By Rachel Koning Beals
Many insurance and reinsurance plans — coverage for the consumer-facing insurers themselves — are renewed on a short-term basis, often annually. It can be hard to account for the damages that unchecked global warming could bring in the coming decades, which influences everything from credit for major construction projects to preventative measures, such as sea walls.
“Climate change is not necessarily causing all these things, but it is enhancing these events and in areas where the impact was much smaller before,” said Bowen. “But we’re not pricing (coverage) for 100 years, we’re trying to price for next 365 days, so it can be rolling the dice. Still, the repetitive type of losses over 20 years makes it easier to get a sense where price changes are needed.” Aon says artificial intelligence and predictive models must evolve faster.
“Multi-peril” events are also on the rise. For instance, Hurricane Ida, which cost more than $75 billion in economic losses , hit several U.S. states in late summer 2021. Ida was not limited to its coastal impact along the Gulf of Mexico. Powerful storm remnants hit the populous Northeast, bringing costly flooding inland as well as tornadoes as far as Pennsylvania and other places.
High water, high stakes
The system for insuring against flood damage is getting increased scrutiny as climate change intensifies.
Currently, the federal government, via the National Flood Insurance Program (NFIP), is the primary insurer when it comes to floods, handling both the determination of what makes up a flood zone and the insurance claims. Flood zones, for instance, can influence what degree of insurance a lender might require if borrowing for a property.
But beginning last fall, the NFIP began a complete overhaul to make insurance pricing more accurately reflect each property’s unique flood risk, it says. And, finally, climate change will be factored in.
“No question that this is the most substantive change to the program going back to 1968,” David Maurstad, deputy associate administrator for federal insurance and mitigation and senior executive of the flood insurance program, said at the time .
Whether the changes and fresh eyes come about fast enough if still open to debate, said Aon’s Bowen.
“There’s a big challenge with flooding. We see changes in land use and altering the terrain on a daily basis… Texas, Florida, the Southeast (U.S.)… the government will really need to be updating these [flood-zone] maps more frequently. We see critical higher risk today than even five years ago,” Bowen said.
Asked if there will be a market for private insurance to pick up where government insurance leaves off, especially when it comes to flood protection, Bowen added: “If private insurance sees that premiums are fairly priced for properties that are highest risk, we could see growing appetite for private to take a bigger role in the market.”
“That would require a fundamental change to flood insurance, but I think some [across the business community] would welcome that.”
Shrinking world, growing risks
Rising physical damage loss is leading to lingering global disruptions to supply chains , Aon said, particularly as in-demand consumerism and one-day delivery has goods and services shuttling around the globe and over U.S. roads faster than ever.
Even without the added risk of climate change, strained supply chains and the ripple effect of higher inflation are already showing what can happen in the face of a global pandemic that clamps down on trade flow.
“When your physical locations [such as a manufacturing plant or a logistics center] are damaged from greater weather events, business suffers from that interconnectedness and that can lead to longer waits or higher costs for the end-consumer,” said Bowen.
He explained that demand for the already existing “business interruption” policies — for instance the type of claims that kicked in when the Texas ice storm power outage shut down busy parts of that state — are likely to jump in demand as climate change persists.