The crossroads of the insurance industry

The huge fires that plague California That's several years in a row causing tremendous damage to the insurance industry in the United States. So, for example, in 2018 alone they were responsible for the death of 86 people and extensive property damage. According to the global insurance giant Munich Re, the cumulative damage of the fires was about 16.5 billion dollars, with insured property amounting to 12.5 billion dollars.

The US National Oceanic and Atmospheric Agency, NOAA, estimates the extent of damage from natural disasters caused by climate change or extreme weather between 2020-1980 About 1.8 trillion dollars. This figure includes 273 weather and climate events, the damage from each of which was over a billion dollars. Moreover, the damage from natural disasters has increased significantly over time and if the average damage per year between 1980-2018 was 42.8 billion dollars, then the average damage in the years 2014-2018 has already reached 99.1 billion dollars.

On NOAA's list of the most damaging hurricanes We find Hurricane Harvey with approximately $130 billion in damage, Hurricane Maria that caused approximately $94.5 billion in damage, and Hurricane Irma that caused $52.5 billion in damage - all of which occurred in 2017.

It is understood that the insurance industry, which is based on risk assessment, is aware of the possible negative effects of climate change and the extreme weather events that it entails.

The Guardian newspaper Reported in 2019 Property damage in states such as California, which is prone to fires, and Florida, which is prone to hurricanes and strong storms, have resulted in many insurance companies deciding to stop providing property insurance or raise premiums so high that many policyholders are unable to afford them. Thus, their resilience and ability to withstand natural hazards has significantly decreased.

The effects of climate change do cause an increase in the number of natural disasters in the world and the damages that accompany them. Fires are raging in Australia and Siberia, and floods and floods in Japan and Africa. In Israel too we see an increase in the frequency and number of fires and the lengthening of the fire season. Last winter's floods are also clear evidence of the consequences of the climate crisis in Israel. We are also seeing a consistent increase in compensation payments to farmers as a result of the weather. Thus, for example, Kent, the fund for natural damage insurance in agriculture, Paid between 2017-2014 Amounts estimated at hundreds of millions of shekels each year as compensation for farmers.

How to price risk in a time of uncertainty?

These facts pose a growing challenge to the insurance industry: how are risks priced in the reality of growing uncertainty and the lack of ability to perform accurate actuarial calculations? How do you attract capital to an industry that is at risk? And how do you pay the many claims and manage to remain profitable? These are some of the problems that the climate crisis poses to insurance companies.

The insurance industry, as we know, plays a central role in the structure of the modern economy. It is difficult to see it functioning, growing and developing without insurance. Insurance is found in every area of ​​our lives from mortgage insurance, through life insurance, business insurance, car insurance and more. This leads many economists to think that damage to the insurance sector could lead to severe and even fatal damage to the global economy.

In a study published in a special issue on climate change of the journal "Ecology and Environment" It is written that the forecast is "that the damage to the insurance sector, which is a significant component of 5 percent of Israel's GDP, will lead to a gradual loss in GDP that will reach 0.2 percent per year in 2050, equivalent to a loss of approximately two billion shekels per year."

This is also a social problem. If only the rich or the powerful can insure themselves - how will the poor and the weak survive? Who will stand by them when all their possessions disappear in a fire or storm? How will they be able to renew their lives or continue to maintain businesses in a disaster-stricken reality? In such a situation, the socio-economic disparities will grow and with them the public indignation and anger towards the authorities and the current economic system.

There is no doubt that a rethinking of how the insurance sector in the world and in Israel should prepare for the challenges of climate change is required. Is he able to stand it alone or is government assistance required?

Historical responsibility for the problem

Insurance companies are indeed affected by the climate crisis, but they also have a significant historical responsibility for the problem: they are the ones who insured, and some of them still continue to insure, companies and ventures that harm the environment and reinforce the phenomenon of climate change.

Insurance companies that insure energy production projects from coal, oil and gas are cutting the industry they are sitting on with their own hands. Because that's how they exacerbate the phenomenon of the climate crisis. Without insurance, it is extremely difficult to embark on large economic ventures, and it is difficult to impossible to raise the required capital and convince investors that their money is guaranteed. Hence the insurance companies have a much wider responsibility than we used to think until today.

As they share responsibility for the problem, insurance companies can play a role in solving it. They must give clear preference to economic ventures that benefit the environment and prevent the climate crisis. They can, for example, encourage projects of electricity generation from renewable energies or of energy efficiency, keep their hands away from projects based on deforestation and the destruction of the natural environment and instead ensure projects that promote sustainable development and the strengthening of natural systems.

Insurance companies can also take smaller but no less significant steps, such as lowering property insurance premiums for those whose homes were built according to a green standard, for those who purchase an electric car, for those who travel by public transportation rather than in a polluting private vehicle or for those who travel less in a private vehicle, in a similar manner to which they resort to when they price life and health insurance and charge higher premiums to smokers and those at risk.

They can also create new insurance instruments such as insurance for cyclists or scooters, insurance for home solar installations and other good ideas are not missing at all.

This is a significant choice that the insurance companies can and even should make today in order to change the dangerous direction in which we are walking. When you think about it in depth, and understand how great their influence is on each and every aspect of our lives, you can also understand the power of insurance companies to positively change the trend of climate change and its effects on the environment and man.

The responsibility is not only on them alone. We, the insurance consumers in the private and public sector, must demand a change from the insurance companies. We must insist on choosing insurance companies that benefit the environment and do not harm it and raise the issue in public and media awareness. The government also has a significant role in this, as the one that oversees the field, in directing the insurance industry in the direction of contributing to the environment and reducing the effects of the climate crisis. The insurance industry can be one of the most important keys to responding to climate change, for its benefit, for our benefit, and for a safer future.

Ambassador Gideon Bacher is the special envoy for climate change and sustainability at the Ministry of Foreign Affairs.

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