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“The insurers always know first.” That’s the view of one fund manager, referring to how some credit insurance providers reduced their exposure to First Brands ahead of the auto parts maker’s spectacular collapse.
The assertion is questionable in the First Brands case, given that several major insurance companies are now preparing for a rush of potential claims.
When it comes to climate risk, however, the insurance industry has undeniably been taking threats more seriously, and for longer, than most other business sectors. What do insurers’ latest moves mean for their clients, and the wider economy?
CLIMATE RISK
How insurers are trying to keep clients insurable
If you’re an insurer whose clients face growing threats from weather disasters, one potential response is obvious. You raise your prices to reflect the rising risk — and if the clients can’t afford it, too bad for them.
This has already started to happen — with serious consequences for property markets in vulnerable parts of the US, where homeowners are finding it increasingly hard to secure coverage.
But there are some obvious problems with a long-term business model that involves providing your services to fewer and fewer customers. So insurers are now putting serious work into helping clients strengthen their defences against climate disasters — in the hope of keeping them insurable.
Yesterday my Tokyo colleague David Keohane published an interview with the boss of Tokio Marine & Nichido Fire Insurance — the main property and casualty arm of Japan’s largest non-life insurer, Tokio Marine.
Hiroaki Shirota highlighted Tokio Marine’s recent $642mn acquisition of Integrated Design & Engineering, a consultancy focused on natural disaster mitigation. The insurer hopes ID&E’s services will help its customers protect themselves against events such as typhoons and landslides — and help Tokio Marine keep insuring them at prices they can afford.
If customers simply “keep on filing insurance claims” instead of building resilience, Shirota warned, “their premium price is likely to go up”.
An insurer buying an engineering company is highly unusual. But it reflects a wider trend in the sector, as insurers and reinsurers try to strengthen their clients’ defences against climate risks.
New directions
In July, Germany’s Allianz launched a platform called Climate Adaptation and Resilience Services, which its consulting unit will use to help insurance clients assess and tackle their climate vulnerabilities.
Zurich Insurance Group now has a “resilience solutions” unit that advised Danish shipping group Maersk, for example, on protecting its port terminals against extreme weather. Munich Re has launched a “location risk intelligence” system that companies can use to assess climate threats. France’s Axa recently started marketing “sustainability-linked insurance” in places like Hong Kong, with lower premiums for clients who invest in flood defences.
These new approaches by insurers can hardly be a panacea for the global “insurability” challenge as the dangers to some regions reach new levels. They may have a slight restraining effect on property insurance rates, which rose steadily for most of the past decade. This chart shows an index of reinsurance pricing for property catastrophe cover:
The dip so far this year reflects a surge of capital into the reinsurance market in response to the higher prices, largely from catastrophe bond investors, Morningstar analyst Henry Heathfield told me. That strong capital supply is likely to keep prices heading lower for the next few years, he argued in a recent paper.
Mind the gap
Even if that forecast pans out, these price figures tell only part of the story, as a growing number of climate-vulnerable property owners fall out of the insurance market altogether.
Private-sector insurers have been withdrawing from covering fire-prone property in California, deterred by rising disaster risks and regulatory limits on price increases. In parts of Florida vulnerable to storms, an increasing number of homeowners have opted to go without insurance because they’re unable or unwilling to pay the surging prices demanded by insurers.
It’s not just the US that faces a widening insurance gap. A sobering paper from the European Central Bank in May warned that only €13bn of last year’s €30bn in European natural disaster losses was insured. Worse, it added, “the long-run average share of insured losses is continuing to fall across the euro area as a whole”.
This trend is leading economies in a bad direction. The Bank for International Settlements has warned of the potential for an “insurability tipping point” — in which large parts of the property market are no longer insured, leading to a real estate price fall with grave implications for the banking sector and the wider global economy.
This year, Allianz board member Günther Thallinger called this an “existential threat” to the capitalist system. “We are fast approaching temperature levels . . . where insurers will no longer be able to offer coverage for many [property] risks,” he wrote. “The math breaks down: the premiums required exceed what people or companies can pay.”
While few insurance executives have put it so bluntly, recent developments in the industry suggest Thallinger’s concern is widely shared. As long as policymakers fail to act on the signals they’re sending, insurers’ ability to tackle this problem through consulting services and price incentives will be limited.
Smart reads
Behind the scenes Is lobbying by oil company ExxonMobil behind the EU’s move to weaken a landmark sustainability law? Check out this new report from investigative group SOMO.
Meat market Droughts in the US have been a big factor behind soaring beef prices.
Tracking the buzz A new FT special report on electricity covers hot topics from offshore wind to energy-hungry data centres, and China’s “electrostate” strategy.
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