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Property Insurance: One of the first to go

Insurance companies are heavily dependent upon continued growth in the value of financial assets; they take customer’s money (premiums), invest it in financial assets and use the proceeds to pay out future insurance claims. If those financial assets do not increase in value as predicted then the insurance company will not have enough funds to pay for those future claims. It will have to significantly increase insurance premiums, restrict the scale and scope of coverage, and perhaps even refuse to insure certain properties, in an effort to maintain solvency. If the economy stops growing for more than just a year or two, due to geologic or self-imposed (to limit carbon emissions) energy constraints, the resulting fall in financial asset prices will thus severely impact the property insurance industry. The availability of property insurance would become increasingly constrained, and more expensive where still available.
 
The second part of the double-whammy that the property insurers will be hit with comes from the effects of climate change. As we are already seeing, warmer air holds more water which increases the severity of rainfall events. Also, the “weird weather” caused by changes in the complex atmospheric temperature and convection flows can radically change local climates. Increases in sea-level, from both thermal expansion and the melting of land based ice, will also add to the severity of many weather events. In only the past year we have seen the flooding of one Canadian city1, the flash flooding of another2, significant parts of England underwater and sea-side houses washed away3, high and low temperature extremes across North America as the Arctic air mass becomes unstable with resulting permafrost thaws in some areas and atypical snow and ice in others4,5,6 and the continuance of a multi-year drought in the western United States increasing forest fires and reducing crop yields7; the list could go on and on. This is with only a 0.8 degree centigrade rise in temperatures over pre-industrial times.
 
Historically, governments have stepped in where flood and storm insurance is not available in coastal and flood plain areas to foster economic development. This is a hidden subsidy to the small percentage of the population that lives in such areas, from taxpayers in general. In addition, government bodies carry out extensive flood protection schemes which also tend to be funded by the wider tax base. As damages become more frequent, and greater in scale, the pressure to reduce or remove such subsidies will intensify. The impact of such reductions upon property owners in the affected areas will be substantial, so bitter resistance to them should be expected. An example is the attempt to roll-back increases in government flood insurance premiums in the United States, a result of the flood events of the past few years8.
 
The end result of the changes from private and government insurers will be either the total removal of property insurance to many areas and/or event types, or such insurance becoming prohibitively expensive. Without such insurance many properties and businesses will become unsalable and whole areas could become depopulated as the costs of recovering from weather-related events fall fully on local property owners. This would include many of the major cities in the world, such as Vancouver, Miami, London, New York, Washington, and Shanghai. The insurance industry will tend to pull forward the effects of increasingly severe weather events as they predict a worsening future; increasing premiums, or removing some insurance all together, to take into account predicted future losses. This “time machine” effect, pulling projections of the future into the present, is a general property of the financial system which will cause many of the economic impacts of climate to be pulled forward in time. Considering the trillions of dollars of wealth, and many millions of people, involved the probable changes within the property insurance sector will cause great economic and social dislocation. The insurance industry is looking into the future with trepidation; Lloyds of London is predicting that the United States could be hit with a hurricane event causing $100 billion of damages, more than twice that of hurricane Katrina, an amount which would bankrupt as many as forty insurers. After such an event9, how many coastal areas subject to hurricanes would still have property insurance available to them?
 
1.     Dispel, Scott (2013), City report breaks down Calgary by the numbers, Canadian Broadcasting Company. Accessed at http://www.cbc.ca/news/canada/calgary/city-report-breaks-down-calgary-flood-by-the-numbers-1.2454771
2.     Mills, Carys (2013), Toronto’s July flood listed as Ontario’s most costly natural disaster, The Star. Accessed at http://read.thestar.com/?origref=https%3A%2F%2Fwww.google.ca%2F#!/article/520bc2af7b1eace30a014933-toronto-s-july-flood-listed-as-ontario-s-most-costly-natural-disaster   
3.     n/a (2014), UK Weather: Floods Could Be Linked To Climate Change, Britain’s Leading Scientists Warm, Huffington Post UK. Accessed athttp://www.huffingtonpost.co.uk/2014/02/22/uk-weather-floods-climate-change_n_4837812.html
4.     Upton, John (2013), Wacky jet stream to blame for wild North American weather,Grist. Accessed at http://grist.org/news/wacky-jet-stream-to-blame-for-wild-north-american-weather/
5.     Roston, Eric (2014), Why Is It So Cold? The Polar Vortex Explained, Business Week. Accessed at http://www.businessweek.com/articles/2014-01-07/polar-vortex-created-by-arctic-warming-north-american-cooling
6.     Liesowska, Anna (2013), No snow in Siberia? Locals marvel – and worry – at the ‘snow shortage’. Siberian News. Accessed athttp://siberiantimes.com/ecology/casestudy/features/no-snow-in-siberia-locals-marvel-and-worry-at-the-snow-shortage/     
7.     Curtis, Alexander (2014), California drought, communities at risk of running dry, San Francisco Gate. Accessed at http://www.sfgate.com/news/article/California-drought-communities-at-risk-of-5184906.php
8.     Schoof, Renee (2014), House votes to curtail flood insurance rate hikes, McLatchyDC. Accessed at http://www.mcclatchydc.com/2014/03/04/220143/house-votes-to-curtail-flood-insurance.html
9.     Morrison, John & Sink, Alex (2007), The Climate Change Peril That Insurers See, The Washington Post. Accessed at http://www.washingtonpost.com/wp-dyn/content/article/2007/09/26/AR2007092602070.html
 
House on beach image via shutterstock. Reproduced at Resilience.org with permission.

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