Are we insured against future climate change damage?

Welcome back to Sustainable Views, the podcast looking at sustainability policy and regulation in depth. I'm Philippa Nuttall, editor of Sustainable Views. Today we're going to be looking at what's happening in the world of insurance as extreme weather events get worse and business and people suffer the often devastating and recurrent impacts. Joining me to do so is Sustainable Views acting deputy editor Elizabeth Meager. Hi, Elizabeth.

Hello.

So great to have you here today. So you've been writing a fair bit about insurance recently. Last year you wrote a really interesting piece for Sustainable Views about the number of US businesses that would consider moving parts of their operations or their supply chains because of extreme weather impacts. And more recently, you've been writing about what's happening in the US in the aftermath of the terrible flooding in Texas. And so perhaps to start, could you give us a bit more detail about the piece you wrote last year and just what the research showed.

Yeah, so this data came out from MIT just a few weeks before the election. And as we were writing at the time, it was a really strange election where both Democrats and Republicans were kind of pretending that climate change doesn't really exist and choosing not to talk about it. I thought that this was a really good illustration of kind of where US climate politics, I suppose, is at, where even if the two kind of main parties weren't talking about it, we have businesses showing a really clear impact from climate change and extreme weather. So it said 55% of businesses had faced damage to their physical infrastructure from extreme weather already. A quarter had already relocated some of their infrastructure as a result, and the remaining three-quarters said they were considering doing the same. And that was interesting, you know, as I've said, but also it kind of showed that, you know, these are businesses, business leaders from across the political spectrum, that even if you don't believe that climate change is what is causing extreme weather, you still have to admit yet extreme weather is increasing and it's costing businesses a lot of money.

Indeed, yeah, and those figures you cite are really big figures. I mean, I remember when I read the piece that I was quite shocked by seeing how high they were and how many companies are actually considering moving because of this extreme weather that we're seeing. And yet the US government reaction, especially under Trump, doesn't seem to be commensurate with these effects. But let's— we'll come back to that in a minute. But first of all, I'd like to turn to Texas a little bit, which is one of the latest examples we've seen of terrible flooding in the US. There are over 130 people killed, including children died, and many businesses were impacted. Could you walk us through a little bit why the impacts of these floods were so devastating and whether there's any link between what the government's doing and what actually happened on the ground?

Yeah, so this one, I mean, every so often there's one that kind of really resonates, and this one did. Um, I think, I'm sure same for you, like, as a parent, but it was really, really awful. And like most people, I thought, you know, oh, it must be these cuts to the US government that has had a big impact here. And I think that will kind of continue to be litigated, like, literally and figuratively over the coming years. Um, it's not that clear. It looks like maybe there were a few kind of vacancies at government agencies that if they had been filled, maybe the early warning systems would have been better. But the main message was actually that the infrastructure just was never there in the first place. So this county hadn't really invested in it. They'd kind of decided it was a bit too expensive, even though they had looked into it. But I think another really big theme of this was this kind of like, I guess, is it cognitive dissonance? I don't know, the— this like kind of human refusal to accept that even though this was a known floodplain, this was quite a kind of unpredictable river, and it had flooded dozens of times over the past century. Some of these cabins at this Camp Mystic were built literally not just in floodplains but in floodways, which is where the river kind of naturally flows during flooding events. And people just kind of choosing to ignore that, thinking maybe the early warning systems that were in place, which I think was text messages, would be sufficient. And, and even in the aftermath, I mean, I've read so many articles about this and so many locals, you know, were just saying, you know, there's nothing that will keep me away from this river. So I, you know, the government can do so much, and this government has shown that it is not going to even do that. But, um, I think a lot of it is kind of, is deeply psychological, their attachment to their, to their river, I suppose, and the nature around them.

And I think a lot of families have been going there for years, hadn't they? So there was this generational sort of attachment as well. Um, so Within this, I mean, as we've seen, there's obviously an impact on people, but there's also an impact on businesses. I mean, many of the businesses there were flooded and impacted by the water that sort of rushed through. And obviously the insurance industry has a role to play in any form of extreme weather event or big incident. Freelancer Louis Woodall, who's based in the US, recently wrote an excellent piece for us about a landmark bill that was passed in Colorado that changes how insurers work to take more into consideration these sorts of events. Do you think this hints at the direction of travel in the US and potentially elsewhere, or is this very much a one-off bill?

