Insurance risks will be a proxy carbon tax

Chubb

27/12/2024 10:55

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Neil Unmack
       LONDON, Dec 27 (Reuters Breakingviews) - A robust global
price on carbon is the holy grail of climate change. If emitting
activities were artificially made more expensive, proceeds from
richer citizens’ carbon usage could help poorer states adapt to
already existing signs of global warming. In 2025 a quasi-carbon
price will become increasingly apparent – but in a much more
regressive way.
    With the world looking increasingly unlikely to restrict
temperature rises to 1.5 degrees Celsius above preindustrial
times, climate change is ceasing to be a hypothetical risk. Take
the insurance sector. On average natural catastrophe
insured losses were $63 billion a year between 1993 and 2022,
according to Swiss Re. But in the years since 2020 they
have topped $100 billion. Hurricane Milton and European
floods mean 2024 losses may exceed that level again.
    This is not as bad as it might sound for the insurers
themselves. After years in which they faced low returns due
partly to low central bank rates, they can now demand higher
premiums to cover losses. An index compiled by broker Guy
Carpenter of global property catastrophe rates for reinsurance,
where insurers farm out the risk of extreme losses, has risen by
over 75% since 2017. U.S. property and casualty insurers like
Chubb  CB.N  or Allstate  ALL.N  have returned over 140%
including dividends in the five years until November 2024,
according to LSEG data.
    Higher insurance costs could conceivably incentivise
homeowners and builders to make houses that are less prone to
flood, fire or other risks. Yet in Britain 8% of new homes are
built in flood zones, even though new houses are not eligible
for support from the Flood Re programme, a kind of mutual
insurance for vulnerable properties. More importantly as
insurance costs rise, fewer people will be able to shoulder the
burden. A recent paper estimated that the most disaster-prone
houses in the U.S. could face annual increases in homeowner
insurance of $700 by 2053.
    Elevated rates are unlikely to subside. Reinsurers used to
fret over large, one-off catastrophes once every decade or
so. They are now having to cope with much more frequent mid-size
losses of $1 billion or more due to climate change, dubbed
secondary events. That can be seen in the record number of
U.S. tornadoes due to convective storms, or floods across many
countries in eastern and central Europe.
    At such high rates, more and more properties will be
uninsured, and more insurers may leave markets. In Florida, the
largest property insurer is state-backed Citizens Property
Insurance. With the world also way off the finance needed to
help affected countries adapt to climate change, the best
realistic outcome is that the taxpayer foots the bill. The worst
is that poorer citizens endure a disproportionate amount of the
costs.
    Follow @Unmack1 on X
  
    
    This is a Reuters Breakingviews prediction for 2025. To read
more of our predictions, click here.

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 (Editing by George Hay and Streisand Neto)
 ((For previous columns by the author, Reuters customers can
click on  UNMACK/ 
neil.unmack@thomsonreuters.com))