The battle over a $2.9 trillion climate risk

 

A repaired crack in the walls of a house in the village of Presles-en-Brie, outside Paris, on June 2. Photographer: Cyril Marcilhacy/Bloomberg

 By Claudia Cohen, Gautam Naik, and Tom Fevrier

 Today’s newsletter looks at how subsidence is become a worsening risk due to climate change. Unfortunately for homeowners, insurers don’t want to pick up the tab. 

 

When Bernard Weisse first noticed a tiny crack in the outer wall of his house on the outskirts of Paris, he dismissed it as little more than a nuisance. But in the four years since, a spiderweb of fissures has spread from floor to ceiling and snaked into virtually every corner of his home. 

“We can hear loud cracking noises especially when it’s warm outside,” said the retired salesman and father of three. “Sometimes, I think we should get all our stuff together and leave.” 

Like a growing number of people around the world, Weisse is grappling with subsidence — a term for the sinking land that’s causing damage to homes and other structures built on it. The slow-moving climate disaster has already caused tens of billions in damage and has the potential to affect 1.2 billion people in areas accounting for more than $8 trillion of economic output. 

While groundwater extraction, mining and earthquakes also cause the ground to shift, global warming vastly increases the risks. What happens is that soil swells with winter rain and then shrinks as it dries in the heat, cracking foundations in the process.

Because of its soil and its status as the world’s fastest-warming continent, Europe is particularly exposed. The European Central Bank estimates the region’s potential damage from sinking land at more than €2.5 trillion ($2.9 billion) across all euro-area financial institutions. Although most of that is classified as “low risk,” this summer is forecast to be one of the hottest and driest on the continent, creating perfect conditions for subsidence damage. 

For Weisse, the cost for repairs could climb to as much as €200,000 to keep his two-story home from crumbling. That would be part of the estimated €43 billion in damage that households face by 2050 in France alone, according to insurance trade group France Assureurs. With that much money at stake, it’s set off a battle over who will ultimately have to pay. 

Weisse’s town of Presles-en-Brie has teamed up with 14 nearby villages and sued the state to have their subsidence issues recognized as a natural catastrophe like flash floods and wildfires. That would trigger payments from insurers and the government, powerful opponents for the municipalities.

“It’s David against Goliath,” said Dominique Rodriguez, who’s been mayor of the pastoral community of 2,300 people for more than three decades.

 

So far, the big guys are winning. In Presles-en-Brie, at least 40 homeowners have sought subsidence compensation since 2020, and while two houses were granted CatNat recognition, others were rejected.  

Europe is the epicenter because of its clay-rich soil and relatively high population density. Also, buildings from the 1970s and 80s — when a postwar housing construction boom was still underway — are particularly susceptible.

While Presles-en-Brie is an early victim, the issues are global. Jakarta has sunk more than 2.5 meters (8 feet) in a decade, and Tehran drops as much as 22 centimeters a year. In the US, Houston is most affected, with 40% of the city subsiding more than half a centimeter a year. 

More than 425,000 Dutch houses will be exposed over the next decade, with subsidence already lowering house prices by as much as 5%, according to a recent study by the Tinbergen Institute. Repair costs can exceed €100,000 per home and are rarely covered by insurance. 

“The situation is urgent,” said Karsten Klein, director of advocacy at Vereniging Eigen Huis, a Dutch homeowners association. “Waiting until homes become uninhabitable is not an option.” 

 

Climate crisis on track to destroy capitalism, warns top insurer. Action urgently needed to save the conditions under which markets – and civilisation itself – can operate, says senior Allianz figure

Some companies were ending home insurance in California due to wildfires, says Allianz SE board member. He says that without insurance, many other financial services become unviable, from mortgages to investments. Photograph: Mario Tama/Getty Images

The climate crisis is on track to destroy capitalism, a top insurer has warned, with the vast cost of extreme weather impacts leaving the financial sector unable to operate.

The world is fast approaching temperature levels where insurers will no longer be able to offer cover for many climate risks, said Günther Thallinger, on the board of Allianz SE, one of the world’s biggest insurance companies. He said that without insurance, which is already being pulled in some places, many other financial services become unviable, from mortgages to investments.

