CLIMATE'S UNSOLICITED PAYOUT

Rising weather extremes is destabilising the insurance industry, driving up premium prices and pushing insurers out of high-risk markets. The crisis is also spurring re-invention of insurance sector.

- AKSHIT SANGOMLA AND SHAGUN

PROBABILITY IS business-critical for the insurance industry. The insurer applies the "probability" factor to assess and value the risks, and sets the premium at a rate that earns them a profit even after paying out claims. When a large number of individuals or businesses subscribe to insurance policies, the risk gets shared by all, which makes the insurance premium affordable. But what happens when "probability" loses its meaning-or, the "how likely something is to happen" becomes the "all likely to happen"? The business of insurance collapses. In the face of high payouts, insurers increase the premiums. This makes insurance unaffordable for individuals and businesses, even discouraging them to buy policies. After sustained losses, insurers also quit the business. At present, the insurance industry is experiencing a similar downturn because of a new risk pattern that has redefined the game of probability: climate change.

In a rapidly warming world, extreme weather events such as storms, cyclones or hurricanes, floods and wildfires have become not just frequent and ferocious but also highly damaging. Probability of a disaster hitting a region is no longer once-in-decades but an annual occurrence. This has hit the insurers that offer coverage or financial protection against losses caused by weather-related events. One could even argue that the insurance is the unconventional tipping point of climate change. "We have the reality of climate change, the inconvenient truth that it's not just some conceptual political debate. It's having an impact and insurance is one of the places where we are starting to feel the pain," says Amy Bach, executive director of United Policyholders, the US-based insurance consumer advocacy group.

The wildfires this January in Los Angeles county of California, US are a sombre reminder of the insurance crisis brewing in a changed climate.