Nov. 11 (Reuters) – Tony and Jhan Dunn never thought they would leave California, where they grew up, built a life together and planned to retire.
But after a wildfire swept through their northern California town of Paradise three years ago, burning down their home, they couldn’t get insurance to buy another.
âWe were basically billed out of California,â Dunn, a retirement planning specialist, told Reuters from the couple’s new home in North Carolina.
There are thousands of owners and businesses from California to Australia in a similar position because the insurance industry, known for its willingness to cover everything from Bruce Springsteen’s vocal cords to alien abductions, struggles to take climate change into account.
The proven approach, where decades of historical data is used to estimate future claims, fails when weather conditions change and hurricanes, floods, heat waves or snowstorms become more extreme and unpredictable, experts say. Of the industry. And the British hosts of the United Nations climate conference in Glasgow acknowledged on Wednesday that current commitments to reduce greenhouse gases were not enough to avert a climate catastrophe.
Insurance broker Aon (AON.N) said in a report last week that “very abnormal” flooding in Germany and China this year has caused record insured losses in those areas.
âInsurers are pulling out because nobody wants to lose money,â says Attila Toth, managing director of specialist risk analysis firm Zesty.ai. “And if they don’t trust their traditional models, they fear losing money.”
Zesty.ai, whose clients include Farmers Insurance, reinsurer Berkshire Hathaway (BRKa.N) and Aon, uses artificial intelligence trained on more than 1,400 wildfires to produce climate change risk scores for any individual property .
Similarly, reinsurance broker Willis Re is using data from artificial intelligence firm Cloud to Street to help clients price flood reinsurance.
Insurance statistics show an urgent need for such innovation.
For example, the average number of large forest fires in the United States has increased by 30% over the past 15 years and by nearly a fifth over the past five, according to insurer Chaucer of Lloyd’s of London (SOLYD .UL).
In all, insured losses for so-called “secondary” perils such as floods and forest fires – rather than more narrowly modeled perils such as hurricanes – has nearly doubled in the past decade, according to data compiled by Swiss Re (SRENH.S ).
The reinsurer does not expect any slack, forecasting a 30-63% increase in insured losses for all types of natural catastrophes in advanced markets by 2040. China, Britain, France and the Germany could even see them climb between 90 and 120%.
Given the momentum, it’s no surprise that traditional models can’t keep up, Bruce Carnegie-Brown, chairman of Lloyd’s London insurance market, told Reuters.
“If you’ve hit an exponential part of the curve where suddenly something is picking up speed, we’re almost certainly underestimating the risk we’re taking.”
FEEL THE HEAT
Policyholders are already feeling the heat, with coverage becoming more expensive or more difficult to obtain.
Broker Marsh (MMC.N) estimates that US property insurance rates rose 10% in the third quarter.
In California, home insurance policy non-renewals increased 31% from a year earlier in 2019 to more than 235,000, according to the most recent data from the state’s Department of Insurance. The data for 2020 could be similar, according to Carmen Balber, executive director of Consumer Watchdog LA.
Across the northern border, the Insurance Bureau of Canada has warned on its website that homeowners may not be able to purchase a new insurance policy if they have suffered a fire.
Among those who opt out of home insurance in California, there are household names such as Liberty Mutual, Nationwide, and State Farm. Liberty Mutual said it was a “difficult but necessary step to reduce overall exposure to wildfires,” a sentiment shared by other insurers.
Some insurers aim to reduce their exposure by helping clients become more resilient. Commercial insurer AXA (AXAF.PA), for example, offers an advisory service to clients such as manufacturers, identifying their vulnerabilities and suggesting remedies, such as erecting flood barriers, told Reuters its risk manager, Renaud Guidee.
“It really is an alignment of interests.”
US insurer Chubb is also working with its clients to help them make their infrastructure stronger, said Paul J Krump, vice president, Chubb Group, Global Underwriting and Claims.
Reinsurers, with their global reach and long history of underwriting disaster risk, also have a role to play in helping the industry adapt to climate change, analysts say.
Ernst Rauch, climatologist and chief geoscientist at Munich Re (MUVGn.DE), said the group had the expertise and willingness to take the climate risk.
The 141-year-old company set up a team to work on natural disasters and climate change in the 1970s after noticing loss patterns began to change for weather events, Rauch said.
âWe have seen a continuation of years with significantly higher losses compared to the last 35 years or so. And that is reflected in our models,â he said.
Yet there was a gap between what the reinsurer saw as a fair premium and what insurers were willing to pay.
âWe can only transfer this risk to our balance sheet if we get the premium we need to cover those risks, based on our own assessment,â Rauch said.
Rating agency S&P Global has warned that even reinsurers could underestimate their exposure to climate risk by up to 50%, describing their efforts to account for climate change as “nascent” in a recent report.
Industry experts also claim that disasters such as hurricanes in Florida, which have long caused severe damage, are more closely modeled than floods or wildfires, which only started causing significant losses. these last years.
This calls on reinsurers and independent risk modeling companies such as RMS and KCC to try new ways of approaching natural disasters.
One such approach is scenario modeling, where insurers receive a number of possible climate impacts on their portfolios over the years, in order to take into account “all of the uncertainty,” Laurent said. Marescot, Senior Director, EMEA and CIS, at RMS, which sells its risk models to insurers.
Another involves machine learning, which can be used to take existing patterns of flooding in a particular region, for example, and map them in other parts of the world, Marescot said.
But any development to make insurance more available and affordable will come too late for the Dunns.
âIt was sad because we’ve both spent our entire lives in California, we both grew up in San Diego,â said Tony Dunn. “I never intended to leave California.”
Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London Editing by Tomasz Janowski and Elaine Hardcastle
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