Is property becoming uninsurable?

River Thames in Winter Flood at Marlow, Buckinghamshire, England

(Image credit: CHUNYIP WONG)

published 21 October 2024

Storm clouds are gathering over the global insurance industry, which is facing yet another year of “exceptional” insured losses, with even worse in the offing. Ratings agency Moody’s estimates that the recent US hurricanes Helene and Milton, which cost hundreds of lives in Florida and neighbouring states, will alone rack up losses of $55 billion. It follows four consecutive years in which global insured losses from natural catastrophes exceeded $100 billion, previously the mark of an exceptionally bad year. Last year, there were 37 separate events worldwide resulting in losses of more than $1 billion (according to insurance broker Aon). Ten years ago, that number was 11.

What's to come for property and climate change?

According to a forecast published last month, the new normal in coming years for the global sector will be insured losses of $151 billion, with far more in bad years. The prediction comes from Verisk, a large risk-modelling firm working across the insurance and reinsurance sectors, which warns of insolvency risks unless firms prepare now. The past four difficult years “should not be seen as outliers”, says Verisk’s Rob Newbold. This is not solely about climate change, it’s also about a greater exposure to risk as populations continue to grow in high-risk areas, and about massive price inflation in rebuilding costs. However, it’s expected that in coming decades the impact of climate change will continue to grow, a fact reflected in the sharp rise, starting in 2022, in the cost of “property catastrophe reinsurance” – or insurance for insurance companies.

Are property insurers worried?

They have been alert to the threat from global warming for decades. In the 1970s, the reinsurance giant Munich Re (now the world’s biggest) published a paper on floods, and urged better monitoring of “climactic variations”. It discussed the future threat from warmer temperatures, polar melting and other environmental risks, noting that “as far as we know” the “conceivable impact on the long-range risk trend” has hardly been examined to date. But despite its long history of forecasting the future, there’s a widespread acceptance in the sector that its models have mispriced and underestimated the threat for too long. The industry is scrambling to reassess risks. Reinsurers took heavy losses before sharply tightening their terms, starting in 2022, piling pressure on primary insurers, who have responded by ramping up premiums (on property and casualty insurance) and withdrawing from some markets.

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What are the key climate risks?

Scientists aren’t certain whether the warming atmosphere causes more hurricanes. But they do know warmer air holds more moisture and results in more storms, and that drier ground means more fires. One-off devastating hurricanes grab the headlines, but the insurance industry is just as focused on the cumulative effect of “secondary perils” such as wildfires and severe thunderstorms, which are becoming far more common. In the 2000s, there were three thunderstorms that cost the insurance industry more than $1 billion. In the 2010s there were 10. And in the present decade, there have been six already. In Europe, losses for insurance firms caused by thunderstorms have topped $5 billion a year for the past three years, and (according to Swiss Re analysis) now account for more than a quarter of costs to the industry from natural disasters.

Are there other risks?

Indeed, there are other, less headline-grabbing ways in which climate change is changing the industry. In London, for example, increasingly common summer heatwaves are drying off the clay on which most of the city stands. Combined with wetter winters, this results in worse cracking and more widespread subsidence issues. PwC estimates that UK home insurers will be paying out £1.9 billion a year on subsidence claims by 2030. In Amsterdam, where many older buildings are built on wooden piles driven deep into boggy soil, extended dry spells are lowering the water table, causing exposed piles to rot, and buildings to sag. There, remediation costs can top £100,000 for the unluckiest homeowners. There are similar examples in cities across Europe and around the world.

Is it a global issue?

Yes, and one with wide ramifications. By making some property and some locations uninsurable, for example, climate change has the potential to drive property prices down, or crash them altogether, says The Economist. Property is the world’s biggest asset class, accounting for about two-thirds of global wealth. Mortgages serve as collateral in money markets and shore up the balance sheets of banks. If the size of the looming risk “suddenly sinks in, and borrowers and lenders alike realise the collateral underpinning so many transactions is not worth as much as they thought, a wave of re-pricing will reverberate through financial markets”. Many buyers and sellers are blithely unaware of such risks, even as insurance premiums rocket in highly exposed and high-price areas of the US.

How will the industry adapt?

It is working on ways of using technology to better assess risks. The market has also been supported by the emergence of new forms of cover, such as catastrophe bonds backed by investors with a high appetite for risk. More broadly, climate change is likely to mean that more risks are socialised, says Ian Smith in the Financial Times. Some countries already use a patchwork of state-backed insurance and reinsurance schemes. The UK’s Flood Re reinsurance scheme, for example, was backed by more than 265,000 home insurance policies last year, up from 150,000 in 2018. If insurers struggle to fulfil their role as a “financial shock absorber”, governments will need to step in. Should the state support people who can’t afford the risk-based price? Should planning rules be changed so you can’t build in certain areas? “These are not questions that are going to be solved by insurers”.

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Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.