The frequency of extreme events – such as floods, inundations, hurricanes, hailstorms, fires, droughts, and heatwaves – is increasing due to climate change. Financial losses caused by these events are also on the rise: according to PIU data, they amounted to 487 billion euros in EU countries in the last 40 years, and 16 billion euros in the case of Poland. For insurers, this means a need to modify their risk assessment approach and to take this trend into account when pricing insurance events. Over time, this could also mean a decrease in the availability of insurance protection.
As the last year’s report of the Polish Insurance Chamber and EY consulting company (“The Climate of Rising Losses. The Role of Insurance in Climate Protection and Energy Transformation”) shows, the number of extreme weather events worldwide has dramatically increased over the past 40 years. Only between 2019-2021, natural disasters caused damages worth over 600 billion dollars, with the most significant losses caused by hurricane Ida in the USA (65 billion dollars) and flood Bernd in Europe (54 billion dollars), particularly severely felt by Germany. The effects of the last September flood, which occurred in Central and Eastern Europe – including Poland – affected millions of people, with losses amounting to tens of billions of euros.
“Insurers always deal with insurance in case of catastrophic events. There are solutions like reinsurance, advanced risk management, and catastrophic options, so there are currently no financial problems. However, it can already be observed, for instance in the United States or Southern Europe, that this insurance capacity, the ability to insure catastrophic risks, is simply decreasing. Too high frequency of such damages means that at some point insurers will start to raise prices, and eventually, it may lead to a situation, which already occurs in some parts of the United States, where insurers simply do not offer insurance protection,” says Dr. Marcin Kawiński, Head of the Social Insurance Department, Warsaw School of Economics to the Newseria Biznes agency.
The growing frequency of extreme events is reflected in the data cited by PIU, according to which in the years 1981-1990 an average of 79 natural disasters were recorded annually, while in the last decade, their number has increased to 186. For insurers, this means the need to modify their approach to risk assessment and to include this trend in the pricing of insurance events for which they provide protection. In practice, this may over time mean a decrease in access to insurance protection, which is already evident in Southern Europe, Australia, or the USA, where the extreme effects of climate change are most visible and have a more violent course.
“The easiest way to show this is by the example of the United States, where there are significant problems with hurricanes and tornados. In these areas, commercial insurers have decided to withdraw from this market and simply do not offer this type of insurance protection in that area,” says Dr. Marcin Kawiński.
As he points out, in Poland the main climate risk is floods and inundations, but the extreme events are not yet occurring on such a scale that would result in limiting insurance protection. However, with the intensification of climate change, this may soon change.
“So far, there are no such situations in which insurers ostentatiously convey that they will not provide insurance services in certain areas, but this will change,” says the SGH expert. “It is also important that in Poland, permits are still issued for construction in flood-prone areas. Here, changes in the law are needed to clarify responsibility in case of construction on such lands or even a ban on any new investments in these areas.”
The frequency of events such as flash floods, inundations, storms, hurricanes, hailstorms, fires, heatwaves, and droughts is increasing with climate change. Meanwhile, according to IPCC forecasts, the most likely scenario for the coming decades is a rise in the global temperature by 2 degrees Celsius by 2050. If this vision becomes a reality, heatwaves will occur even four times more often, and their intensity will also increase. Heavy rains resulting in flash floods will also be more frequent, and extreme droughts will occur 2.4 times more often than in the pre-industrial period, causing huge losses, including in agriculture, energy production, and the entire economy.
“Although we recently had a severe flood in Poland, these climate changes are not yet visible. However, they will occur more and more often and in 10-15 years serious problems will appear when the compensation or benefits paid by insurers will significantly differ from what we currently have,” says Dr. Marcin Kawiński.
According to PIU data, in the years 2016-2021, insurance companies reported to the UKNF 273 events which they assessed as catastrophic, and paid 3.622 billion PLN in compensation. The most significant damages were caused by torrential rains, inundations, storms, hailstorms, and hurricanes. Importantly, in Poland, insurance for natural disaster risks for individuals is relatively common – 71% of single-family buildings are insured against hurricanes, and 63% against the risk of flooding.