Yeah, it's a good question, and I don't fully have the answer. So the insurance industry is absolutely fascinating. I'm very kind of new to learning about it, and I think, like, I mean, maybe this is obvious, but I think like lots of people, I assumed that a climate crisis equals an insurance crisis, and I've learned in the the past couple of months that that is actually really not true. So insurance companies are kind of really well insulated against losses, even though, you know, we keep reading climate change-related insured losses hit this number. So there's a few things going on here. So they've had like years of record profits. That means they're really kind of well capitalized. And I'm also hearing that the risk appetite of reinsurers and private equity companies is super high as everyone's searching for returns. So they're just, they're just willing to take this on. And but I think the really big one is that insurers have this really easy escape route of just not providing coverage. And that, that is part of the issue that I think Colorado was trying to tackle. So in California, there's been efforts here as well because insurers just keep pulling out of areas. So I think that there will be kind of no choice for governments but to step in and force, um, either force insurers to provide cover or to show what they are doing. I think in the Colorado case, it was offering— was it offering reduced rates for houses that had kind of invested in adaptation?

Yeah, it basically forces investors as well to step up to the mark. And as you say, they can't just sort of walk away and say it's not, it's not our bag, this, you know, it's got too much for us. So they have to do something about it.

Yeah. And I think so another really big thing, um, is that, um, and it's very much connected to this, is that the majority of natural catastrophe losses, even before insurers have kind of really ramped up their pulling out of certain areas, they're still uninsured. So I was looking at the data from one of my pieces this morning and Hurricane Helen, which hit Florida and North Carolina last year. So it caused around $78 billion in economic damages roughly. But even in those kind of, you know, relatively wealthy areas, certainly in a global context, only $20 billion of that was insured. And obviously in other parts of the world, the proportions are even more off. So I think governments are going to have no choice because if it's not an insurance crisis, it's a societal crisis.

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I mean, you say governments have got no choice, but Trump seems to very much make his own choices regardless of the science or the facts. I mean, we've seen this constantly since he came to office. Whether it's sort of undermining clean energy regulation, undermining the IRA, or undermining the agencies that are responsible for climate change and early warning systems, which potentially could have helped out in places like Texas. And we recently ran an opinion piece by Lurie Schulman, who was the senior climate resilience advisor to the former US President Joe Biden, and she raises issue. How do you see this playing out in the years to come? I mean, do you, do you genuinely think that the sort of US government and other governments will be forced to step up, or do you think it's more likely to, to kind of become an issue for either individuals or, or businesses to have to sort of figure out, um, on their own?

So I— when I say the government, maybe I mean the state governments will have no choice. Um, I think particularly these rollbacks at federal level, um, are just so extreme. I mean, Just this week we've seen the endangerment finding, which kind of all of the Clean Air Act and all the related regulations are based on. That is catastrophic for the environment, but also, you know, as we say, for businesses who are kind of relying on that policy certainty, have spent a lot of money investing in compliance. Not to mention the increasing cost of extreme weather events, which ironically the US government has this year stopped tracking.

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I mean, administrations can change, and I think a lot of people are kind of counting on that. I mean, particularly in relation to the endangerment finding, people are saying, well, this is going to take a while. It will have to go to public comment, and then hopefully the next president, whoever that is, just kind of cancels the whole project. Some of it is obviously going to be much more lasting, cause much more lasting damage. And I think, you know, these these rights are hard-won, um, and removing them has proven pretty easy so far. So, um, starting back at square one is going to be the case. But, um, as I said, states— uh, there are a lot of Democrat states in the US that, um, will be doing a lot, hopefully. But we also see, you know, insurance— property insurance is a fairly kind of bipartisan issue. So the hope is that everyone can kind of get behind that.

Yeah, and I mean, this obviously isn't just a US issue as well. I mean, in the UK we've got these grand house building plans. I think some of these houses will be built in areas that at least do flood because there just isn't the space to kind of say we won't build anywhere where it doesn't flood. I mean, do you get the sense when you speak to businesses in particular that there's enough energy thought going into this question of insurance, or do you think it's an area really where there still needs to be a certain amount of, yeah, discussion, thought, to actually see how we, how we manage this problem going forward, and that either companies or individuals are not left without insurance and unable to, yeah, to insure their home or their business or whatever.