Global carbon emissions are still rising and current policies will result in a rise in global temperature between 2.2C and 3.4C above pre-industrial levels. The damage at 3C will be so great that governments will be unable to provide financial bailouts and it will be impossible to adapt to many climate impacts, said Thallinger, who is also the chair of the German company’s investment board and was previously CEO of Allianz Investment Management.

 

The core business of the insurance industry is risk management and it has long taken the dangers of global heating very seriously. In recent reports, Aviva said extreme weather damages for the decade to 2023 hit $2tn, while GallagherRE said the figure was $400bn in 2024. Zurich said it was “essential” to hit net zero by 2050.

Thallinger said: “The good news is we already have the technologies to switch from fossil combustion to zero-emission energy. The only thing missing is speed and scale. This is about saving the conditions under which markets, finance, and civilisation itself can continue to operate.”

Nick Robins, the chair of the Just Transition Finance Lab at the London School of Economics, said: “This devastating analysis from a global insurance leader sets out not just the financial but also the civilisational threat posed by climate change. It needs to be the basis for renewed action, particularly in the countries of the global south.”

 

“The insurance sector is a canary in the coalmine when it comes to climate impacts,” said Janos Pasztor, former UN assistant secretary-general for climate change.

The argument set out by Thallinger in a LinkedIn post begins with the increasingly severe damage being caused by the climate crisis: “Heat and water destroy capital. Flooded homes lose value. Overheated cities become uninhabitable. Entire asset classes are degrading in real time.”

“We are fast approaching temperature levels – 1.5C, 2C, 3C – where insurers will no longer be able to offer coverage for many of these risks,” he said. “The math breaks down: the premiums required exceed what people or companies can pay. This is already happening. Entire regions are becoming uninsurable.” He cited companies ending home insurance in California due to wildfires.

Thallinger said it was a systemic risk “threatening the very foundation of the financial sector”, because a lack of insurance means other financial services become unavailable: “This is a climate-induced credit crunch.”

“This applies not only to housing, but to infrastructure, transportation, agriculture, and industry,” he said. “The economic value of entire regions – coastal, arid, wildfire-prone – will begin to vanish from financial ledgers. Markets will reprice, rapidly and brutally. This is what a climate-driven market failure looks like.”

 

No governments will realistically be able to cover the damage when multiple high-cost events happen in rapid succession, as climate models predict, Thallinger said. Australia’s disaster recovery spending has already increased sevenfold between 2017 and 2023, he noted.

The idea that billions of people can just adapt to worsening climate impacts is a “false comfort”, he said: “There is no way to ‘adapt’ to temperatures beyond human tolerance … Whole cities built on flood plains cannot simply pick up and move uphill.”

At 3C of global heating, climate damage cannot be insured against, covered by governments, or adapted to, Thallinger said: “That means no more mortgages, no new real estate development, no long-term investment, no financial stability. The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable.”

The only solution was to cut fossil fuel burning, or capture the emissions, he said, with everything else being a delay or distraction. He said capitalism must solve the crisis, starting with putting its sustainability goals on the same level as financial goals.

Many financial institutions have moved away from climate action after the election of the US president, Donald Trump, who has called such action a “green scam”. Thallinger said in February: “The cost of inaction is higher than the cost of transformation and adaptation. If we succeed in our transition, we will enjoy a more efficient, competitive economy [and] a higher quality of life.”

 

California’s High-Risk Insurer Gets $1 Billion Bailout After L.A. Fires

 

Destruction left behind by the Eaton fire in Altadena, Calif., last month.Credit...Philip Cheung for The New York Times

 

 By Christopher Flavelle

Christopher Flavelle has been covering the effects of climate change on California’s insurance market for almost a decade.

 

 The move will likely lead to higher costs for households across the state, and may push more insurers to leave, intensifying a home insurance crisis.

 

California’s home insurance plan of last resort, designed for people who can’t get coverage on the private market, does not have enough money to pay claims from the Los Angeles wildfires and is getting an infusion of cash from regular insurers.

State regulators said Tuesday that they will allow the program, known as the FAIR Plan, to collect $1 billion from private insurance companies doing business in California to pay its claims. That is likely to drive up insurance costs for homeowners across the state.

