Today, I want to dive into a topic that’s as hot as a summer heatwave—climate change and its profound impact on business via the insurance industry. As we all know, climate change is no longer a distant threat; it’s here, and it’s reshaping our world in ways we never imagined. The increasing frequency and intensity of severe weather events is driving significant changes to insurance costs and coverage which is impacting our communities and businesses. So, grab your umbrellas and let’s explore this stormy landscape together.

The Rising Tide of Climate Change

First, let’s set the stage. Climate change is driving an uptick in extreme weather events globally. According to the National Oceanic and Atmospheric Administration (NOAA), the number of billion-dollar weather and climate disasters in the United States has been steadily increasing. In 2024 so far (cut off July 9th), there have been 15 such events. These events included 13 severe rain/wind storms and 2 winter storms. Overall, these billion-dollar weather events have resulted in the deaths of 106 people this year and had significant economic effects on the areas impacted. The 1980–2023 annual average of billion-dollar weather disasters is 8.5 events (CPI-adjusted); the annual average for the most recent 5 years (2019–2023) is 20.4 events (CPI-adjusted) [1]. The frequency of these devastating weather events has more than doubled in recent years.

The Usual Suspects: Weather Events on the Radar

Insurance companies are particularly worried about several types of weather events:

• Hurricanes and Tropical Storms: Coastal areas, especially in the Gulf of Mexico and the Atlantic seaboard, are at high risk. Hurricane Harvey in 2017 caused an estimated $125 billion in damages, making it one of the costliest natural disasters in U.S. history. Hurricane Beryl made landfall in Texas a couple of weeks ago after devastating the Caribbean leaving millions of Texans without power. Beryl set numerous records as the earliest category 5 hurricane, strongest ever June storm [2].
• Wildfires: The western United States, Canada, Australia, and parts of Europe are increasingly vulnerable to wildfires. The 2023 Canadian wildfire season was especially devastating, with over 45 million acres burned, making it the worst fire season on record. In the U.S., California has faced numerous destructive fire seasons, including the 2018 Camp Fire, which destroyed the town of Paradise and became the deadliest and most destructive wildfire in the state's history.
• Floods: Riverine and flash floods are becoming more common, affecting areas like the Midwest and Southeast U.S. The 2019 Mississippi River floods caused over $6.2 billion in damages. More recently, in 2023, Vermont experienced its worst flooding since Hurricane Irene in 2011, causing widespread destruction and economic losses. The frequency of these floods is increasing as well. The fact of the matter is that since 2010, Vermont has had 22 flood-related federal disaster declarations: nearly two per year. This is up from an average one every other year throughout the 60s, 70s, and 80s [3].
• Droughts: Droughts have become more frequent and severe across North America in recent years, with significant impacts on agriculture, water resources, and the economy. In the United States, the ongoing "megadrought" in the Southwest, which began in 2000, is considered the worst in 1,200 years. California experienced a particularly severe drought from 2012 to 2016, causing an estimated $9 billion in agricultural losses. In 2021, exceptional drought conditions affected over 20% of the western U.S., leading to widespread crop failures and increased wildfire risk. Canada has also faced significant drought challenges, with the Prairie provinces experiencing severe agricultural droughts in 2021, resulting in crop yield reductions of up to 50% in some areas.

Insurance Companies Battening Down the Hatches

Faced with escalating risks, insurance companies are taking several measures to protect themselves and their policyholders:

• Reassessing Risk Models: Insurers across North America are rapidly revising their risk models in response to the escalating frequency and intensity of weather-related events. This recalibration is driven by the stark reality of climate change, which has rendered historical data less reliable for predicting future risks. Companies are now incorporating advanced climate modeling, satellite imagery, and artificial intelligence to assess vulnerabilities more accurately. As a result, many insurers are identifying previously unforeseen high-risk areas, leading to significant premium increases for policyholders in these regions. For instance, homeowners in coastal areas prone to hurricanes or inland flood zones are facing substantial rate hikes. In some cases, premiums have doubled or even tripled. This trend is particularly pronounced in states like Florida and California, where extreme weather events have become more common. The insurance industry's shift is not only affecting individual policyholders but also influencing broader economic patterns, potentially impacting real estate markets and community development in vulnerable areas. As insurers continue to refine their risk models, there's growing concern about the long-term affordability and availability of insurance in regions most affected by climate change, prompting discussions about the need for government intervention or alternative risk-sharing mechanisms.
• Promoting Resilience: In response to the growing risks posed by extreme weather events, many insurance companies are actively promoting and rewarding resilient building practices and disaster preparedness among their policyholders. These initiatives aim to reduce potential losses and create more sustainable insurance models in high-risk areas. For example, some insurers offer premium discounts for homeowners who install impact-resistant roofing, storm shutters, or elevated foundations in flood-prone regions. In wildfire-susceptible areas, companies may provide incentives for creating defensible spaces around properties or using fire-resistant building materials. Beyond structural improvements, insurers are also encouraging better disaster preparedness through measures like installing backup generators, creating evacuation plans, or participating in community resilience programs. Companies like USAA and Travelers have developed mobile apps and educational resources to help policyholders assess and mitigate their risks. Additionally, some insurers are partnering with technology companies to offer smart home devices that can detect water leaks or monitor for other potential hazards, providing real-time alerts to prevent or minimize damage. These proactive approaches not only benefit individual policyholders through reduced premiums and potential damage but also help insurers manage their overall risk exposure in an era of increasing climate-related challenges.