Uh, no, I don't think people are thinking about it enough. I mean, people keep building new houses in South Florida. South Florida has the highest kind of insurance premiums, um, in the country. People are still kind of want to live beachfront. Um, I think it really speaks to this kind of like disconnect, psychological disconnect. I know one investor, and when I was asking her about this this theory that insurers are ready for extreme weather, she said, well, you know, markets don't perform very rationally. And I think that like the same is true of humans. Um, I have a friend who bought a house a couple of years ago on the Wirral who said, oh yeah, and you know, we've got a great sea view and that bit there just outside ours is a floodplain, so no one's going to build there. Oh, um, great, that's really great for your house. So I think, yeah, this kind of collective denial is everywhere. I think another thing is that people sometimes feel that adaptation spending is almost admitting defeat. So there's one stat, I think adaptation finance gets around 10% of all climate spending, and we kind of drop that into a lot of stories because it is remarkable. That is going to have to change. I don't know what happens if it doesn't. I think, you know, we're going to have so many more Texases.

Yeah, I mean, adaptation is definitely interesting, and I think adaptation used to be a very dirty word even among sort of nonprofit organizations, climate campaigners who were very much focused on we have to reduce emissions. Mitigation was the be-all and end-all, and that has definitely shifted. I think adaptation has become much more of a mainstream discussion point, and I think just the number of extreme weather events— I mean, every time you you— I was going to say open a newspaper, but more click on a website and read the news. You know, there's forest fires, there's droughts, there's floods. So this is becoming very mainstream. And so I think adaptation is definitely higher on the political agenda. I think it'll be interesting in going into COP30, especially a COP that's held in a Global South country where there are more impacts being felt already from climate change as to whether adaptation really does get the attention it needs and we finally start giving more money to it. I mean, the Loss and Damage Fund that was set up is still largely underfunded and certainly can't compensate countries for the losses that they're being subject to because of extreme weather events caused, or at least linked to a certain degree, to climate change. So yeah, these are— I think we've got more questions than answers, but it's definitely an area where there's going to be a lot of discussion going forward, and I'm sure where we're going to, uh, yeah, write a more. And I just wanted to, before we finished, I mean, today we have had this announcement from the US administration about the EPA and this kind of massive rollback on emissions regulation and this sort of show of excitement or whatever, that this is the biggest deregulatory move ever in the US, as if it's a good thing to do to any kind of regulation. That would manage and helps to reduce emissions. Could you just explain to us a bit more kind of just how important this is in the US and what, if anything, you know, campaigners or the Democrats or anybody can do to stop this happening?

So it's hard to say just how important the endangerment finding is. So the Clean Air Act is the kind of foundational environmental regulation in the US and a lot of other rules are based on it. I think if that falls away, that you know, extreme weather events are going to increase, emissions are going to continue to increase. And then as I said, you know, businesses have spent money planning for this. They've also spent money investing in clean tech. And with the endangerment finding announcement yesterday, the EPA also said separately that it was going to kind of remove tailpipe emissions standards. And so that was a move that was trying to boost EV sales. So that, that raises really big questions around kind of US competitiveness as well, um, of competing. So I think that there will be a lot of pushback, um, not just from environmental groups who are kind of always coming out against these things. There will definitely be lawsuits, but you would hope that there would also be some resistance, not just behind closed doors, from businesses that have spent a lot of money investing in this. See what the way the world is going. I mean, China is just, um, kind of moving ahead from everyone else very rapidly, particularly on EVs. That is a really big risk to U.S. business, particularly a U.S. industry that is so kind of central to American identity, um, cars. And so, um, you would hope that there will be resistance. And as I said, this will go through a kind of lengthy, um, consultation process now. So, um, that would be one to watch.

Yeah, definitely. And I noticed yesterday that Stellantis, one of the car companies that in the UK is, I think, one of the leading sellers of EVs, has decided they're going to produce more petrol cars so that they can make the most of the new regime in the US. So yeah, these policies or executive orders, which in many cases, as you've pointed out, I think in various of your articles, are not necessarily fully legally binding, are definitely having an impact in the world of business and not going in the right direction in terms of the need to reduce emissions to, as you say, reduce these extreme weather events?

I think that even long before Trump was reelected and kind of made clear what he was going to do with the IRA, there were reports that US carmakers were just not managing to keep up and compete with cheaper EV manufacturers. So yeah, maybe the more cynical view is that they're pretty happy with this.

Indeed, it's difficult not to be cynical at the moment, I think. But anyhow, thank you very much for sharing your insights with us, and this is going to be a subject that we'll be covering all the time on Sustainable Views because it's definitely not going to go away. To keep up with climate regulation and the impacts of extreme weather on the insurance industry and business more widely, be sure to sign up for a free trial of Sustainable Views and our daily newsletter at sustainableviews.com. We'll have a new episode of this podcast in September.