Why insurers worry the world could soon become uninsurable
Günther Thallinger, a board member at Allianz, one of the world's biggest insurers, recently outlined how the world is fast approaching temperature levels where insurers will no longer be able to offer cover for financial services, such as mortgages and investments.
In a LinkedIn post published in late March, Thallinger made the case for rapid decarbonization, pointing out that entire asset classes were "degrading in real time" as extreme weather events take their toll. Perhaps most strikingly of all, he warned the worsening climate crisis appears to be on track to destroy capitalism.
Insurance, which is regarded as the invisible lubricant of the global economy, has a unique role to play in addressing climate-related risks. As professional risk managers, insurers routinely allow investors to take on calculated risks, protecting individuals and businesses against financial losses.
Thallinger, who is responsible for investment management and sustainability at Allianz, told CNBC that approximately two-thirds of economic losses from natural catastrophes are currently uninsured, indicating a "major societal problem."
The so-called protection gap means that the financial burden of these disasters often falls on individuals, businesses and governments, rather than insurance firms.
"If this volume just grows even more, we simply have a societal situation that is not bearable anymore because it is just too much risk that is no longer covered," Thallinger told CNBC by video call.
"The logic is not ours or mine. No, absolutely not. There are many people who are actually talking about how you cannot insure certain assets. It's very, very difficult to deal with these assets as an investor."
The warning comes at a time when the world is on course for a temperature increase of as much as 2.6-3.1 degrees Celsius this century, according to the United Nations, a level that would trigger "catastrophic" consequences for the planet.
Scientists have repeatedly warned that global average temperatures must be kept below 1.5 degrees Celsius to avoid the worst of what the climate crisis has in store.
This threshold is recognized as a crucial long-term target because so-called tipping points become more likely beyond this level. Tipping points can lead to dramatic shifts or potentially irreversible changes to some of Earth's largest systems.
"We can really talk about adaptation. How to build our infrastructure, our houses, our streets, our pipelines, our grids in such a way that they can withstand certain forms of weather phenomena. This is something that we can do with a very, very easy economic case behind it," Thallinger said.
Allianz estimates that the cost of economic losses from natural catastrophes is typically around 10 times higher than the cost of adaptation, noting that this provides a clear economic incentive for policymakers to invest in preventative measures.
"If we continue, however, with the policies that we have out there, we are clearly on a pathway now of 2.7 degrees or 3 degrees where adaptation is simply not doable anymore. This is just what it is. We cannot protect Amsterdam from sea level rise of three meters. This is just not doable," Thallinger said.
It's not just Allianz's Thallinger fearing the worst. Zurich Insurance Group, Europe's fifth-largest insurer, said in April alongside a research paper assessing climate resilience that the outlook looks "alarmingly bleak."
The Swiss insurer cited the Los Angeles wildfires at the start of the year as a stark reminder that even the world's wealthiest economies are unprepared for the impact of increasing climate risks.
Zurich also found that global insured losses have grown at a much faster rate than the global economy over the past three decades.
On an inflation-adjusted basis, Zurich said that average insured losses rose by 5.9% per year between 1994 and 2023, while global gross domestic product (GDP) increased by 2.7% annually over the same period. The findings suggest that insured losses have more than doubled relative to global growth over the past 30 years.
"If insured losses continue to grow at this rate, premiums for climate risk coverage will need to increase to reflect the additional risk," Zurich Insurance Group said in the paper. "This in turn, will affect the level of protection that individuals and businesses are willing and able to purchase, with potential consequences for the overall functioning of the market."
For insurers and reinsurers, the increase in severity and frequency of extreme weather events has coincided with astronomical growth in the catastrophe bond market.
First created in the 1990s, so-called CAT bonds refer to a type of financial instrument designed to raise money for insurers in the event of a natural disaster, such as a hurricane or earthquake.
Swiss Re, a leading global reinsurer, said in a recent report that the CAT bond market has expanded by a whopping 75% since the end of 2020, noting that the trend that shows little sign of slowing down.
For Allianz's Thallinger, however, the climate crisis threatens to push a long-standing relationship between more risk and more business for insurers to breaking point. At some stage, this could have implications for financial markets, he said.
Steve Evans, owner and editor-in-chief at specialist data provider Artemis.bm, warned the insurance industry won't just keep bearing the brunt of economic losses from natural disasters.
"Unless resilience is increased and protection is put in place, then the more disasters impact regions and the more expensive their insurance is going to get. And that could be a terrible spiral to be honest with you," Evans told CNBC by video call.
"If the losses keep escalating, it just becomes uneconomic for insurers and reinsurers and even the capital markets. So, something has to be done to really bring together both resilience and protection."
Not everyone is convinced the insurance industry will struggle to function amid rising global average temperatures.
"Will the world become uninsurable? Well, I'm a bit hesitant on that," said Tobias Grimm, chief climate scientist at German reinsurance giant Munich Re.
"It's all about the question of price. We have appetite still to offer — not cut — insurance given that there are healthy market conditions, and we get risk adequate premium on that."
Grimm told CNBC that since Munich Re's business offers reinsurance on a one-year basis, rather than a multi-year basis, the question of insurability is not typically something that comes up.
"The underlying problem is that we still develop properties in high-risk areas, and we have seen with the example of Californian wildfires where many of these rich villas in the outskirts of the Los Angeles suburbs were hit first," Grimm said.
"So, that's the issue. We can counter them by encouraging loss prevention and thinking about land use management schemes, these kinds of things," he added.
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