“When more and more damage is caused, someone has to pay for it,” says Ernst Rauch, a climate expert at reinsurance company Munich Re. Either the security, or the state, or the one who has suffered the damages.

The logic of insurance is as follows: many buy insurance, a few suffer damage, and then they are compensated. But when the number of those who suffer a loss increases more and more, then the insurance company will transfer the higher risk to the policyholders – that is, the cost of insurance will increase. Because offering insurance makes sense for an insurance company only if it can be profitable.

As in the past insurance companies faced problems due to some extreme conditions, now many are turning to so-called reinsurance companies. One of the biggest is Munich Re – which has been researching the effects of climate change for 50 years to serve its business interests.

Some insurers are withdrawing

But what happens when environmental risks become so magnified that insurers no longer want to insure certain areas? Or when they raise the cost of insurance so much that no one can afford it anymore?

In California one of the largest insurance companies, State Farm, withdrew. The reason: the risk of natural disasters is constantly increasing, building costs are high and the reinsurance market is limited.

While property damage to the insurance economy in California has been between one and three billion dollars a year in recent decades, it is soon to significantly exceed $10 billion, Rauch observes. This is a leaps and bounds.

$100 billion in damages

And this isn’t just happening in California. Floods, storms, droughts and fires are happening in Germany too – and such phenomena are expected to occur more and more often according to the German Meteorological Service. Therefore, the cost of material damage will increase, but so will the number of people affected.

“The amount of insured losses from natural disasters worldwide reaches around 100 billion dollars per year,” says Ernst Rauch. “80-90% of these damages are weather-related.”

Can the amount of damages be limited?

However, the expert emphasizes that the fact that the damages are constantly increasing is mainly due to socio-economic factors and not only to the increasing frequency of severe weather phenomena. The value of buildings and infrastructure is increasing, so is the population, and buildings are being built in areas where a natural disaster is more likely, such as in coastal areas or near rivers, where there is a greater risk of flooding.

Thus, the amount of damage seems much greater, as not all buildings are insured for all eventualities. This is true both globally and specifically in Germany, where for example only about half of the buildings are insured against flooding.

Extreme weather events during the very hot and dry summers of previous years and the devastating floods of 2021 caused Germany damages totaling 80 billion euros, according to figures from the German Environment Ministry.

The premium should be proportional to the risks

Rauch considers it possible that some areas will not be insured in the future. However, he does not believe that this will happen immediately, i.e. within the next five to ten years.

The federal government reports that the total economic costs of climate change in Germany will skyrocket in the long term – by 2050 they are estimated, in proportion to the extent and intensity of climate change, to between 280 and 900 billion euros. And these do not include the cases of death, the reduction of the standard of living, the disappearance of certain species of plants and animals or the effects on the water balance.

Prevention is critical

A “key” factor, in addition to addressing climate change, is loss prevention – which is critical for insurers to continue to offer affordable premiums in high-risk areas for natural disasters, Rauch points out.

After the major floods that occurred on Germany’s major rivers in 2002 and 2013, flood protection in these areas has improved significantly, the expert adds. Similar preventive protection measures should therefore be taken worldwide, especially in coastal areas.

This is also the demand of the German Insurance Association: “The highest priority should be the adaptation of plans, constructions and renovations to climatic conditions.”

There is no time for hesitation

Immediate action is also crucial. “If we do not take preventive measures and adapt to the effects of climate change immediately and effectively, we estimate that within the next decade home insurance premiums will probably have doubled – and this only because of climate disasters”, warned the CEO of Germaniki already last year Association of Insurers (GDV), Jörg Azmussen.

Europe is also moving too slowly in taking preventive measures according to the European Environment Agency (EEA), which is calling on those responsible at national and EU level to act immediately. Only in this way could the climate risks be reduced – by reducing gas emissions faster, drawing up specific strategies and taking measures to adapt to climate conditions.

Edited by: Giorgos Passas