Igniting the Insurance Industry: Extreme Weather Events Cause Havoc for Insurers​

By Violet O'Gorman​

The Story

In the first half of 2021, countries globally were hit by extreme weather events, including the widely reported wildfires in Greece and California, flooding across Germany and China, and various severe weather outbreaks across the US. In response, insurers globally are expected to pay out up to $42 billion (The Guardian). This may be the largest amount of compensation in ten years, according to a report by professional services firm Aon, which also highlighted that those six months showed “multiple instances of climate records being broken” (The Guardian).

Climate change plays a significant role in these “extreme events becoming more extreme” (Insurance Journal). This is a problem for insurers, who typically use historic data to calculate risk levels for future insurance cover. Antonio Grimaldi, partner at McKinsey, told DW that "the changing nature of climate risk means that the likelihood of these events actually repeating […] over the next 50 years will increase". This means insurers can less predictably estimate the risk in certain regions, especially those which have never experienced severe weather before. In light of recent events, insurers will likely increase premiums (Reuters) to better protect themselves against the unpredictability of climate change.

Impact on Businesses and Law Firms

Another change likely to be made by insurers in the future is a greater focus on “secondary perils” (Bloomberg). These are events that typically cause relatively minor damage, including snow storms, hail and wildfires. In the past, the insurance industry has closely monitored the risk for rarer events like earthquakes and hurricanes, but has not put equal focus on secondary perils (Bloomberg). As they increase in likelihood and cause more damage, insurers need to invest into modelling them for risk analysis. For example, last year insurer Swiss Re “started considering pluvial—that is, heavy rainfall […]—flood zones when assessing risks” (Wall Street Journal).

The increasing likelihood of extreme events could also generate more clients for insurers. According to Reuters, the “devastating summer floods in the populous province of Henan in central China [were] a wake-up call for local authorities to seek better insurance cover against natural disasters, potentially opening up a huge market for insurers in the country”, and this may also translate into more work for insurance lawyers. Law firms specialising in insurance and litigation may also see an uptick in future work, as disputes arise about whether certain events can be considered ‘force majeure’ (which are typically unforeseeable, rare events), where they increase to more predictable levels due to climate change.