The situation marks a perilous new stage for California’s home insurance market, which had already been reeling from wildfires made more frequent and intense by climate change. Facing growing losses, major insurers like State Farm were already pulling back from the state, making it harder for homeowners to find coverage.

Now the pressure to leave will be even greater.

The $1 billion assessment is the largest since the FAIR Plan was created in 1968, and the first time since the 1994 Northridge earthquake near Los Angeles that the FAIR Plan has faced claims it can’t pay on its own. The fee will be divided among insurers based on their market share, as required by state law.

“The number one priority right now is that the FAIR Plan pay out its claims,” Ricardo Lara, California’s insurance commissioner, said in an interview. “The FAIR Plan, the way we’ve set it up, is doing what it’s supposed to.”

As of 2023, the state’s largest insurers by market share were State Farm, Farmers Insurance Group and CSAA Insurance, according to data from AM Best, a company that rates the financial strength of insurers. Other major insurers in the top 10 included Liberty Mutual, Allstate and Travelers.

State regulations allow insurers to pass along as much as half the cost of the assessment to customers, in the form of higher charges. Insurers must absorb the other half.

“They’re supposed to eat that through their profits,” Mr. Lara said. “Consumers cannot shoulder 100 percent of this cost.”

Those companies could face bills from the FAIR Plan assessment in the tens of millions of dollars or more — and by state law, they must pay within 30 days. Leaving California would not relieve insurers of their share of the assessment for the FAIR Plan. But they might conclude that continuing to write home insurance policies in the state has become too risky.

The problems facing insurers in California did not start with last month’s wildfires in Los Angeles. Fires in 2017 and 2018 wiped out a quarter-century of profits for insurers, leading many carriers to reduce the number of homeowners they covered. Making the problem worse was the fact that California regulators have historically made it difficult for insurers to raise their premiums.

Still, the Los Angeles fires made insurers’ financial position even more tenuous. Last week State Farm asked state regulators for an urgent 22 percent rate increase, which it said was necessary “to help avert a dire situation for our customers and the insurance market in the state of California.” Mr. Lara’s office said he is still reviewing the request.

As private insurers reduce their business in California, more homeowners are being pushed into the FAIR Plan, which was designed as a plan of last resort but is increasingly covering more and more homeowners. Between 2020 and 2024, the number of homes with policies under the FAIR Plan more than doubled to almost half a million properties with a value of about half a trillion dollars. Many of those homes were in the area devastated by the Palisades fire.

As of Feb. 4, the plan had received more than 3,400 claims from the Palisades fire, and more than 1,300 claims from the Eaton fire. About 45 percent of those claims were for “total losses” — homes that were completely destroyed.

As wildfires get worse, a vicious cycle is emerging: More insurers leave, pushing more homeowners toward the FAIR Plan, which is less able to cover claims after the next disaster, leading to more assessments on regular insurers, pushing them out of the state even faster.

Mr. Lara is trying to break that downward cycle. In December, he introduced changes that would allow insurers to charge higher premiums in exchange for covering more homes in high-risk areas. That would take pressure off the FAIR Plan and reduce the incentive for private insurers to leave the state, he said.

Mr. Lara said other changes are needed, including giving the FAIR Plan the ability to borrow money through bonds or a line of credit. That way, if future wildfires produce claims that the plan can’t cover, it wouldn’t necessarily need another assessment.

That proposal has support from the insurance industry. “The state must explore a diverse range of funding solutions,” Mark Sektnan, a vice president for the American Property Casualty Insurance Association, said in a statement. He also said that state regulators must allow the FAIR Plan to charge higher premiums.

But the change can’t come from the insurance sector alone, Mr. Lara said. Officials need to tighten the rules around how and where people construct homes and infrastructure, he said, so that communities suffer less damage from future fires.

“The responsibility now is on local governments to build better,” Mr. Lara said.

More Americans, Risking Ruin, Drop Their Home Insurance

 

By Christopher Flavelle and Mira Rojanasakul

 

Homeowners in places most exposed to climate disasters are increasingly giving up on paying their insurance premiums, leaving them exposed to financial ruin, according to sweeping new government data.

The numbers show how climate change is eroding the underpinnings of American life by making home insurance costlier and harder to hang on to, even as wildfires, hurricanes and other calamities increasingly threaten what is, for many people, their most valuable asset. 

