The Future of Insurance in a Warming World
INSIGHTS FROM SWISS RE CEO TRENT THOMSON
Insurance companies must deal with the financial realities of climate change. They must make quantitative decisions and translate risks into dollars. They must do it for today’s impacts as well as predicted future impacts. And behind the insurance companies are the reinsurance companies who act as shock absorbers to the industry on a global scale. Who better to go to for insights on how climate change translates into dollars?
MEETING TRENT THOMSON
I met with Trent Thomson, CEO of the Australian and New Zealand arm of the second largest reinsurer in the world, Swiss Re to discuss the climate risk changes they have observed over the last 30 years, the contributing factors to overall costs, and how they see the future unfolding from an insurance perspective. Trent was amiable, honest and forthright. He offered a fascinating and different point of view to compliment the scientists I talk to. Listen to our conversation here, or wherever you get your podcasts, and see what you think!
CHECK OUT THE PODCAST TRANSCRIPT →
COST TRAJECTORY
I used to start my climate discussions with the science, viz:- “every additional degree of warming increases the water-holding capacity of the atmosphere by 7% as WELL as adding energy, no wonder those storms are getting worse!” – but a few years ago I discovered audiences payed far more attention when I talked dollars, so that’s where I start now. Hence my interest in having this conversation with Trent. And two of the data points Trent mentioned, a 450% increase in event frequency for ‘secondary perils’ ('primary perils' refer mainly to earthquakes and tropical cyclones and 'secondary perils' refer to hail, flood, storm or wildfire) and a 1,500% increase in event severity in terms of financial cost, tell us that insurance surely offers a powerful lens to look at future climate impacts to go with all those carbon concentrations and temperature readings! More details on those data points can be found in The State of the Reinsurance Property Catastrophe Market. Take a look at Figure 1 in particular, for a striking visual of increases in insured natural catastrophe losses between 1970 to 2022. A wealth of further research can also be accessed at Swiss Re Institute
POPULATION MIGRATION AND EVENT COSTS
Funny how we tend to think of populations as static when considering the future frequency of floods, fires and storms, but of course they’re not static at all. Trent educated me on the significant role played by population migration in the overall cost/risk calculus. With so many people migrating to places like Florida in the United States, or Queensland in Australia, the property under threat in those geographies grows proportionally, and the entire financial calculus of the insurance industry is shifting accordingly. Quoting from the aforementioned report (italics are mine):
“We see two diametrically opposed influences where people and property values move into harm's way. Globally, but most notably in the developing world, we see more and more people moving from rural areas to concentrated urban areas. This is illustrated by the development of 33 mega-cities across the globe … most megacities develop around a historical core of cities close to waterways, coastal or riverine – ingredients towards wind, storm surge and river flood exposure. Conversely, in the developed world, we see more and more people living in the urban-bush interface and coastal areas, such as in Australia and the U.S., areas that are more vulnerable to dangers from wildfires and severe flooding.”
COVERAGE GAPS
Few people will talk about this, but it’s a simple fact that as event frequency and severity increase, more and more properties must inevitably become uninsurable. Many Floridans, already paying several times the US national average in property premiums, are discovering this the hard way: they try to renew their annual home insurance policy only to have their insurer politely decline, and when they go elsewhere they find the competition isn’t much interested either. Highly distressing, and many cohorts will follow in high-impact geographies around the world as insuring their properties becomes uncommercial. After all, when storm surges used to flood houses in a particular location once in a hundred years, and now flood them one in five, insurers have two options: demand annual premiums no one can afford (eg $100k) or walk away. Anything else is a guaranteed loss. And looking to the government for coverage isn’t going to cut it for long, not when weather severity is on a one way journey and your fellow citizens can do the math on where their taxes are going. It’s ugly and it’s distressing, no question, but no matter what we believe or what we wish for or how much we protest the outcome, the physics will not change. Coverage gaps must grow.
RISK TRANSPARENCY TO CHANGE BEHAVIORS
A big takeaway from our conversation was the future role that reinsurance can play in publishing the quantified risk of climate events right down to the individual residential address. Trent is keen for this to happen and I can only see it as a triple win for home-buyers, investors and for governments. Public transparency must nudge all three to make better decisions, both through self-interest (I don’t want to build in a high-risk location) and through public scrutiny/pressure (I want more realistic zoning in my city). So, yes please, let’s do this, and the sooner the better!
THE FUTURE OF INSURANCE SERVICES
Trent discussed the growing roles of insurers in fostering resilience through education and collaboration (eg on building codes, zoning and so forth) and also at a higher level by supporting the rollout of emerging technologies that build resilience.
I also see an almost endless list of service opportunities relating to ‘pre-event’ loss mitigation and prevention, which I love presenting on and brainstorming with insurance industry audiences. The satellite scanning for tree branches that I mentioned is one example I have fun with. There are hundreds. My biggest message on the future of insurance is that the shift to pre-event services, and the attendent customer/providor win-wins, increased relationship capital, and lucrative new data streams (wherever there are data streams there are new insights and new services to offer) is a VAST opportunity! It’s a great subject, and an opportunity space where expect a LOT of creative innovation in the next 10 years.
MORE INSIGHTS TO COME
No one likes higher premiums, making this a sensitive topic in the wider community, and it would have been easy for Trent to decline my meeting on this basis. Instead, he generously answered my questions and shared his thoughts on each subject I raised. In a sense, we are both in the same line of work, for reinsurers have a clear commercial imperative to predict the future as accurately as they possibly can. Our conversation stopped at climate change and property, but we could have gone on to discuss shifting risks in healthcare, artificial intelligence and so much more. Trent and his colleagues are connecting me to specialists to help me access more of their data, and I’m looking forward to sharing these insights via the podcast and in my keynotes, as we try to identify more pathways to a better future!