“Basically, if there is more damage, someone has to pay the price,” said Ernst Rauch, a climate expert at Munich Re, a major reinsurance company. It is the insurance companies, the State or the person who suffered the damage who must pay the bill.
The logic behind insurance is that many people buy it, but only a few suffer losses and receive compensation. However, if an increasing number of people are affected by losses, insurance companies will pass on the risk and increase premiums for policyholders.
As some previous extreme events proved too costly to cover, insurance companies in turn transferred part of their risks to so-called reinsurers. Munich Re is one of these companies. She has been studying the effects of climate change as it relates to her own business for around 50 years.
A shrinking field of insurance companies
What happens when climate change creates risks so great that insurers no longer want to insure certain parts of the world or have to raise premiums so much that no one is willing to pay them?
One such example is State Farm. The big insurance company stopped selling insurance policies in Californiaciting the increasing risk of catastrophes, high construction costs and a difficult reinsurance market.
In California, insurance companies have had to cover between $1 billion and $3 billion (€935 million to €2.8 billion) in damages per year in recent decades, Rauch told DW. However, these days, annual insurance claims have soared to more than $10 billion, he added.
Global damage totaling around a hundred billion dollars
Other parts of the world have also been hit by increasingly extreme weather events that cause severe destruction, and Germany is no exception. It experiences floods, storms, droughts and fires. The German Weather Service warns that such extreme events will become more and more frequent, causing even greater destruction and affecting more and more people.
“The amount of insured losses resulting from natural disasters now amounts to around $100 billion worldwide each year,” Rauch told DW. “Eighty to 90% of this damage is weather-related.”
Damage can be minimized
The increased damage is only partly the result of more frequent extreme weather events, says Rauch, explaining that socio-economic factors play a larger role. The value of buildings and infrastructure increases, the population increases, and construction continues to take place in particularly vulnerable areas such as coastal regions or near rivers.
The actual amount of damage caused is much higher, however, because not everything is covered by insurance. In fact, only half of all natural disasters worldwide are covered, says Rauch. Even in Germany, for example, only about half of all buildings are insured against flooding, he points out.
Extreme weather events in Germany, such as the exceptionally hot and dry summers of recent years and the devastating floods of 2021, have caused more than 80 billion euros in damage, according to the German Environment Ministry. This figure includes damage to buildings and infrastructure, crop losses and damaged forests, as well as indirect losses, for example due to reduced labor productivity.
Premiums must match risk
Does Rauch think Germany could one day find itself in a situation similar to California, where insurers like State Farm have stopped issuing insurance policies? He explains that U.S. regulators, called insurance commissioners, do not allow insurers to increase their premiums to reflect growing risks. This, he says, is why State Farm pulled out of California.
In the long term, however, Rauch believes that some regions may find it impossible to obtain insurance coverage, even in parts of the world where insurers can charge whatever they want. He doesn’t think this can happen in the next five to 10 years, except for some smaller regions.
The overall economic costs caused by climate change will increase significantly in Germany in the coming years, the German government has found. Depending on how quickly the planet warms, this could cause damage of between €280 billion and €900 billion by 2050. This estimate excludes the impact of deaths, reduced quality of life, extinction of animal and plant species and damage to water. Power system.
Damage prevention is ever more important
When it comes to controlling costs, damage prevention plays a key role alongside efforts to limit climate change. According to Rauch, these are the most important measures that can be taken in regions where climate risks become so high that insurance companies can no longer offer affordable insurance policies. Possible examples in the public domain include the construction of sea walls; Individuals can secure their fuel oil tanks, tile their basements and ensure that no valuables are stored there.
Flood protection measures have improved significantly in Germany after significant flooding along the country’s main rivers in 2002 and 2013, says Rauch, adding that similar measures need to be implemented along the world’s coasts entire.
The German Insurance Association (GDV) also called for action: “The top priority should be climate-friendly planning, construction and renovation.” No new construction should take place in flood-prone areas, the association says, and natural surfaces must be restored.
No time to waste
The industry group believes rapid action is necessary. “If we do not systematically take preventive measures and adapt to the climate, our estimates show that home insurance premiums in Germany will double over the next 10 years due to climate damage alone,” said Jörg Asmussen, CEO of the German insurance company. Association, warned more than a year ago.
Europe as a whole is also too slow on prevention, the European Environment Agency (EEA) concluded in its first European assessment of climate risks. EEA Executive Director Leena Ylä-Mononen called on responsible European and national political authorities to act now, saying the only way to minimize climate risks is to rapidly reduce emissions, adopt climate change strategies and ambitious adjustment and take the necessary measures.
This article has been translated from German.