Michel Lepetit, THE SHIFT PROJECT Vice-president, insurer and energy historian, calls on the insurance industry to unite to overcome the major crisis resulting from the accumulation of catastrophes related to climate change.
Initially published in LE MONDE – July 9th 2023 “Les assureurs semblent s’être longtemps illusionnés sur leur capacité d’adaptation au changement climatique »
In 2022, a combination of financial and physical phenomena disrupted the global reinsurance market for climate-related natural disasters. The sudden rise in interest rates, inflation in costs of repairs and, above all, a surge in extreme events have stressed this market, whose function is to share risks between insurers – the reinsurer acting as an “insurer of insurers”. By the end of 2022, the spectacular rise in reinsurance costs had not been accompanied by an increase in supply, as market theory had predicted. Demand has not been satisfied, and some insurers have had to keep more risks on their balance sheets than expected.
For a long time, insurers seem to have deceived themselves about their ability to adapt to the risk of climate change. They thought all they had to do was revise their rates – upwards – every year. But the violence of the shocks, the uncertainty about their variability, and the systemic nature of increasingly complex extreme events with poorly anticipated effects have shaken the market’s certainties and beliefs. The risk of climate disruption has nothing to do with climate risk, a risk that has been well known in the past. The risk of climate disruption is the disruption of climate risk. This risk is difficult to model, quantify and anticipate, and therefore difficult to insure – so let’s stop believing that modelling is the answer. Let’s stop believing that statistical modelling of climate disruption will enable us to quantify and therefore control the insurance of this risk; let’s stop believing that the financial markets, through their innovations (such as “catastrophe bonds”), will be able to support private reinsurers in need of capital; let’s stop taking refuge behind the idea that capital and people will continue to accumulate in the places most exposed to climate change.
Growing insurability deficit
The warning signs of the crisis had been building up for some years, particularly in Europe, with the dramatic floods in Belgium and Germany in the summer of 2021. Forest fires have multiplied, especially in North America. The insurance crisis is therefore a global one, as it is a market interconnected through reinsurance, whose raison d’être is to mutualize risks, in space and time. Symptoms of the crisis first proliferated in the United States, with reinsurers and insurers pulling out, rates and deductibles rising, and governments intervening to make up for a growing shortfall in the insurability of property. Concern is growing inexorably among customers, citizens and, consequently, their political representatives.
Neither insurers collectively, nor their regulators, despite their accurate apprehension of the climate crisis, have been able to warn political decision-makers of a possible stress scenario like the one that occurred last year. Since the beginning of the year, international bodies in Europe, and regulators and public authorities in France, have been stepping up emergency initiatives in an attempt to remedy the situation and prepare for the future. Anticipating the long-term socio-economic consequences of this crisis, regulators fear the emergence of systemic risks on residential mortgages outstanding, due to the potential uninsurability of collateral.
In 2022, France seems to have finally understood the imperative need to adapt to climate disruption: increasing forest fires, droughts, devastating hailstorms. The national insurance regime for natural disasters is the subject of debate. Backed by a state guarantee, the forty-year-old “Cat Nat” insurance scheme, often cited as a model abroad, is now in financial imbalance. Extreme climatic events not covered by the State (such as hail storms) had a major impact on insurers’ accounts in 2022. The insurability crisis is also affecting our local authorities, who are at the forefront of the fight for adaptation.
Offloading onto the State
If the debate is a technical one, it will also be political, even historical: the principle of national solidarity enshrined in the preamble to the 1946 french constitution will be invoked:
“The nation proclaims the solidarity and equality of all French people facing the burdens resulting from national calamities.”
On May 26, Bruno Le Maire, French Minister of the Economy, and Christophe Béchu, his colleague in charge of the ecological transition, set up a commission to examine the resilience of the french insurance system in the face of climate disruption. Will we be satisfied with simply “patching up” the system financially, or even allowing stakeholders to offload their responsibilities onto the State, as insurer of last resort?
The French insurance industry needs to focus on risk prevention and long-term planning, as it is already doing with the ten-year builders’ warranty. We’re hoping for much more united players, despite their disparities and divisions, engaging in partnerships and capable of collective intelligence in the service of the common good, sharing best practices, tools and data, and planning local experiments. We need to have the audacity to create exemplary international solidarity and, if there’s still time, at least on a European scale.
Adapting to climate change is an immensely complex, interdisciplinary and systemic undertaking. With its planning and trajectory for adaptation to +4°C, the French government seems to have grasped these challenges. The French insurance industry must do its part. And it must not miss its rendezvous with history.
Michel Lepetit is an engineer, vice-president of The Shift Project, and an associate researcher in energy global history at the interdisciplinary laboratory of future energies (“Laboratoire interdisciplinaire des énergies de demain”), at “Paris Cité” university.