In the wake of the Los Angeles wildfires, which killed at least 27 people and caused an estimated $275 bn of damage, a “vicious cycle” has emerged in the insurance markets.
California created an insurer of last resort in 1968, the California Fair Access to Insurance Requirements (FAIR) plan, following a spate of brush fires and riots in the state over the decade. (An insurer of last resort is an insurance company or government entity which provides insurance for entities which are considered high risk or uninsurable). But as fires increased in size and cost in recent years, standard insurers stopped offering new policies.
“Between 2020 and 2024, the number of homes with policies under the FAIR Plan more than doubled”, writes seasoned climate journalist Christopher Flavelle. More people have been pushed onto the FAIR Plan, which has become less capable of covering claims. A $1 billion bailout is planned, half paid for by higher insurance premiums, and half paid for by insurers, likely prompting more insurance companies to leave the state.
But the problems with the insurance industry aren’t limited to California. From 2017 onwards, average annual insured losses from natural catastrophes added up to over $110 billion. The insurance sector model didn’t anticipate this doubling of losses compared with the previous five years, because they rely on historical weather and claims data to price risk. Climate change will have cascading and non-linear effects, something acknowledged by industry bodies and leading firms. But the challenge remains unresolved.
As Californians have experienced, the implications of this reach wider than the insurance industry. As losses grow, insurers reprice risk. This is reflected in a significant hike in premiums, which Californians are experiencing. As we have seen, this also widens an ‘insurance gap’ in which people and businesses are fully exposed to risks, just as climate change increases their likelihood and severity. The European Insurance and Occupational Pensions Authority estimates that only 23 per cent of potential weather-related losses are currently insured across Europe.
The consequence is that an increasing number of economic activities, like buying a house, or planting crops, can’t attract investment and might not go ahead. This reverses the role insurance is meant to play in the economy: of making things happen by mitigating risk.
What’s more, fossil fuel extraction continues to be a big business for insurers and reinsurers, even as it undermines their business models and their historical role in the economy. It’s true that some leading UK-based insurers like Allianz, Aviva and Swiss Re have set stringent climate targets matched with action.
Then there’s Lloyd’s of London. Edward Lloyd owned a coffee house in the City of London in the 1600s, which attracted sea-going types to bet on which ships would make it back to port. It grew into a major marketplace, where financiers now come together to spread risk. It had amassed £45 billion of assets in 2023. It is the world’s largest insurer of fossil fuels, accounting for nine per cent of the global fossil fuel market.
Lloyd’s recognises that “continuing to provide (re)insurance for carbon intensive businesses and projects will become increasingly unsustainable”. But it maintains that it is only the market through which these insurance deals are made. It declines to intervene in the underwriting decisions of its managing agents, who organise the syndicates that ultimately write insurance contracts.
As a result, of the 51 Lloyd’s managing agents, only 15 have committed not to underwrite risks related to new coal mines and new coal plants. Forty-six managing agents – which represent close to 93 per cent of the market for insurance for fossil fuel projects – have yet to commit to stop insuring new oil and gas fields.
We should be sceptical of Lloyd’s claim that it can’t tell its members what to do. It can make byelaws to guide managing agents. It’s also governed by the Lloyd’s Act 1871, and subsequent Acts of Parliament, which give it responsibilities for regulating and directing the business of insurance.
Lloyd’s also says it is waiting for a political steer from the government. In 2023, it said its climate targets depend on whether politicians enact policy to transition to lower carbon economies and net zero by 2050. It’s true that Westminster has sent some mixed signals recently – Rishi Sunak granted permission for the giant Rosebank oil field in 2023, only for it to end up contested in court. Keir Starmer recently said that “oil and gas is part of the future [energy] mix for decades to come.”
But the current government was elected with a manifesto pledge to force financial institutions which are regulated in the UK and FTSE 100 companies to “develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement”. It should bolster this by bringing forward new laws to compel insurers to produce a Climate Transition Plan and ensure that underwriting policies comply with a 1.5°Cpathway.
The insurance industry once aimed to stabilise the economy, but today it is amplifying the risks of climate change. The good news is that the UK’s position in the global insurance market means policymakers here can help change this. The government has a mandate, and parliament has the power to intervene. With much of Los Angeles destroyed, and extreme weather affecting everyday life in the UK, there is no time for delay.
This article was originally published as an edition of the Green Transition, New Statesman Spotlight’s weekly newsletter on the economics of net zero. To see more editions and subscribe, click here.
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