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Climate risks are expected to add as much as $183bn to annual premiums for property insurance by 2040, as the growing frequency and severity of extreme weather prompts insurers to raise prices.
Swiss Re Institute, the reinsurance group’s research unit, predicted on Monday that climate-related risks would account for just over a fifth of the overall rise in property premiums over the next two decades.
Factors categorised as “economic development”, including inflation and growth in insured assets, are forecast to make up three-quarters of the rise, contributing as much as an extra $616bn of premiums to what the institute expects will become a $1.3tn market.
Wildfires, winter storms and floods have made 2021 costly for the sector, which had its worst start to the year for natural catastrophe insurance in a decade — and that was before Europe’s floods in July and the devastation wrought by Hurricane Ida in the US in recent weeks.
Jerome Haegeli, Swiss Re’s group chief economist, believes the changing climate is the “number one” risk to the global economy.
The insurance industry has the capacity and expertise to cope with the risks, he said, but highlighted that the forecasts for losses and claims assumed that the world met the target of keeping the rise in global temperatures to 1.5C above pre-industrial levels.
“If we were in a more severe scenario, then you would talk about much higher economic losses, and then the question would be, obviously, what is the price tag [put on that by insurers],” he added. “Is it still affordable, and is the insurance industry still willing to do it?”
Swiss Re said that in some important markets including China, the UK, and France, weather-related property catastrophe losses could double by 2040 because of climate risks.
The predictions demonstrate how the wider property and casualty market is likely to change.
Property insurance is expected to rise from a 25 per cent share of total property and casualty premiums in 2020 to up to 29 per cent by 2040. Motor insurance, meanwhile, was expected to fall from 42 to 32 per cent over that time, as a result of “safety improvements from automation and smart technology”, Swiss Re said.
Policymakers are increasingly focused on how insurers will respond to climate change. Last month, the US Treasury’s Federal Insurance Office published a request for information on climate-related risks to the sector. “Growing evidence indicates that climate change may be associated with a decline in the availability and affordability of insurance provided by the private sector . . . in certain markets,” it said.
The FIO said it would assess the potential for “major disruptions” of certain insurance markets due to climate change, and would “examine the insurability of disasters that are produced or exacerbated by climate change, including wildfires, hurricanes, floods, wind damage and extreme temperatures”.