The Exodus: Insurance Companies Pulling Out

In some cases, the risks have become so great that insurance companies are pulling out of certain markets altogether. For instance, in California, several major insurers have stopped offering coverage in wildfire-prone areas. State Farm, which is California's largest home insurer, announced in March that it would not renew 72,000 property owner policies. [4] In Canada, about 10% of all households across the country are highly exposed to flooding but lack access to flood insurance. [5] This leaves homeowners and businesses scrambling to find alternative coverage, often at much higher costs or risk not having coverage at all.

The Reinsurance Ripple Effect

The reinsurance industry, which provides a critical backstop for primary insurers, is undergoing significant changes in response to the escalating frequency and severity of climate-related disasters. Reinsurers, faced with mounting losses from catastrophic events, are reassessing their risk models and adjusting their practices accordingly. This has led to substantial rate increases and more stringent terms in reinsurance contracts. For instance, after the record-breaking hurricane seasons of recent years, many reinsurers have raised rates for wind coverage in coastal areas by 10-30%. Similarly, wildfire coverage in high-risk regions has seen even steeper increases with insurers in California looking to increase prices by 30%-52% [4]. These changes are having a ripple effect throughout the insurance ecosystem. Primary insurers, now facing higher costs to transfer their risks, are compelled to either absorb these expenses, potentially impacting their financial stability, or pass them on to policyholders. As a result, consumers in vulnerable areas are experiencing premium hikes that reflect not only the direct risk assessments of their primary insurers but also the heightened costs of reinsurance. This evolving landscape is prompting discussions within the industry about the long-term sustainability of current insurance models in high-risk areas and the potential need for innovative approaches to risk sharing and mitigation.

The Business Impact

So, what does all this mean for businesses? The actions taken by insurance companies are having a significant impact:

• Higher Costs: Businesses in high-risk areas are facing higher insurance premiums, which can strain budgets and impact profitability.
• Coverage Gaps: Some businesses may find it difficult to obtain coverage at all, leaving them vulnerable to financial losses from natural disasters.
• Operational Disruptions: Extreme weather events can disrupt supply chains, damage infrastructure, and halt operations, leading to lost revenue and increased recovery costs.

Mitigating the Risk: What Can Businesses Do?

While the outlook may seem daunting, there are steps businesses can take to mitigate their exposure to climate-related risks:

• Risk Assessment: Conduct a thorough assessment of your business’s vulnerability to climate-related risks and develop a comprehensive risk management plan.
• Invest in Resilience: Implement measures to make your facilities and operations more resilient to extreme weather events. This could include upgrading infrastructure, diversifying supply chains, and investing in backup systems.
• Engage with Insurers: Work closely with your insurance providers to understand your coverage options and explore ways to reduce premiums, such as adopting risk mitigation measures.
• Advocate for Policy Change: Support policies and initiatives that address climate change and promote resilience at the community and national levels.

Navigating the New Normal

Climate change is reshaping the insurance industry and, by extension, our communities and businesses. As business leaders, it’s our responsibility to stay informed, adapt to the changing landscape, and take proactive steps to protect our enterprises. By doing so, we can weather the storm and emerge stronger on the other side.

So, let’s roll up our sleeves, batten down the hatches, and navigate this new normal together. After all, in the face of climate change, resilience is not just an option—it’s a necessity. If you are a business leader looking to understand your businesses climate risk exposure we would love to help. Reach out to us at contact@toolzero.com

Until next time,

Cofounder and CEO at Tool Zero

Chris Walton

[1] National Centers for Environmental Information. Billion-Dollar weather and climate disasters | national centers for environmental information (NCEI). www.ncei.noaa.gov. Published 2024. https://www.ncei.noaa.gov/access/billions/

[2] National Centers for Environmental Information. Hurricane Beryl Brings Massive Power Outages to East Texas. National Environmental Satellite, Data, and Information Service. Published July 15, 2024. Accessed July 15, 2024. https://www.nesdis.noaa.gov/news/hurricane-beryl-brings-massive-power-outages-east-texas

[3] Office of Governor Phil Scott. TRANSCRIPT: Governor Phil Scott Remarks on One Year Anniversary of July 2023 Flood | Office of Governor Phil Scott. governor.vermont.gov. Published July 9, 2024. Accessed July 15, 2024. https://governor.vermont.gov/press-release/transcript-governor-phil-scott-remarks-one-year-anniversary-july-2023-flood#:~:text=The%20July%202023%20floods%20impacted

[4] Chakrabarti N. State Farm Threatens to Abandon California If They Can’t Raise Prices: 52% For Renters, 30% For Homeowners. International Business Times UK. Published July 12, 2024. Accessed July 15, 2024. https://www.ibtimes.co.uk/state-farm-threatens-abandon-california-if-they-cant-raise-prices-52-renters-30-homeowners-1725427

[5] Insurance Bureau of Canada. Canadians need flood protection. www.ibc.ca. Published 2023. https://www.ibc.ca/issues-and-advocacy/canadians-need-flood-protection