Extreme weather has hit the insurance sector. So why are share prices rising?

Hello from London, where recent scorching heat has been yet another reminder of our world’s relentless rise in temperature, and all that goes with it. Last Monday was the Earth’s hottest day on record, according to both the EU’s Copernicus Climate Change Service and the US’s Nasa.

The effects of climate change are conspicuous, too, in the soaring price of insurance coverage — or the lack of it — facing a growing number of households and businesses. That trend, and where it could go from here, is the focus of today’s newsletter.

Meanwhile, regular readers will remember the recent upheaval over the Science-Based Targets initiative’s stance on carbon offsetting. Now the influential corporate climate standard-setter is sounding a rather different note.

The Moral Money Summit Asia is returning to Singapore on September 4-5. Join us to hear from an exceptional line up of speakers, including ISSB vice-chair Jingdong Hua, UN Climate Change high-level champion for COP29 Nigar Arpadarai, and many more. As a subscriber to the Moral Money newsletter, you are entitled to a 30% discount on in-person passes or you can claim a complimentary digital seat. Sign up now.

extreme weather

Investors are rewarding insurance companies for limiting coverage

There have been some ugly numbers coming from the insurance sector of late.

US home insurers, hit by a rash of extreme weather events, last year suffered their worst net underwriting loss this century, according to a new report this week. Globally, there were 37 disasters in 2023 that each caused more than $1bn of insured losses, and it was the fourth consecutive year in which insurance losses from natural disasters topped $100bn.

Less ugly has been the share price performance of big companies in this sector, even as it reels from the increasing severity and frequency of disasters that scientists link to climate change.

Munich Re, the world’s biggest reinsurance company — which takes on disaster risk for insurers around the world — has more than doubled in market capitalisation over the past five years. S&P’s composite index of big US property and casualty insurers is up by a healthy 76 per cent over the same period.

But these bullish share price numbers are not necessarily a reassuring sign for society at large. Investors are not cheering insurers for rolling out affordable coverage ever more widely in response to worsening climate risks.

On the contrary, they’re rewarding them for becoming increasingly selective in the coverage they offer — and charging significantly higher prices for it — in an effort to avoid big losses in the future.

Global reinsurers increased the prices they charge insurers for property catastrophe cover by more than 30 per cent last year, Morgan Stanley analysts estimate. In response to investor pressure they’ve also been cutting back the cover they provide for “medium-sized” disasters, which have been driving a growing volume of losses, according to analysts at Fitch Ratings.

This has fed through into some eye-catching moves by primary insurers, which provide coverage to households in businesses. Several of the biggest US insurers, including State Farm and Allstate, have stopped writing new contracts altogether in California, which has been swept by increasingly severe forest fires. Annual insurance premiums for mansions in Miami have risen as high as $620,000.

The government response

Government officials have been responding — but in questionable ways. California regulators, for example, have moved to restrict insurance premiums, and in some cases to force insurers to renew policies in vulnerable areas — both moves likely to encourage further retreat by insurers in the long term.

Meanwhile, government insurance bodies in climate-vulnerable states have been dramatically extending the coverage they provide to households unable to find affordable private-sector insurance. This is in effect a taxpayer-funded subsidy granted to people living in places most vulnerable to extreme weather events — which are frequently expensive holiday homes on beachfronts or near woodlands. In the event of a really large-scale disaster, this approach could have a ruinous effect on state government finances.

A more sensible approach was advocated in a recent interview by Petra Hielkema, chair of the EU’s insurance regulator. In Europe too, premiums have been increasing in response to extreme weather events — notably flooding in Germany and wildfires in southern Europe.

Rather than encouraging residential investment in the most vulnerable areas through subsidised insurance, Hielkema called for greater action on adaptation, such as making buildings more resilient to flooding.

As well as protecting lives and property, that would help households to retain access to private-sector insurance. Hielkema also nudged officials to consider a stance that few have been willing to discuss in public: encouraging people to stop developing property in high-risk areas. “Ultimately, there might even be areas where maybe you should no longer build,” she said.

The insurance sector still has work to do

None of this is to detract from the vital work that the insurance sector will need to do to play its part in the global response to climate change. Rather than cutting back on coverage, the industry needs to be expanding it, with most of the world — especially developing nations — still far behind US levels of property insurance coverage.

New approaches — including parametric insurance, where payouts can be triggered by weather data — will make this more feasible. Insurance executives have been talking increasingly publicly about the need for more sophisticated modelling systems, making growing use of artificial intelligence, to enable them to keep providing affordable cover in a world that’s deviating from historical patterns.

The sector is also in need of more capital — at a greater rate than the past few years’ 6 per cent growth — which could come from new entrants or incumbents. This will be needed to protect against weather disasters, but also to enable the rollout of the clean energy infrastructure required to slow the pace of climate change. A report last month by insurance broker Howden and the Boston Consulting Group found that $10tn of new insurance would be needed for investment supporting the low-carbon transition just between 2023 and 2030.

Meanwhile, insurance companies are under pressure from activist groups such as Insure Our Future to stop providing coverage for companies pursuing new oil, gas and coal projects. Efforts to pursue decarbonisation goals through the Net-Zero Insurance Alliance ran into heavy opposition from US Republican politicians who accused members of pursuing an anti-competitive campaign against fossil fuel companies.

The NZIA has now been dissolved, though ex-members say they are continuing to pursue climate goals through other avenues including the new Forum for Insurance Transition to Net Zero. But if humanity is to marshal a serious response to climate change — both by cutting carbon emissions, and by managing the effects — the insurance sector will need to be at the heart of the action.

Smart watch

Here’s a rather touching short animation from artistic initiative Rewriting Earth, aimed at raising awareness of pension savers’ exposure to companies involved in deforestation.