Climate Change and Rising Insurance Premiums: A Necessary Shift
June 6, 2024
As climate change intensifies, its impact on the insurance industry becomes increasingly apparent. Evan Greenberg, CEO of Chubb, one of the leading insurers in the U.S., recently addressed this issue at the RIMS Risk World conference in San Diego. Greenberg emphasized the rationality behind surging insurance premiums in climate-vulnerable regions and the unsustainable nature of government efforts to suppress these increases.
The Reality of Climate Risk Pricing
Climate change is reshaping risk landscapes globally. Wildfires, floods, and extreme weather events are becoming more frequent and severe, particularly in regions like California. Insurance companies, tasked with mitigating financial risk, have responded by adjusting premiums to reflect these heightened dangers. Greenberg asserts that these price adjustments are not arbitrary but are essential signals that reflect the true cost of climate risks.
"Climate change is sending price signals," Greenberg stated. "Society will not adjust its behavior to the change of climate just because people talk about it. We’re sending price signals very rationally. That starts driving behaviors."
Government Intervention and Market Realities
In response to rising premiums, some U.S. states have intervened, attempting to prevent insurers from incorporating forward-looking climate-risk models into their pricing strategies. This regulatory stance, particularly evident in California, has led some insurers to halt new policy offerings in the state. These policies, intended to keep insurance affordable, inadvertently create long-term sustainability issues for the insurance market.
Greenberg pointed out that by blocking accurate risk pricing, states are disrupting the natural economic signals that would otherwise encourage individuals and businesses to avoid high-risk areas. "We haven’t told people to live in a high-wildfire zone, and we haven’t told them to build magnificent homes in a wildfire zone," Greenberg said. "I’m willing to insure them if I can charge the right price for the risk."
The Economic Consequences
The failure to allow proper risk-based pricing has broader economic implications. When insurers cannot price policies correctly, they may exit the market, leaving state-backed insurance plans as the last resort. These plans, while providing temporary relief, ultimately place the financial burden on taxpayers. States like Florida, California, and Louisiana have already seen significant shifts towards such state-backed insurance solutions as private insurers retreat.
A Call for Sustainable Policies
Greenberg’s message is clear: addressing the financial impacts of climate change requires policies that reflect the true cost of risks. Artificially low insurance premiums may offer short-term affordability but lead to greater financial strain and reduced availability of insurance in the long run. "The cost of climate change, to state the obvious: Going up," Greenberg remarked. "This is not a short-term thing that’s going to go away."
What This Means for Policyholders and Insurers
For policyholders, especially those in high-risk areas, understanding and accepting the necessity of higher premiums is crucial. These premiums are not just about covering current risks but are also about fostering behavioral changes that could mitigate future risks. Building resilient communities and making informed decisions about property locations can help reduce long-term costs.
For insurers, the challenge lies in balancing profitability with regulatory constraints and public expectations. Clear communication about the reasons behind premium increases and active participation in discussions about sustainable policy frameworks are essential.
The intersection of climate change and insurance is a complex but critical area that demands rational pricing and sustainable policies. As a financial firm in California, we are dedicated to helping our clients navigate these changes. Whether you are seeking to understand how these shifts impact your insurance premiums or looking for ways to mitigate financial risks associated with climate change, our team is here to provide guidance and support. Please reach out to us for personalized advice and comprehensive financial planning tailored to your needs.
Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here.
Video Presentations All video presentations discuss certain investment products and/or securities and is being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect SHGA's or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
