Are frequent floods, hurricanes driving up the price of insurance?

DW (English)

The insurance industry is worth $6 trillion, more than Japan’s GDP. Can it keep up with the damage caused by climate change and do insurers really carry the burden of the risk?

Transcript

00:00Hurricane Otis, 2023, Mexico.

00:05Flash floods, banned, 2021, Germany.

00:10Hurricane Katrina, 2005, USA.

00:15More frequent and way more intense natural disasters or catastrophes like hurricanes, floods, heat waves and droughts

00:24are happening more often, becoming more dangerous and they're growing in cost.

00:30In this episode of Transforming Business, we dig deeper into the insurance industry.

00:35We ask, is it keeping up with the increasing destruction being caused by extreme weather?

00:47Devastating. That's how people described Hurricane Otis in Mexico.

00:52And especially so for the province of Guerrero, where the city of Acapulco sits.

00:58When it started to get stronger and stronger, so much that you could hear it from the room.

01:04I didn't want to go out because it was very strong.

01:07I could only hear things falling, sticks and everything. I could only hear it.

01:14Rocio is a homeowner here. The morning after the hurricane in October 2023, she was unable to enter different parts of her house.

01:24She did not have homeowners insurance. Instead, she had to rely on savings and help from the government to rebuild what she had lost.

01:32It's very expensive to be able to be insured against disasters or things like that.

01:37We don't have enough to be insured or to have something secured if any disaster comes.

01:47Rocio is one of the majority of people living in Acapulco who choose not to have insurance.

01:54Only around six percent, six of a hundred houses have insurance.

02:01This is one of the big challenges when it comes to insurance in Mexico.

02:06And unfortunately, Guerrero is no exception.

02:12We'll get back to why people are not insured later in this video.

02:16But it's not just homeowners. Acapulco is a tourist destination.

02:21A year before the hurricane hit, the region reeled with almost nine million tourists,

02:25filling around half of the hotels during peak season.

02:28Hurricane Otis damaged 80 percent of the hotels.

02:32Here's how David Zuniga, the owner of Hotel Turquesa, remembers it.

02:38What can I say? Tears were running down my face when I saw my company and all my savings.

02:43What worried me was where to get money to recover and be able to start and buy televisions and supplies.

02:49We're talking about 500,000 pesos.

02:57David's midsize hotel is currently being rebuilt.

03:00This property was not insured, but he managed to get some coverage through his bank.

03:05Cost was a big factor why he decided against insurance.

03:09But why can it be so expensive?

03:13The global insurance industry is worth US$6 trillion, more than Japan's GDP,

03:20and is one of the biggest industries in the world.

03:26What it essentially does is take risks on your behalf.

03:29You pay an insurance company monthly premium that is calculated

03:33based on the potential risk of a disaster like a fire or flood.

03:37The higher the risk, the higher the premium.

03:39And in such cases, they cover the damage you incurred.

03:44Obviously, it's not as simple as that.

03:46And we'll talk about the problems of the industry later in the video.

03:50So, how is risk analyzed?

03:52Well, we can do it ourselves to some extent.

03:55If you're a young family looking to invest, if you choose a property in a city,

03:59your insurance against natural disasters would maybe be 100 euros a year.

04:05But if you find a house closer to the coast or the sea,

04:09then your insurance would be higher, maybe 500 euros.

04:12This is because the coastal area is more prone to flooding.

04:17Am I living in a flood-prone area?

04:20Today, and with climate change advancing over the next years and decades,

04:25if you think about a property, a home, then you need to have a long-term view.

04:31How is my property exposed to flooding in 20, 30, 40, 50 years time from now?

04:37Ernst Rauch, chief climate scientist at Munich Re,

04:40the largest reinsurance company in the world, explained it like this.

04:45Having this knowledge, this transparency about the situation

04:50and about the options I have to react properly, to improve my resilience.

04:57For a long time, insurers and scientists looked at historical data.

05:01They checked activity in different parts of the country, for example,

05:04and attached a risk level based on how vulnerable it was in the past.

05:08The focus at those days was hurricanes and earthquakes.

05:12Nobel Prize honoree Karen Clark pioneered the risk assessment model in the 80s.

05:17But she questions whether it's an adequate way of looking at it today.

05:22The challenges today are not just hurricanes and earthquakes.

05:26It's severe convective storms, floods, wildfires, winter storms.

05:32So there are many other perils.

05:34And the problem is the methodology used by the first generation of models

05:40to assess hurricanes and earthquakes is not well-suited to what we call the frequency peril.

05:46Insurers and risk modelers learn from events all over the world.

05:50A major hurricane in the U.S. or windstorms in Europe help modeling systems

05:54analyze the loss and use the learnings to calculate the cost of future disasters.

05:59So risk modeling systems also help set the price of premiums.

06:03We have a catalog of hundreds of thousands of potential future events,

06:09of all types of events, you know, severe convective storms, hurricanes,

06:14earthquakes, just throw them in even though they're not weather-related.

06:17And then our clients use that catalog to price the risk.

06:24But there are holes in data that these systems use, and that can be a problem.

06:28And we've come a long way in some regions in improving the quality of that data.

