Expert Voices

Climate change is exacerbating insurance protection gaps

Power line poles and lines downed by the passing of Hurricane Maria lie on a sidewalk in San Juan, Puerto Rico on November 7, 2017.
Downed power lines and poles after Hurricane Maria in San Juan, Puerto Rico, on November 7, 2017. Photo: Ricardo Arduengo/AFP via Getty Images

Of the $337 billion in insured losses from disaster events in 2017, $330 billion was caused by natural catastrophes, marking a nearly 90% increase from the previous 10-year average. If 2017 was an annus horribilis for the world and the risk-finance industry, which covered $144 billion of these losses, 2018 is on track to be even worse, since this is the year insurers will directly incur these costs on their balance sheets.

The big picture: Research shows that the world’s cities can expect on average $320 billion in lost economic productivity each year because of climate-related risks — climate change, floods, droughts, wild fires and heat-island effect, among others. Meanwhile, because more than 60% of these direct and indirect costs are not typically covered by insurance, insurers and public finance are in retreat as suppliers of last resort. For example, 60% of FEMA claims in Puerto Rico have been denied. Even against predictable threats like floods, earthquakes and wildfires, the protection gap is massive.

In the U.S., from 1950 to 2000, FEMA recorded an average of 39 natural disasters per year. In the 18 years since, the annual average has climbed by 318% to 124, making a calamitous year like 2017 the new normal. These events, even as single catastrophes, can now be directly correlated to climate change.

The effects are damning to the actuarial models insurers rely on to price risk. Houston, for example, had the biggest rainstorm ever recorded in the U.S. when Hurricane Harvey hit in 2017, and that flooding followed other historic floods there in prior years. Ellicott City, Maryland, no stranger to catastrophic flooding, has had two consecutive 1,000-year floods in as many years. If last year’s fires in California were the deadliest, this year they are the largest in state history. When actuarial math is broken in this manner, people are left high and dry and high finance struggles to overcome its expense ratios, ranging between 30% and 50% for every dollar of risk premium.

What's next: Closing the protection gap is an urgent global priority requiring as much public policy work as innovation in human adaptation and financial resilience. Research shows that a 1% increase in insurance adoption yields a 22% decrease in the share of risk borne by taxpayers, which will help stricken communities get back on their feet faster.

Dante Disparte is the founder and CEO of Risk Cooperative.