Building big business from climate-fueled disasters
Why the damage from extreme weather is a profit center, and not a risk for insurers.
Here is a climate finance riddle. Why are insurance companies posting record profits even as climate-related losses from natural disasters reach historic highs?
Despite a $182 billion price tag for losses due to weather-related disasters in the US last year, property and casualty insurers reported a near-doubling of their earnings over 2023. After-tax profits of the industry totaled $171 billion last year, compared to $92 billion the previous year. Last year was also an especially good one for home insurers, who booked the first aggregate underwriting profit on home insurance since 2019.
The reinsurance industry is also doing more than just fine, reports Peter McKillop, founder and CEO of Climate & Capital Media. The world’s biggest reinsurers — Munich Re, Swiss Re, Hannover Re, and SCOR — collectively reported a record $13 billion in earnings last year, according to Moody’s. “Climate disaster is good business for banks and insurers,” he concludes.
Wait! I Thought the Climate was Bad for Insurers
The answer to this apparent contradiction is simple, as millions of Americans are now discovering. Cash-flush insurers like State Farm are raising premiums faster than claims are rising, while reducing their exposure in high-risk areas.
In other words, your loss is their gain. In the industry, it is referred to as the “insurance cycle.” The insurance cycle is a phenomenon that has been understood since at least the 1920s. But now rising climate-related property damage is exacerbating the cycle. American premium holders are now experiencing the portion of the cycle when insurers tighten their underwriting standards and sharply raise premiums after a period of growing underwriting losses.
The “Insurance Cycle”
During a hypothetical “soft” period in the cycle (see above), premiums are low, the capital base is high, and competition is high. Premiums continue to fall as insurers take greater risks to compete or risk losing business in the long term.
Then, catastrophe strikes, such as this year’s firestorms in Los Angeles. At this point, the market hardens, as premiums soar and underwriters either reduce risk or pull out altogether, as many insurers have done in high climate risk states like Florida, Louisiana, and California.
In California, companies are protecting their bottom lines by simply pulling coverage, as they assess the $40 billion cost of wildfires earlier this year. As competition shrinks, rates rise, and profitability returns. This occurred after Hurricane Katrina devastated a swath of the US Gulf Coast in 2005, when riskier, less well-capitalized insurers filled the void left by departing insurers. The Insurance cycle starts again.
Insurers have another huge advantage. They can sell their “risk” through the sale of their insurance positions to giant, mostly European-based “reinsurers.”
So far, at least, increased losses due to climate change have not busted the cycle.
Endless Damage
But how long can property and business owners bear a cycle of endlessly increasing premiums, or having policies cancelled? Worldwide, weather disasters in 2024 resulted in an estimated $320 billion in insured losses, about 30 percent more than the previous year. In evaluating overall economic losses due to weather events, estimates range from $500 billion to $2 trillion in such losses over the past decade.
Catastrophe Bonds
Given such enormous numbers, where can insurers and reinsurers look for future profits? Why, sell bonds focused on catastrophe, of course. Catastrophe bonds or “CAT bonds” are the hottest product in the industry because they allow the insurance company to transfer some of the risk to investors. In that way, they are a bit like corporate high-yield or “junk bonds.” Mostly, institutional investors accept greater risk for a greater yield, but with CAT bonds, the risk is catastrophic property loss, rather than a company going bankrupt. CAT bonds also have a unique feature in that they are more correlated to weather patterns than business cycles.
Kaching!
It is then no surprise that catastrophe bond issuance is on track to be the second-largest year ever for the products since their introduction in 1994. This year, in the first six months, more than $15 billion in new CAT bonds have been issued, with another $1.8 billion in the market pipeline. In all, $16.8 billion of CAT bonds will have been issued by the end of June, just shy of last year’s record of $17.6 billion.
When you combine the benefits of the insurance cycle and the boom in CAT bonds, escalating climate-related property damage is big business. In 2024, the US experienced $27 billion in weather and climate-related disasters of over $1 billion or more, including 17 severe storm events, five hurricanes, one wildfire, one drought, one flood, and two winter storms. The overall price tag, $183 billion, is the fourth highest on record. When considering the period since 1980, the US has endured 403 weather and climate disasters that individually have reached $1 billion or more. The cumulative cost: more than $2.9 trillion. That is a lot of new business.
Rosy Growth Prospects for Rising Property Damage
This year is also expected to be a very fine vintage. Insured losses from natural catastrophes are well on their way to record levels, and hurricane season is expected to be very fruitful. Longer term, the prospects are even greater. A report by Swiss Re Institute projects that a combination of growing population, unrelenting urban sprawl, and increased climate damage will supercharge risks, leading to higher premiums and greater issuance of CAT bonds. Like last year, says Swiss Re, severe thunderstorms, floods, and wildfires will be the main drivers behind surging property loss.
And the future looks bright (for insurers) who are modeling long-term disaster growth to grow 5%–7% annually.
Globally, it’s the same story. Over the last 30 years, the total cost of insured losses from natural catastrophes has grown at a faster pace than the global economy, more than doubling relative to global gross domestic product since 1994, according to a Zurich Insurance report.
Build More Now
And in a masterpiece of greenwashing, Swiss Re ignores the potential profit of being masters of disaster and instead “highlights the ‘urgent need for action from governments, insurers, and communities to collaboratively build climate resilience.” Which, of course, needs to be insured and funded with CAT bonds!
And that is just what insurers are doing as they advise clients on how to profit from a 3°C world, notes McKillop. “Today, it’s about managing risk for the wealthy and mining new revenue streams from the wreckage. If extreme weather is inevitable, why not make money off the fallout?”
Welcome to disaster capitalism.
Article reprinted with Permission as part of GreenMoney’s ongoing collaboration with Climate and Capital Media.
Article by John Howell, Finance Editor for Climate & Capital Media and a partner in his family agri-business firm in Missouri. John is a writer, editor, and broadcaster who advises on communications and media strategy. He was co-founder, editorial director, and chief of thought leadership for 3BL Media, for which he managed all original editorial content, wrote, and edited newsletters, and created the Brands Taking Stands initiative. He has worked as an editor and contributor for Elle, Artforum, and High Times magazines, developed new media for Hearst Magazines, and created communications for Calvin Klein, Polo/Ralph Lauren, and The Body Shop. He lives and works in New Hampshire and Maine.
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