This is part three of an FT series about the consequences of climate change on insurance. Read part one here and part two here.
Thomas Brennan is well placed to observe the mounting pressure from climate change on the insurability of American business. An insurance broker, he is also a member of the wider Brennan family that has owned restaurants across New Orleans since his grandfather’s generation.
The low-lying city — like many other areas especially exposed to floods, fires or storms — has been hit as insurers pull back, spooked by a toxic mix of inflation in the costs of claims and increasing extreme weather events.
The scramble to get affordable insurance, Brennan says, has become even more fraught for businesses such as his family’s than in the aftermath of Hurricane Katrina in 2005, the costliest ever windstorm.
“I would argue that the market is worse now than it was then,” he told the Financial Times, on the challenge of finding private flood insurance. A last-resort federal government insurance scheme is available but it has a limit of $500,000 for building damage and separate cover for contents.
“The limit [of additional cover available through private-sector policies] got eroded, rates went up, deductibles were higher,” said Brennan.
The Brennan restaurants turned instead to FloodFlash, a UK start-up that is one of an expanding cohort of insurers, big and small, offering a form of insurance known as parametric: cover at a set amount based on a pre-agreed trigger.
In this case, the trigger is a water sensor at the claimants’ premises. A flood of sufficient depth will be covered, and the claim paid out quickly at the set rate.
Parametric insurance is just one way the global insurance sector is trying to keep homes and businesses insurable as climate change fuels more extreme weather and mounting losses.
Another strategy getting more attention is adaptation. After bottling company Coca-Cola Consolidated suffered a damaging flood at its Nashville plant in 2010, it worked with its insurer FM to reconfigure the factory, so that flood waters can run through the building without damaging critical electrical equipment and other vulnerable areas.
When flood waters returned with a vengeance a decade later, the damage was minimal and the plant was down only a few days rather than a few weeks.
Such efforts feed a hope in the insurance sector that a combination of preventive and adaptive measures by property owners, plus new ways of measuring or insuring risks, will be enough to meet the climate challenge.
Paula Jarzabkowski, an expert on risk at University of Queensland, is an advocate for a new insurance “ecosystem” of public and private initiatives that can keep homes and businesses insurable as the planet warms.
On this view, the worldwide patchwork of last-resort insurance now provided by government schemes alone will not be sufficient. “A lot of what we have already . . . hasn’t grown up to fix the problem we’re in,” she said.
The private sector innovation falls broadly into two buckets: closer calibration of the risks — which can remove enough uncertainty to provide traditional property coverage — or finding new forms of insurance cover.
Risk-modelling companies have recently poured investment into technology they say can much more closely identify the risks posed by highly localised events, such as fire and floods that might affect a building on one side of the street and not another.
“We’re in a position where we can now offer much more sophisticated modelling methodologies, and more insights into this kind of risk, because we now have the computing power to do that,” said Julie Serakos, head of the model product management team at risk modeller Moody’s RMS.
There are a variety of approaches. Drawing on the ever greater data sources available to underwriters, specialist property insurers such as London-listed Hiscox are able to analyse home insurance risk house by house.
And start-ups have emerged, such as Delos, founded in San Francisco in 2017, using machine learning and satellite data to get a more detailed understanding of the wildfire risk of an individual property — aiming to provide coverage to households that others applying broad risk assessments may be avoiding.
Some insurers are leaning on third-party climate specialists, such as US-based Jupiter Intelligence, which provides forward-looking analytics on how climate change will affect their portfolio.
The insurance market has also been supported by a proliferation of structures such as catastrophe bonds — an increasingly mainstream form of cover against extreme weather provided by investors through securities. Issuance has boomed in recent years.
Parametric policies are also gradually being employed by even the largest in the industry. “With a parametric trigger, uninsurable exposures become more insurable,” Aon, one of the biggest insurance brokers, said.
But there are pitfalls, experts say, to some of these approaches. Parametric insurance, for example, runs the risk that a flood or hurricane does not hit precisely the required trigger, and there is no cover at all.
While ever more granular analysis might allow some properties to be underwritten that could not be otherwise, it could also widen the divide between those properties and people viewed as “good risks” and “bad risks”.
Policymakers are also increasingly concerned with the role of local and national governments in providing a backstop.
Petra Hielkema, head of Eiopa, the EU’s insurance regulator, told the FT there was growing support among politicians in the bloc — in the world’s fastest-warming continent — for national risk-sharing schemes for natural catastrophes. A “next step”, she added, would be a pan-EU scheme that was proposed by the regulator and the European Central Bank last year.
“These [natural catastrophe] problems, that are this size, ultimately you will need a European solution,” said Hielkema, though she added it would have to be carefully constructed to avoid moral hazard such as reducing the incentive for individual countries to invest in resilience measures.
Meanwhile, there are smaller-scale initiatives, such as a pilot programme to provide low- and moderate-income families in New York in high-flood risk neighbourhoods with an emergency cash payout after a major flood.
Some think it is up to local communities to engage with the insurance industry and regulators on the insurability question.
A non-profit promoting new insurance solutions to climate risk, InnSure, says community leaders can “protect their insurability” by applying insurance-focused assessments to new developments and infrastructure.
“Simply asking, ‘If we do this, what are the insurance implications and resulting economic impacts’, can be incredibly impactful, as unaffordable insurance can affect home prices and damage community wealth,” said Charlie Sidoti, its executive director.
For some executives, the way forward is simply to recognise the scale of the problem and adapt — working with clients or households to either protect themselves from water or fire reaching the door, or to make sure it does not do significant damage when it does. Such actions can keep insurance costs to an affordable level, they say.
FM’s chief executive Malcolm Roberts told the FT that requests from companies such as the Coca-Cola bottler for its resilience services, which draw on its own risk maps for natural hazards, are at unprecedented levels.
The company has been making an insurance and prevention pitch since 1835, when Rhode Island textile mill owners created a mutual insurer for those willing to take prevention measures such as thick floors and firewalls to minimise fire losses.
“When insurance gets expensive,” said Roberts, “that’s when people start to say, ‘What can I do about it?’”
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