The floods of 14 and 15 July were the "most costly disaster in the history of Luxembourg insurance,” according to Marc Hengen, director general of the Association of Insurance and Reinsurance Companies (ACA). But such a record may not remain isolated: natural disasters linked to global warming are multiplying, as are their costs. This could have a profound impact on the insurance world.
In fact, the number of natural disasters linked to global warming has more than doubled since 1980. 7,225 major natural disasters have been recorded over the past 20 years, 91% of which were attributable to global warming, according to the UN. And while they have resulted in 1.3 million deaths and 4.4 billion injured, affected or displaced, their cost is also spectacular at $2,245bn, representing a threefold increase over the last two decades.
Luxembourg has not been spared. "Natural disasters have significantly increased in number and intensity in recent years. This trend can be supported by the scale of the public funds released to cover the costs resulting from these climatic phenomena,” notes the Court of Auditors in its opinion on the draft state budget for the year 2022. €160m has been allocated to deal with natural disasters (including €100m for last summer's floods).
Though the state takes over of part of the cost of repairing damage, insurance companies are also largely called upon to contribute. Since 2016, they have disbursed €362m for consequences linked to climatic disasters, including €125m for the floods of 14 and 15 July.
"Insurance plays an essential role in the transfer of risks, enabling households, companies and the national economy to mitigate the consequences of climatic disasters,” the Court of Auditors says. However, in order to carry out its role, the insurance industry has had to evolve in the face of the multiplication of these phenomena.
Some natural disasters have long been covered by private insurance. This is the case with storm insurance, which also includes hail and snow. "It proved its usefulness at the beginning of the 1990s in Luxembourg and neighbouring regions, where there were heavy storms, and of course with the tornado that took place in Bascharage," recalls Marc Hengen.
However, Luxembourg insurance companies have had to keep up with the evolution of floods, the manifestations of which have changed with global warming. Traditionally, floods occurred in winter, along the Moselle or in the Alzette valley. Due to heavy winter rain or snow, these rivers regularly burst their banks.
At that time, there was no private insurance solution for the damage caused by these winter floods. "The same disaster affected the same people every year, so the risk pooling system, which is the basis of all insurance, did not work," explains Hengen.
But over the past five years, climate change has taken its toll: in winter, it rains less and floods are less frequent. In contrast, in the summer, brief storms cause localised heavy precipitation, which leads to flood damage, but also to landslides.
The victims are no longer only the inhabitants living near the watercourses. The whole territory can be affected. For example, in March 2017, following the floods in the Ernz Valley in July 2016, and at the request of the ministry of finance, cover was offered by ACA member insurers for the entire population, capping compensation at €20,000 for residents living in flood-prone areas and €200,000 for those living in non-flood-prone areas.
"More and more people are seeing the value of having such insurance cover," says Hengen. Following the floods of last July, the system proved its usefulness: 90% of the damage was concentrated in areas declared non-floodable.
Will we be able to continue financing the repair of damage caused by natural disasters?
But with the number and cost of weather-related disasters increasing, how long will it be profitable for insurers to cover them? "Will we be able to continue to finance the repair of damage caused by natural disasters? At some point, it's a question of price. Hence the question: is it still insurable?" asks Hengen. "There are limits, we can't go on forever,” he warns.
One solution is for insurers to increase the price of premiums. "Following the recurrence of natural disasters that have affected Luxembourg in recent years, insurance premiums will inexorably increase," warns the Court of Auditors. "Logic dictates that if there are more and more claims that cost more and more money, it is clear that insurers must pass this on to their clients, as this is the very basis of insurance,” explains the director of the ACA.
But this price inflation could prevent customers from taking out insurance because they cannot afford it. "Will the premium charged remain saleable or acceptable to a potential customer? If all customers consider it too expensive, unless you make it compulsory, it will be a problem," says Hengen.
Finding a reinsurer
In general, to cope with the rising costs of climate-related disasters and to maintain financial stability, insurers insure themselves with reinsurers for this type of risk. However, "if it cannot find a reinsurer, it will limit its intervention, or even stop offering such cover so as not to jeopardise the company - which is an obligation of the management," explains Hengen. "For the moment, reinsurance is still available.”
Insurers and reinsurers have warned that if the temperature rises by 4°C, the planet will no longer be insurable.
But until when? "Insurers and reinsurers have warned that if the temperature rises above 4°C, the planet will no longer be insurable. Financing the repair of damage following natural disasters caused by such significant global warming would no longer be possible without these companies going bankrupt," explains Hengen.
According to the latest report by the World Meteorological Organisation (WMO), the average temperature in 2021 was about 1.11°C above its pre-industrial value. And, according to the UN, if the commitments made to reduce greenhouse gas emissions are respected, the world is on course to warm up by 2.7 degrees during this century.
This story was first published in French on Paperjam. It has been translated and edited for Delano.