| As well as the devastating human cost for the many people who have lost their homes, the wildfires in Los Angeles are expected to be the most expensive such disaster in American history. The price to insurers could be as high as $30bn, Wells Fargo and Goldman Sachs estimated. Premiums have already rocketed in California in recent years, rising by 43% between January 2018 and December 2023; many companies have pulled out of the state altogether. The reason the economics are changing is obvious: between 2004 and 2013, an average of 653 structures were destroyed each year by fire in the state, according to data from Cal Fire. Between 2014 and 2023, that number was 5,669. The consequences are only likely to worsen as the market adjusts to the new reality in the years ahead. (This piece by Oliver Milman and Andrew Witherspoon sets out the impacts that are already being felt across the US.) But the wildfires are, of course, not an isolated catastrophe. “It is one of a pattern of recent events that is changing perceptions,” Eugenia Cacciatori said. “The future of disaster insurance is under threat all over.” What is the bigger picture on the future of insurance? “Insurance is caught between two poles,” Cacciatori said. “On the one hand, there is a desire to charge people in ways that are proportionate to the risk, because that’s fair, and it allows insurers to balance the books. But that creates problems, because those who are at very high risk tend to have trouble getting the insurance they need.” The other extreme, she added, is “a heavily regulated market that tends to produce affordable prices. But that creates the problem of funding reconstruction or new construction in places that are vulnerable to disaster. It is a very difficult problem to resolve.” Part of the problem is that the insurance system has traditionally worked by using past events as a guide to future risk, and pricing their policies accordingly: indeed, the law in California requires that they do so. But that model no longer works, and it isn’t easy to work out a new one. “The long term global trends are very clear,” Cacciatori said. “But translating them into reliable local projections, especially when different risks intersect – for example, somewhere that’s vulnerable to fire and flooding – is very complicated.” If a particular country’s insurance industry fails, that is obviously a huge problem for the people who rely on it. But there are wider risks as well: if insurance becomes unaffordable, property values collapse. That could easily create a 2008-style financial crisis. What does the future look like in the UK? At the moment, the UK is not prone to the kinds of climate disasters that are becoming increasingly common in other parts of the world. But the past two years were among the wettest on record here, and the risks are increasing: about 6.3m properties are now at risk from flooding, with that figure likely to rise to about 8m by 2050. In April last year, the Association of British Insurers said that the annual cost of weather-related home insurance claims had risen by more than a third, to a record £573m. One useful initiative in the UK, Cacciatori said, has been the creation of Flood Re, a public-private partnership where insurers pay a levy that goes into a scheme to cover homes that have previously been flooded – essentially a subsidy for the homeowner. “That has been very useful and innovative,” Cacciatori said. But it is also a project with a limited shelf life: as this excellent Bloomberg feature (£) explains, it will end in 2039, and is meant as a bridging exercise so that private insurance companies have some protection until better flood defences are in place. And it will only get more expensive over time. Meanwhile, the Environment Agency has confidence that only 15% of flood-defence projects will be completed on time – even as the government has doubled its investment. What can be done to fix the system? There are past examples of the insurance industry in other sectors playing a role in improving safety or resilience: in the car industry, for example, insurers have pushed for the standardisation of safety features, because it reduces the cost of claims. But there are major obstacles to implementing the same kind of approach in disaster insurance. One well known intervention, reduced premiums for customers who take those measures, isn’t a great tool, Cacciatori said: “The companies only have a very limited sense of what the risk reduction will be, and there’s a danger that customers switch insurance a few years later, so it’s a complicated model for them.” One alternative is the model in place in Switzerland, where local insurance companies have a monopoly on coverage in many areas and insurance is compulsory. “They can’t charge according to risk under that model, so they have the incentives and the means to contribute to resilience,” Cacciatori said. “They are heavily involved in discussions of building standards in which insurers in other countries are only beginning to be involved.” It would be very difficult to repeat that approach in countries with longstanding systems where major insurers are in constant competition nationwide. “But there are some elements that you could learn from,” she added. For example, insurance associations could pool their expertise and would be collectively incentivised to push for reduced risks. “Insurers shouldn’t be investing directly in resilience or mitigation measures,” she said. “Ultimately the responsibility for those decisions to be taken in the public interest has to lie with governments.” How likely is that to happen? There are huge obstacles to the kinds of reforms that will mean that people living in high-risk areas can find affordable insurance. For one thing, the incentives for politicians with an eye on the next election to advocate for models that would probably push up premiums aren’t straightforward. And there are competing priorities that work in very different directions. It obviously isn’t realistic to imagine that the entire population of somewhere like Los Angeles could up sticks and recreate the city somewhere safer, which means that a viable insurance industry is a non-negotiable; but if the world in 2050 looks very different to the one of 2000, it may not make sense to create incentives for people to live in places that are becoming much more dangerous. Part of the problem is that humans just aren’t very good at weighing long-term risks against short-term benefits – a significant problem for the insurance system but also a fundamental feature of how the climate crisis has unfolded. A classic example of that tendency is the way that people have kept on buying coastal condos in Florida even though many of them may well be underwater in a few decades’ time. But there is evidence that reality is starting to set in: with major weather events causing more than $1bn in losses in the state in 2024, four of the 10 US cities where house prices dropped most last year were in Florida. “We are starting to see signs that people are adjusting their expectations,” Cacciatori said. There are many seemingly intractable problems with reaching a sustainable solution, she added. “But if I want to cheer myself up, I think about the way the status of green energy generation has changed over the last 15 or 20 years, and the incredible progress that has been made which wasn’t thought to be possible. We can find ways to deal with these problems. But I’m very worried.” | 