 

“Homeowners’ insurance is where many Americans are now feeling the financial effect of climate change directly, in their pocketbook,” said Ethan Zindler, climate counselor at the Treasury Department. “Nature doesn’t really care whether people are living in a blue state or a red state or another state, or whether you do or don’t believe in climate change.”

The rising cancellation rates are part of a broader trend captured by the Treasury Department, which analyzed information for 246 million insurance policies issued by 330 insurers nationwide from 2018 through 2022. The result is the most comprehensive look yet at the effect of climate change on the American home insurance market.

Homeowners with mortgages are generally required by lenders to carry insurance. But people who own a house outright, perhaps because the property has been in a family for decades or generations, have the option of dropping insurance.

The cost and frequency of insurance claims are rising quickly in the highest-risk parts of the United States, as defined by the Federal Emergency Management Agency, according to the numbers. They show that the financial stress on insurers is also growing.

So, too, is the cost of insurance, which has risen far more in high-risk areas than elsewhere.

As those trends worsen, more people are getting thrown off their insurance plans. That happens two ways. One is through cancellations, when insurers drop homeowners who fail to pay their premiums. Another is through nonrenewals, in which insurers refuse to renew the policies of homeowners who want to keep paying for coverage.

The rates of both cancellations and nonrenewals are increasing, and those increases are most pronounced in high-risk areas. 

In more than 150 ZIP codes around the country, insurers canceled at least 10 percent of home insurance policies in 2022, the most recent year for which numbers are available, because homeowners failed to pay their premiums, according to the data. Cancellation rates were highest in coastal areas in the Carolinas, including Hilton Head, Charleston and Myrtle Beach, which are especially exposed to hurricanes. They were also high in parts of West Virginia, Arizona and California.

The data doesn’t capture why homeowners chose to stop paying. But Nellie Liang, the Treasury Department’s under secretary for domestic finance, said her team viewed it as an indicator of families facing growing financial stress worsened by climate change.

“Households are not able to bear the burden by themselves,” Ms. Liang said.

As for cases where insurance companies refused to renew policies even for their paying customers, those nonrenewal rates were also higher, and grew faster, in high-risk areas. The ZIP codes with the greatest share of nonrenewals in 2022 were in coastal South Carolina as well as parts of California, including in Sonoma County and Yuba County, which have been hit by wildfires. Areas of Tennessee that have suffered severe storms also saw high nonrenewals.

The destabilization of the home insurance market doesn’t hurt only homeowners, Ms. Liang said. It also threatens property-tax revenues that communities rely on, since tax receipts can decline if homeowners can’t rebuild or if homes lose value. It also hurts local businesses that rely on homeowners as customers.

“There’s a lot to worry about,” Ms. Liang said. 

 

A Climate Crisis for Insurance

As Insurers Around the U.S. Bleed Cash From Climate Shocks, Homeowners Lose

It’s not just California and Florida now: Insurers are losing money around the country. It means higher rates and, sometimes, cancellation notices.

By Christopher Flavelle and Mira Rojanasakul

May 13, 2024

Home Insurance Rates in America Are Wildly Distorted. Here’s Why.

Climate change is driving rates higher, but not always in areas with the greatest risk.

By Christopher Flavelle and Mira Rojanasakul

July 8, 2024

Insurers Are Deserting Homeowners as Climate Shocks Worsen

Without insurance, it’s impossible to get a mortgage; without a mortgage, most Americans can’t buy a home.

By Christopher Flavelle and Mira Rojanasakul

Dec. 18, 2024

 

 

The Treasury Department’s effort to gather data was complicated by the political clashes over climate change, and also over who gets to regulate insurance companies.

The department announced the effort in 2021 as part of the Biden administration’s efforts to address the financial effects of climate change. Its original plan was to gather data directly from insurance companies. But some state insurance commissioners (which regulate the industry) objected, backed by Republicans in Congress.

So the Treasury Department let state commissioners gather the data. Or not gather it: Seven states — Florida, Alabama, Louisiana, Georgia, Indiana, Montana and North Dakota — declined to participate. According to the Treasury Department, this meant that local insurance companies that happen to be headquartered in those states did not provide data. But national insurers still provided data for homeowners they cover in those states. (Another exception was Texas, where they did not provide some data.)

