The change in frequency of the natural damage events can be seen, for example, in Spain. Two decades ago, there were seven or eight years between severe droughts. Within the years 2017, 2019, 2022, and 2023, only four years have passed between them. The World Climate Council IPCC, with headquarters in Geneva, Switzerland, estimates that long-lasting heat waves and droughts in many parts of the world due to the high concentration of CO2 in the atmosphere are already twice as likely today as before the onset of the industrial age.
Rethinking the Business
While it has been warm and dry in Central Europe for a long time, Greece and Libya have been plunging into stormy rainfall for days. The question of what causes climate change is relevant not only for farmers but also for domestic insurance companies. Their business is to insure farmers against weather-related crop losses. The insurance business must ask itself how many times it is necessary to go deep into the pocket after severe droughts in the future, what this means for premiums, and how long such risks can be insured at all.
A 2019 global survey by Columbia Climate School found that 72 percent of insurance companies believe climate change will affect their business, but 80 percent of them have not taken significant steps to lessen climate risks. Moreover, US insurers invest the money from the premiums they collect in the financial markets. They have USD 582 billion invested in fossil fuel investments that could be devalued as climate risks increase.
Still, even today, drought insurance exists, especially in those countries where the state covers a good part of the premiums. That’s in the US, China, or India, for example. But this does not apply in all European countries. For example, Germany does not cover the costs; only Bavaria has introduced a similar regulation this year. Approximately 90% of all financial damage caused by natural disasters in Europe in the first half of 2023 was not covered by insurance, according to an analysis by Munich Re. Some small reinsurers can or do not want to insure drought damages anymore. Others increase the premiums, which in turn puts pressure on first-rate insurers.
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New Tools and Products
According to the Europe Insurance and Reinsurance Federation, worldwide in the 1980s, 16% of weather-related losses were insured. This doubled to 31% on average during the years 1999–2008 and reached 41.5% during the 2003–2008 years. On average, Europe faced an annual economic loss burden of EUR 11.1 billion between 1980 and 2008 as a result of weather-related events.
Insurers must develop innovative insurance products that incentivize climate-related risk prevention, for instance, by offering lower premiums to policyholders and implementing climate-related adaptation measures. In the meantime, some of them have switched to the so-called index products in order to be able to offer drought insurance to countries in general. Farmers receive money as soon as rainfall and heat days in their region are well below or above the long-term average, respectively. Satellite images and AI help to better estimate the damage.
Still, the climate system has a high degree of inertia. Even if we stop carbon emissions immediately, in the next 10 to 20 years, we will see the consequences of progressive warming more and more strongly.
