Increasingly costly heat waves present insurance challenges
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A stifling heat wave continues to bring more than just the hottest temperatures to an already unusually sizzling summer — it's also inflicting economic losses.
Why it matters: Those losses are hard to tally, and in many cases aren't covered by insurance.
State of play: Extreme heat warnings and advisories stretch up and down the East Coast and in parts of the Central U.S. Tuesday, encompassing 120 million people.
- According to the NWS' Heat Risk Scale, which goes from level 1 to 4, many of the most populated areas of the East Coast will see the highest risk category of "extreme" on Monday and Tuesday with "impacts likely in most health systems, heat-sensitive industries and infrastructure."
The big picture: Studies have consistently shown that as the world warms, there are growing economic losses from extreme weather events, sea level rise and other impacts.
- A multiagency review of climate science published last year found that climate change threatens a "net loss in Americans' economic well-being."
- Human-caused climate change, largely from burning fossil fuels such as coal and natural gas, is already greatly increasing the odds of heat waves, along with their intensity and severity, research shows.
- Heat waves are unlike other extreme events such as hurricanes and floods. They alter the built environment silently, and their impacts can compound over time.
Between the lines: As the WSJ reported Saturday, recent heat waves have offered vivid previews of how a warmer world is also more costly.
- Extreme heat can create ripple effects through transportation networks, causing losses for airlines and rail companies. Recent hot days have seen major delays along Amtrak's Northeast corridor, for example.
- Hotter air temperatures can force airlines to carry fewer cargo or passengers to get their planes airborne, due to hot temperatures' effects on generating lift.
- Their greatest impacts are to industries dependent on outdoor workers. This affects everything from package delivery services to the construction industry.
By the numbers: A recent report from the California insurance commissioner on seven recent heat waves that hit the state found that each caused between $7.7 million and $210 million in labor productivity losses, with much of that in uninsured wage losses.
- Infrastructure costs from heat-related damage were as high as $35 million, mostly for road and rail repairs, the report found.
- Injuries to construction workers, for example, tend to increase during heat waves, the California report found. It did not include the costs of heat-related illness or these injuries, however, and for this reason and others is likely to be an underestimate.
- Climate change-worsened heat waves also can induce flash droughts and harm crops, leading to hundreds of millions or more in lost revenue.
The intrigue: With heat waves becoming more prevalent and menacing, businesses may seek new ways to insure against what are presently uninsured losses.
- Parametric insurance, which provides a payout if certain temperature (or other types of) thresholds are exceeded, could provide effective ways to withstand the costs of this climate extreme.
What they're saying: "The beauty of parametric insurance is the simplicity and speed of a payout directly to the policyholder," Steve Bowen, chief science officer for Gallagher Re, told Axios.
- "Using temperature as a baseline to trigger the payout makes a lot of sense for extreme heat, but other non-weather related thresholds (for instance such as yield targets) can also be used to ensure protection for farmers."
- Bowen also said that "it is still fairly early days" for parametric insurance offerings.
- But industry expects to see "more creative policy writing that pushes this solution into other arenas such as health, construction, manufacturing, or federally run programs," he said.