06:34But in some areas, we still have challenges in terms of having very good information.

06:41That would be used by the models to assess the risk.

06:45Places that were once deemed safe to build are no longer as secure.

06:50Welcome to Ahr Valley in Western Germany, a region filled with vineyards and tourism,

06:56a region that was ravaged in 2021 by flash floods caused by the low-pressure weather system banned.

07:03Over 150 people lost their lives. Many saw their homes destroyed.

07:08Infrastructure they used every day like bridges torn away.

07:14In total, according to the expert opinion, we have just under 190,000 euros in damage to the house.

07:21It was flooded up to 10 centimeters below the ceiling of the first floor,

07:25so that everything on the first floor and in the basement was affected by the water,

07:29contaminated by the mud, and was no longer usable.

07:35Ahrtal was not designated as a high-risk area,

07:39and so Harald didn't get the natural hazards insurance.

07:44Considering the flood, I was expecting a horrendous premium.

07:49And I'm now paying just under 900 euros a year for the whole house insurance, including natural hazards cover.

07:58Climate change, caused mainly by humans burning fossil fuels, is having a big impact.

08:04According to a World Weather Attribution Study, which investigates the impact of global warming on the weather,

08:10the heavy rain that led to the floods in Ahrtal were more likely to happen and be heavier due to climate change.

08:16In Germany, having insurance is a key part of life and a big chunk of monthly wages.

08:21Despite this, only 52% of the country's homes are covered by natural hazards insurance,

08:27which covers damages caused by floods, rain, earthquakes, and more.

08:32When we moved here, or rather when we bought the house, I thought about water damage

08:38and asked around in the neighborhood what the situation was like, what happened here in the past.

08:44And everyone always said no, no one can ever remember anything like that.

08:50Yes, but I've come to the conclusion that I made a mistake by not buying natural hazards insurance.

09:01Increasing risk as a result of climate change is driving up insurance premiums.

09:06But let's go back to Mexico.

09:08There are many reasons why people don't buy insurance.

09:12Affordability is the main one.

09:15This leads to a protection gap, in which many people are uninsured

09:19and hence are unable to get payouts for their loss when a catastrophe hits.

09:23They face enormous financial pressure when rebuilding.

09:26This gap is also highlighted in the difference between total damage of a disaster and the insured losses.

09:33Even in years when the damage from catastrophes was huge, the insured losses were only a fraction.

09:40Remember Rocio?

09:41The Mexican government helped with some money and her family chipped in too.

09:45But she and others like her would have benefited from insurance.

09:49Companies say education is key.

09:54We work with different programs to reach the youngest population,

09:57including educational campaigns for elementary and high schools.

10:02And we also have a whole campaign of identification and raising awareness

10:06to the risks to which we're exposed in the adult population.

10:13Then there are places labeled uninsurable.

10:17It's a very complicated situation, obviously.

10:21And nobody likes the fact that the risk is going up, but there is a cost to that.

10:27And so it's just a question of how we're going to pay for it.

10:31A UK initiative called Flood Re is trying to bridge this problem.

10:35That provides reinsurance to insurers that cover homes against flood risk

10:40to make sure that these insurers can continue to offer that insurance to homeowners

10:46at an affordable premium level.

10:49This is Franziska Arnold-Weir.

10:51She's a lawyer and an academic in the insurance industry living in the UK.

10:55How it works is that when you're buying home insurance,

11:00a flood cupboard is automatically bundled in into that insurance policy

11:05as one of the risks, which ensures that whether you're a homeowner

11:10that is exposed to flood risk or not, we are all buying it.

11:15In other words, every insurer that offers the typical homeowners insurance in the UK

11:20pays into the Flood Re pool.

11:22Each year, the pool accumulates money,

11:24which is then used to cover flood-related damages for the insured.

11:28Instead of the insurance companies paying for the damage, the Flood Re pool is used.

11:32And whether you're at risk or not, you're protected.

11:35Another initiative in Fiji, which is high risk for cyclones,

11:38brings communities, the state and insurers together.

11:41The UN sponsored an insurance program there,

11:45which actually makes anticipatory payouts.

11:50So where the insurance doesn't wait for the loss to happen,

11:54but a payout is triggered when a cyclone is imminent.

11:59And then people in the affected communities,

12:02they get vouchers for specific local stores,

12:06which they can redeem against the food supplies

12:09and also the hardware stuff to secure their properties.

12:14Experts say initiatives like these can help in high risk areas all over the world

12:19with close coordination between the insurance industry,

12:22scientists, risk modelers and financiers like the government

12:25can help protect the vulnerable.

12:28But let's come back to the original question.

12:31Is the insurance industry keeping up with the destruction caused by extreme weather?

12:35Well, it is an industry worth trillions of dollars where companies gamble with risks.

12:41And it's worth mentioning that the same industry is also contributing to the problem

12:45by investing billions in fossil fuels.

12:48As the global population becomes increasingly vulnerable to climate events,

12:52the cost of insurance is also rising.

12:55Ultimately, it's up to the industry to change itself,

12:58to put in place systems that allow affordable insurance

13:01and to back a green transition that will slow the probability of such catastrophes.

13:18Transcription by ESO, translation by —

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