing.
The research arm of Swiss Re estimates that
it more than doubled in real terms between
2000 and 2018, to $1.2trn. Half of last year’s
losses from natural disasters were unin-
sured. Nine out of ten American home-
owners have no flood insurance despite
half of the population living near water,
says Erwann Michel-Kerjan of McKinsey.
Insurers are trying various ways to stop
this “protection gap” growing. They are
digitising their operations and automating
claims to cut costs. They are deploying new
technologies, for example tackling fraud
by gathering data through sensors and
sending drones to disaster areas, notes
Seth Rachlin of Capgemini, a consultancy.
Innovations such as parametric policies
help with cost-cutting and fraud preven-
tion. Rather than compensating reported
losses ex post, these pay a lump sum when
an observable parameter, such as rainfall,
passes an agreed threshold.
Where risks become uninsurable, states
and firms may work hand-in-hand. In Brit-
ain, where a sixth of homes are at risk of
flooding, government and insurers have
set up Flood Re, a reinsurer that enables in-
surers to offer affordable premiums on
350,000 homes in flood plains.
Many insurers already offer discounted
premiums when preventive measures are
taken, such as building flood walls. They
should consider lending to clients willing
to undertake more substantial protective
work, says David Bresch of the Swiss Feder-
al Institute of Technology, for example re-
inforcing embankments. The short-term
nature of most insurance contracts com-
plicates matters: an insurer that invests in
a project one year can lose its customer to
someone offering lower premiums the
next. But long-term policies could work for
public infrastructure projects.
Developing countries are underinsured
partly because the risks they face are poorly
understood. More research would help, as
would making models publicly accessible
in order to allow officials and financiers to
evaluate mitigation measures. Above all,
insurers need to publicise the risks posed
by climate change, and the need for cover.
Often people do not take out insurance be-
cause they think the worst will not happen,
says Alison Martin of Zurich Insurance.
Talking of one-in-2,000-year events is not
very helpful, “because many people would
think we’re safe for another 1,999”. 7*InsuredanduninsuredlossesBattening downSource:SwissReInsured catastrophelosses
$bn, 2018 pricesInsuredanduninsuredcatastrophe losses
$bn, 2018 pricesGlobal insured losses from wildfires
$bn, 2018 pricesGlobal non-life and reinsurance capital
$bn03060901201501970 75 80 85 90 95 2000 05 10 15 18Earthquake/tsunami
Man-madedisasters
Weather-related catastrophesHurricane KatrinaJapanesetsunamiHurricaneHarvey01002003004005001970 75 80 85 90 95 2000 05 10 15 18Insured Uninsured
Insured Economic*Losses:
10-year moving average:0102030401980-89 1990-99 2000-09 2010-1820162017201805001,0001,5002,0002,5001999 2005 10 15 18InsuranceTraditional
reinsuranceAlternative capital