At some point, comprehensive insurance for some regions and risks is likely to become exorbitant
THE PILOTS of the Port of London Authority are the cabbies of the Thames estuary. Based in Gravesend, 33km from the capital, they navigate some 10,000 ships into London terminals every year. Dispatched offshore on fast patrol boats, they use rope ladders to board ships as tall as buildings. Much like London’s black-cab drivers, who know its 25,000 streets by heart, they must recall every sandbank and wind farm at the mouth of the river.
Very costly disasters are becoming more frequent. Between 1980 and 2015 America saw an average of five events causing over $1bn in damage each year. Between 2016 and 2018 the yearly average was 15. In the 20th century, according to AIR Worldwide, a climate-modelling firm, a hurricane on the scale of Harvey, America’s costliest ever, would have been regarded as a one-in-2,000-year event. By 2017, when Harvey blew in, that frequency was estimated at one in 300 years.
Climate losses can also come from the other side of insurers’ balance-sheets: the investments they hold in order to cover potential payouts and park any spare funds. Insurers are the world’s second-largest institutional investors, with $25trn under management. They often place chunky bets on multinational firms, infrastructure and property—which are becoming riskier propositions as the climate changes.
Most probably, payouts will continue to rise without capsizing insurers. But that still creates a problem. To absorb bigger losses, they must charge higher premiums. According to Marsh, a broker, global commercial-insurance prices rose by 6% in the second quarter of this year, compared with the previous quarter. That was the largest increase since records began. In America property rates jumped 10%; in the Pacific region they soared by nearly 18%.
Insurers are trying various ways to stop the protection gap growing. They are doing their best to keep policies affordable by digitising their operations and automating claims to cut costs. They are trying to deploy new technologies, for example tackling fraud by gathering data through sensors embedded in buildings and sending drones to disaster areas, notes Seth Rachlin of Capgemini, a consultancy.
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