In addition, the states that did participate chose to withhold some important information, including data from their state-mandated high-risk-insurance plans. Those plans, which are designed to provide insurance to people who can’t buy it from regular insurance companies, are becoming more important as climate change worsens. Excluding those plans means the data doesn’t capture the experience of many homeowners facing the highest risk from climate threats.

And of the data that was collected, the National Association of Insurance Commissioners, which represents state commissioners and compiled data from them, shared only a portion with the Treasury Department.

The association did not immediately respond to a request for comment.

The Treasury Department, as part of its report, called on state commissioners and the national association to keep working with the agency’s Federal Insurance Office to gather and publish the data annually, and even expand that effort by including information for high-risk pools.

The chances of that happening are unclear. Last month, Republican state insurance commissioners wrote to Elon Musk and Vivek Ramaswamy, the leaders of what President-elect Donald J. Trump has called his new Department of Government Efficiency, urging them to scrap the Federal Insurance Office altogether.

They argued that the office’s work gathering data on climate change showed that the federal government was trying to exceed its authority and that, by moving ahead with releasing the new data, the office “has chosen to proceed with flawed information, which risks misleading the public.” The commissioners did not say why they viewed the information as flawed. 

 

Methodology

Seven state insurance departments did not participate in the Treasury Department data collection: Alabama, Florida, Georgia, Indiana, Louisiana, Montana, and North Dakota. In some cases, national insurers that provide coverage in those markets submitted data for those states. Texas insurer data provided by the National Association of Insurance Commissioners did not include nonpayment cancellations or nonrenewals.

Risk categories are based on the composite risk score from FEMA’s National Risk Index. Policy cancellation and nonrenewal rates represent an average within each risk category.

Italy plans mandatory insurance for climate risks

 

By Gautam Naik

Starting Jan. 1, every company in Italy must buy insurance to protect its assets from floods, landslides and other natural hazards that have become more common thanks to global warming. It’s the latest sign of Europe’s rising anxiety about climate change.

As the fastest-warming continent, its climate losses have increased by 2.9% a year from 2009 to 2023, according to the European Environment Agency. This year alone saw epic wildfires in Greece, a crippling drought in Sicily and costly floods in the UK, central Europe and Spain. And there’s still a month left.

The biggest danger in Italy is flooding. Companies affected by such events face a 7% higher probability of going bust, and those that survive typically suffer a 5% average decline in revenue within three years, according to a 2024 study published by the country’s central bank.

Most Italian businesses — especially small and mid-sized ones — have no protection at all. The new law will require companies to buy coverage and insurers to write policies or face fines. The plan is backed by a €5 billion ($5.3 billion) reinsurance fund, set up by a state-controlled financial institution.

But there are rumblings the plan’s rollout may be delayed. One concern is that one big catastrophe could overwhelm the new fund. Another is that insurers will abandon the country’s riskiest areas, as is happening in the US. 

Insurers in Italy have to accept all clients under the law, and that means there’s no limit to their loss exposure, said Petra Hielkema, chair of the European Insurance and Occupational Pensions Authority (EIOPA). As a result, the industry is “wondering: How much am I up for and how do I price this?”

Across Europe, the financial risk is captured in one number: 75%.

That’s the insurance-protection gap—the difference between insured and uninsured losses from climate-related catastrophes, according to EIOPA data compiled from 1980 through 2021. The gap in Italy for all natural catastrophes is roughly 80%, based on Swiss Re research for the past decade. In the US, where insurers have fled states like California and Florida, the gap is a less onerous 42%.

 

European insurers are feeling the pinch. For the first nine months of 2024, Italy’s Assicurazioni Generali SpA reported a “significant” €930 million hit from “adverse weather conditions” across the continent. Deadly floods in central and eastern Europe have generated some of the worst regional losses for insurers this year.

“It’s a critical concern for insurers and policymakers, and if no countermeasures are taken, the insurance-protection gap is expected to widen,” Hielkema said in an interview. Generali has said that new law “will serve to fill the protection gap not only for companies, but also for citizens.”

