Tony and Jhan Dunn never dreamed they would leave California, where they grew up, built a relationship and planned to settle down.
Despite the fact that their home was destroyed by a wildfire in Paradise, California three years ago, they were unable to obtain insurance to buy another because of the disaster.
“We were effectively priced out of California,” Dunn, a former planning specialist, remarked from their new house in North Carolina.
Because the insurance business, notorious for its eagerness to cover everything from Bruce Springsteen’s voice chords to alien abductions, has problems accounting for climate change, there are thousands of homeowners and companies in California to Australia in the same situation.
The tried-and-true method, which draws on decades of historical data to forecast future claims, fails to account for changing weather patterns and hurricanes, floods, heat waves, or snowstorms that become more severe and unpredictable according to industry experts. The British hosts of the U.N. climate summit in Glasgow acknowledged on Wednesday that present emission cut promises were insufficient to avoid catastrophe if global warming is left unchecked.
Last week, insurance broker Aon (AON.N) said that “extremely odd” floods in Germany and China this year resulted in record insured losses for those areas.
According to Attila Toth, the CEO of Zesty.ai, insurance companies are withdrawing because no one wants to be in the business of losing money. “And if they don’t trust their usual methods, they’re afraid that they’ll lose money,” he adds.
Zesty.ai, which is used by Farmers Insurance, reinsurer Berkshire Hathaway (BRKa.N), and Aon, uses artificial intelligence that has been trained on over 1,400 wildfires to generate climate-change risk scores for each house.
Willis Re is using data from AI firm Cloud to Street to assist clients price flood insurance.
According to insurance research, there is a pressing need for such progress.
According to Lloyd’s of London insurer Chaucer, the average number of large U.S. wildfires has increased by 30% over the last 15 years and by nearly a fifth in just the previous five years (SOLYD.UL).
In all, insured losses for so-called “secondary” perils such as floods and fires, rather than more closely modelled risks like hurricanes, have increased by almost 90% over the last decade, according to data from Swiss Re (SRENH.S).
By 2040, global insured losses from all types of natural disasters are expected to rise by 30-63 percent in developed nations. China, the United Kingdom, France and Germany may all see premiums climb by 90% to 120%.
Traditional ways of doing business cannot keep up with the rate at which blockchain technology is progressing, according to Bruce Carnegie-Brown, chairman of Lloyd’s of London.
“If you’ve gone to the end of the curve and something is suddenly speeding up, that’s very probable we’re underpricing the risk we’re taking.”
Customers are already feeling the effects, with insurance becoming more expensive or difficult to obtain.
U.S. property insurance rates are expected to have increased by 10% in the third quarter, according to Broker Marsh (MMC.N).
In California, the number of non-renewals of homeowners’ insurance policies increased 31% from a year earlier in 2019 to more than 235,000, according to data released by the state Insurance Department. According to Carmen Balber, executive director of Consumer Watchdog LA, the data for 2020 could be similar.
On the other side of the northern border, the Insurance Bureau of Canada stated that homeowners may not be able to purchase a new policy if they have suffered a fire.
Some household names, such as Liberty Mutual, Nationwide, and State Farm, have cut back on homeowners insurance in California. To lower overall risk of wildfires, Liberty Mutual claimed it was a “painful yet necessary step,” which was also shared by other insurance companies.
Insurers aim to reduce their risk by assisting customers in becoming more resilient. For example, commercial insurer AXA (AXAF.PA) provides a consulting service for clients like manufacturers that identifies their weak spots and suggests solutions, such as building flood barriers, according to its chief risk officer Renaud Guidee.
“This is a collaboration of interest that comes together.
Paul J Krump, Vice Chairman of Chubb Group, Global Underwriting and Claims, said the firm is assisting clients in making their infrastructure sturdier in light of recent geopolitical events.
Analysts believe that reinsurers, with their global scope and long history of writing catastrophe risks, can also help the industry adjust to climate change.
The group, according to Ernst Rauch, chief climate and geo scientist at Munich Re (MUVGn.DE), had the knowledge and desire to tackle climate risk.
After noticing a shift in the patterns of loss for weather-related calamities in the 1970s, AccuWeather created a team to address natural disasters and climate change.
“We saw a continuation of years with losses that were substantially larger than those seen over the previous 35 years. And that’s reflected in our models,” he added.
However, there was a gap between what the reinsurer believed to be a reasonable premium and what insurers were willing to pay.
“We cannot transfer this risk onto our balance sheet unless we obtain the premium required to cover these hazards, which is determined on our assessment,” Rauch added.
S&Per Global Ratings agency revealed that even reinsurers may be understating their climate risk by as much as 50%, calling their efforts to address climate change “nascent.”
Floods and wildfires, which have only in recent years begun to cause major losses, are not as well represented in industry simulations. Experts claim disasters such as hurricane strikes in Florida with a long history of causing severe damage, are more closely modeled than floods or fires.
This necessitates reinsurers and independent risk analysis firms like RMS and KCC to explore new ways of dealing with natural disasters.
Scenario modelling is one such technique, in which insurance companies are given a number of possible climate consequences on their portfolios over time to account for “the full range of uncertainty,” according to Laurent Marescot, senior director EMEA and CIS at RMS, which provides risk models to insurers.
Another tool examines how to take existing flood models for a certain area, such as the South China Sea, and map them to other areas across the world.
However, any improvements in making insurance more accessible and inexpensive will be too little, too late for the Dunns.
“It was terrible because we spent our whole lives in California and were both born in San Diego,” said Dunn. “I had no intention of leaving California, ever.”
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