Will climate change make insurance too expensive?

"Basically, if there is more damage, someone has to pay for it," said Ernst Rauch, a climate expert with Munich Re, a major reinsurance company in Germany . Either insurance companies, the state, or the person who suffered the damage must foot the bill.

The logic behind insurance is that many people sign up, but only a few suffer losses and receive compensation. If a growing number of people are hit by losses, however, insurance companies will pass on the risk and increase premiums for insurance holders. 

As some previous extreme events have proven too costly to cover, insurance companies have in turn passed on some of their risk to what are known as reinsurers. Munich Re is one of these companies. It has been studying the effects of climate change for around 50 years, looking at the consequences for their own business.

A shrinking field of insurance companies

What happens when climate change creates such great risks that insurers no longer want to insure certain parts of the world, or they have to raise premiums to such an extent that no one is willing to pay them?

One such example is State Farm. The major insurance company has stopped selling insurance policies in California, citing the growing risk of catastrophes, steep construction costs and a challenging reinsurance market in the US state.

Insurance companies had to cover between $1 to $3 billion (€935 million to €2.8 billion) in damages annually in California over the past decades, Rauch told DW. These days, however, annual insurance claims have jumped to well over $10 billion, he added.

Global damages totaling a hundred billion dollars

Other parts of the world have also been hit by increasingly extreme weather events that cause serious destruction, and Germany is no exception. It experiences floods, storms, droughts and fires. The German Meteorological Service has warned that such extreme events will grow more frequent, resulting in even greater destruction, affecting more and more people.

"The amount of insured damage resulting from natural disasters now annually totals around $100 billion worldwide, " Rauch told DW. "Eighty to 90% of these damages are weather-related."

Damage can be minimized

The increasing amount of damage is only partly the result of more frequent extreme weather events, Rauch said, explaining that socioeconomic factors play a greater role. The value of buildings and infrastructure is increasing, populations are growing and construction is still taking place in particularly vulnerable areas such as coastal regions or near rivers.

The actual amount of damage caused is much greater, however, as not everything is covered by insurance. In fact, only half of all the world's natural disasters are covered at all, said Rauch. Even in Germany, for example, only about half of all buildings are insured against flooding, he pointed out.

Extreme weather events in Germany, such as the exceptionally hot and dry summers of recent years and the devasting flood of 2021, have caused more than €80 billion in damage, according to Germany's Environment Ministry. This figure includes damage caused to buildings and infrastructure, harvest losses and damaged forestry, as well as indirect losses, for instance due to reduced labor productivity.

Premiums must match risk

Does Rauch believe Germany may one day find itself in a similar situation to California, where insurers like State Farm have stopped issuing policies? He said that US supervisory authorities, called insurance commissioners, do not allow insurers to increase premiums to reflect growing risks. This, he said, is the reason State Farm withdrew from California.

In the long term, however, Rauch believes certain regions may find it impossible to get insurance coverage even in those parts of the world where insurers can charge what they want. He doesn't think this could happen in the next five to 10 years, with the exception of some smaller regions.

The overall economic costs wrought by climate change will increase enormously in Germany in the coming years, the German government has found. Depending on how rapidly the planet heats up, this could cause damages in the range of €280 to €900 billion by 2050. This estimate excludes the impact of deaths, diminished quality of life, animal and plant species going extinct and damage to the water supply system.

Damage prevention ever more important

When it comes to controlling costs, damage prevention plays a key role alongside attempts to limit climate change. According to Rauch, these are the most important measures that can be taken in areas where the climate risks become so high that insurance companies can no longer offer affordable policies. Possible examples in the public realm include building levees; private individuals can secure their heating oil tanks, tile their basements and make sure no valuable possessions are stored there.

Flood protection measures improved greatly in Germany after significant flooding occurred along the country's major rivers in 2002 and 2013, Rauch said, adding that similar measures must be implemented along coastlines around the world.

The German Insurance Association has also called for action. "The top priority should be climate-adapted planning, construction and renovation," it has said. No new construction should take place in areas prone to flooding, according to the association, and natural surfaces must be restored.

No time to waste

The industry group believes fast action is required. "If we fail to systematically institute preventive measures and adapt to the climate, our estimates show that premiums for homeowners insurance will double in Germany within the next 10 years due to climate damage alone," Jörg Asmussen, the chief executive officer of the German Insurance Association, warned more than a year ago.

Europe as a whole is also too slow when it comes to prevention, the European Environment Agency concluded in its first European Climate Risk Assessment. EEA Executive Director Leena Ylä-Mononen has called on the responsible European and national political authorities to act now, saying the only way to minimize climate risks is by quickly reducing emissions, adopting ambitious adjustment strategies and undertaking the necessary related measures.

This article was originally written in German.