Read More: European Floods Threaten Insurers With Worst Losses in Decades

Unless weather patterns change, higher premiums will make insurance less affordable just when it’s needed most. A bigger gap threatens to increase “financial stability risks and reduce credit provisions” in countries with large exposures to catastrophe-risk events, according to a report by the European Central Bank and EIOPA. 

The two organizations are calling on insurers to expand programs such as “impact underwriting.” It means providing discounted premiums for people and companies that have taken steps to reduce risk, like flood-proofing a home or using a real-time weather warning system for crops.

“You can’t prevent the damage, but you can lower it,” Hielkema said.

The ECB and EIOPA also want a wider adoption of catastrophe bonds, instruments that allow insurers to pass on natural disaster risk to hedge funds and other private investors. While the US market for such bonds has grown strongly in the past two years, Europe is lagging behind.

“European perils still represent a relatively small portion of bonds currently outstanding,” the ECB and EIOPA wrote in their report. “Part of the reason for this lies in the high-transaction costs involved in executing a cat-bond transaction.”

Disaster insurance varies across the continent. In Spain, a state-managed group acts as a catastrophe insurer. In France, a state-backed program provides affordable coverage to all citizens. The UK has teamed up with private insurers to offer policies for flood risk. In Switzerland, most buildings are covered under a mandatory system.

Germany doesn’t offer state support. Even after ruinous floods caused about €11 billion of insured damage in 2021, “there’s still no prospect of such a scheme” in that country, Fitch Ratings said in a recent report. “This leaves German insurers more vulnerable.”

Annual climate losses in Europe soared to €50 billion in the 2021-2023 period from less than €16 billion during the 2010-2019 period, Hielkema said. And the European Environment Agency recently pointed out that, while extreme weather events are intensifying, the pace of adaptation is trailing. 

The agency said while there is uncertainty, it’s unlikely the European Union will mitigate climate impact enough to reduce associated economic losses by 2030.

Pagamentos de seguros a plantações disparam com efeitos de mudanças climáticas

 Secas e inundações mais do que triplicaram nos últimos 25 anos nos Estados Unidos

 

 Por Leah Douglas, da Reuters

 

Pagamentos de seguros para fazendeiros que perderam suas plantações para secas e inundações mais do que triplicaram nos últimos 25 anos nos Estados Unidos, de acordo com uma análise de dados federais do Grupo de Trabalhos Ambientais (EWG) publicada na quinta-feira (27).

O relatório reforça preocupações de que assegurar os cultivos do país vai ficar mais caro para as empresas seguradoras, fazendeiras e contribuintes, enquanto as mudanças climáticas provocam mais eventos erráticos que atrapalham a produção agrícola.

 

 

Pagamentos de seguros para fazendeiros que perderam suas plantações para secas e inundações mais do que triplicaram nos últimos 25 anos nos Estados Unidos, de acordo com uma análise de dados federais do Grupo de Trabalhos Ambientais (EWG) publicada na quinta-feira (27).

O relatório reforça preocupações de que assegurar os cultivos do país vai ficar mais caro para as empresas seguradoras, fazendeiras e contribuintes, enquanto as mudanças climáticas provocam mais eventos erráticos que atrapalham a produção agrícola.

Os pagamentos de seguros a fazendeiros por conta de secas cresceram mais de 400% entre 1995 e 2020 para 1,65 bilhão de dólares, enquanto os pagamentos por excesso de umidade —em eventos como inundações— subiram quase 300% para 2,61 bilhões, de acordo com a organização ambiental sem fins lucrativos, que avaliou dados públicos do Departamento de Agricultura dos EUA.

A Reuters revisou os dados, que mostraram uma tendência constante de alta nos pagamentos de seguros durante o período.

Durante o período analisado pela EWG, o número de hectares segurados cresceu apenas 84,5%, de acordo com dados da Agência de Gerenciamento de Riscos do departamento, que administra o programa federal de seguros a plantações.

“Com eventos climáticos extremos se tornando mais frequentes, a crise climática já aumentou o pagamento de seguros e os prêmios subsidiados.

Esses custos devem crescer ainda mais, à medida que mudanças climáticas devem causar condições ainda mais imprevisíveis”, disse a EWG no relatório.