Insurance risks will be a proxy carbon tax

A robust global price on carbon is the holy grail of climate change. If emitting activities were artificially made more expensive, proceeds from richer citizens’ carbon usage could help poorer states adapt to already existing signs of global warming. In 2025 a quasi-carbon price will become increasingly apparent – but in a much more regressive way.

With the world looking increasingly unlikely to restrict temperature rises to 1.5 degrees Celsius above preindustrial times, climate change is ceasing to be a hypothetical risk. Take the insurance sector. On average natural catastrophe insured losses were $63 billion a year between 1993 and 2022, according to Swiss Re. But in the years since 2020 they have topped $100 billion. Hurricane Milton and European floods mean 2024 losses may exceed that level again.

This is not as bad as it might sound for the insurers themselves. After years in which they faced low returns due partly to low central bank rates, they can now demand higher premiums to cover losses. An index compiled by broker Guy Carpenter of global property catastrophe rates for reinsurance, where insurers farm out the risk of extreme losses, has risen by over 75 per cent since 2017. US property and casualty insurers like Chubb or Allstate have returned over 140 per cent including dividends in the five years until November 2024, according to LSEG data.

Higher insurance costs could conceivably incentivise homeowners and builders to make houses that are less prone to flood, fire or other risks. Yet in Britain 8 per cent of new homes are built in flood zones, even though new houses are not eligible for support from the Flood Re programme, a kind of mutual insurance for vulnerable properties. More importantly as insurance costs rise, fewer people will be able to shoulder the burden. A recent paper estimated that the most disaster-prone houses in the US could face annual increases in homeowner insurance of $700, by 2053.

Elevated rates are unlikely to subside. Reinsurers used to fret over large, one-off catastrophes once every decade or so. They are now having to cope with much more frequent mid-size losses of $1 billion or more due to climate change, dubbed secondary events. That can be seen in the record number of US tornadoes due to convective storms, or floods across many countries in eastern and central Europe.

At such high rates, more and more properties will be uninsured, and more insurers may leave markets. In Florida, the largest property insurer is state-backed Citizens Property Insurance. With the world also way off the finance needed to help affected countries adapt to climate change, the best realistic outcome is that the taxpayer foots the bill. The worst is that poorer citizens endure a disproportionate amount of the costs.