Insurance companies revenues are coming from insurance policies they sell but also through the return on their investments. The premium they collect are invested to generate a return on money that could be needed at a later stage when claims come in.Insurance is a risk-based business. Risk of a person becoming ill, risk of a business being damaged, risk of a company being targeted by a cyber-attack. Insurance companies need to assess these risks and adapt the price they offer for the premium accordingly.If the occurrence of the event grows, the risk and the need to cover for it becomes higher. It directly impact the profitability of the insurance or even its solvency.In the last couple of years, most insurance companies saw profit margins at 3-5%. If the Covid-19 pandemic played a role in a limited profitability, natural catastrophes took the lion’s share. Swiss Re estimates they added around 10% to the industry’s 2021 combined ratio. This combined ratio measures if the company is making an underwriting profit or if it pays more claims than it collects premiums. Most companies being very close to the 100% balance, a 10% increase could seriously impact their profitability.
A report from the French Senate in 2019 stated that the claims related to Natural Catastrophes in the country will grow 50%, because of climate change. The country put in place in 1982 a solidarity mechanism for Natural Catastrophes, supporting damage payments. An extra premium is paid on all insurances, at a rate defined by the government. So far, except for one year, the system is balanced. Will it remain so if extreme weather events continue to multiply is another story.
Insurance companies will become more and more cautious; they may either reduce exposure to some of the risks presented by climate change or increase Property & Casualty premiums.They need to identify and quantify the risks posed by extreme weather and therefore understand even better weather, climate and urbanization. In their risk reports, North America risks of hurricanes and tornadoes, Europe risks of winter storms are identified. But probably none of them foresee that the UK will face wildfires last summer or the intensity of hail storms in France last spring. Insurance companies need more data and insights, more local, more precise.Will it still be possible to insure a house near a coastal area potentially subject to storm surge, a warehouse close to a river, or a solar photovoltaic power plant in a region now subject to hail ? What about agriculture ?
And even if it is possible, what will be the price of the premium? Will it be affordable for the people concerned ?
As per Swiss Re Institute report published recently, insured losses represent not even half of the economic losses due to Natural Catastrophes in 2022. At the rate the risk grow, will it be possible for people to be financially protected from extreme weather events ?