The destructive fires raging around Los Angeles highlight the role of insurers. But also the risks that they will have to bear because of climate change. A threat which will continue to increase the prices of reinsurers, to whom insurance companies, particularly Belgian ones, can transfer part of the risks.
“Insurers will be able to absorb losses” linked to dramatic fires currently ravaging the Los Angeles regionin California. This reassuring statement came from the rating agency Standard & Poor’s (S&P) last week, when the damage caused by the fire was estimated at around ten to fifteen billion dollars. Wells Fargo has since cooled the claim, inflating the estimate to $30 billion, highlighting the colossal cost of the disaster in terms of property destroyed.
The fires which are devastating Pacific Palisades and Malibu, two upscale areas of Los Angeles, have destroyed several thousand buildings, the vast majority of which are worth an average of three million dollars. This is expected to make these fires the costliest ever in Californiaestimate several experts at JPMorgan and S&P, who expect an increase in premiums in a region already neglected by many insurers, because it is considered too risky.
The impact of the disaster for the insurance world will go far beyond the Californian context. Financial risks linked to climate change are only getting stronger everywhere on the planet. Disasters at one point on the globe have cascading consequences at the global level, particularly via reinsurers.
Insurance insurance
These large international companies are the “insurance of insurance companies”. “They make it possible to transfer part of the risks borne by an insurance company. The insurer protects itself against excessive risks which could lead to its insolvency. All insurers that offer home insurance do so. Reinsurers make it possible to pool and balance risks across the entire planet,” explains Nevert Degirmenci, spokesperson at Assuralia, the voice of the insurance sector in Belgium.
This system obviously costs insurers and if disasters increasein one of the locations supported by the reinsurer, his premiums will also increase. “In years when there have been a lot of natural disasters around the world, prices inevitably rise. They therefore increase over the years, since it must be noted that these events are now more frequent and more intense. But this does not automatically mean that insurance companies will directly pass on increases in reinsurance premiums to their customers. They remain free to adapt them. It’s a commercial choice,” says the Assuralia spokesperson.
For reinsurers, 2024 ranks 3rd costliest year since 1980estimates Munich Re, one of the German giants in the reinsurance sector. This estimates the insured damage at around $140 billion, close to the estimate of Swiss Re, another world leader, at $135 billion. Amounts to which must be added the economic losses linked to disasters, which multiply these figures by more than two.
A system that is still viable?
With the intensification of destructive climatic phenomena, it is difficult to see a possible drastic reduction in the risks incurred. In the short and medium term, the final amounts to be paid to insure insurers should therefore not decrease.
Has the reinsurance system survived and does it remain bearable? Insurers can hardly do without it, they admit. They all seek to diversify, to divide the risks, in order to be able to bear reimbursement in the event of a disaster. “The system is stable. It helps absorb risks and provide coverage to policyholders at reasonable pricesreassures Nevert Degirmenci. For Belgium, however, it is time to establish a real public-private partnership, to distribute compensation between insurers and public authorities. When it comes to climate damage, it is difficult to have an overview of the amounts and Belgium, with its compensation ceiling, may find itself in an unmanageable situation. This is what happened during the dramatic floods in July 2021, after which it was necessary to establish an exceptional protocol to be able to further compensate the victims, by exceeding this ceiling.
-It is time to establish a real public-private partnership, to distribute compensation between insurers and public authorities.
The public-private agreement is also a wish expressed directly by insurance companies. Ethias goes even further in the reflection, calling for a “four-stage rocket model” for insurance: insurers, reinsurers, the different levels of Belgian public authorities and the European level. “On the third floor, we should imagine the creation ofa new regional reinsurance fund. It would be made up from a small part taken from all premiums, in order to be able to help in the event of major disasters,” explains spokesperson Albane Lairesse. The top level, at the European level, would be part of solidarity on the continent, which would be more solid and lasting. New way of dividing risks.
Belgium ready in the event of a major disaster?
In Belgium, coverage against the risks of natural disasters is found in so-called “fire” home insurance. This insurance, not obligatory, is subscribed to by around nine out of ten householdsaccording to data from the federation of insurers. Coverage whose premiums have actually increased in recent years. But it has rather evolved according to the ABEX index, which tracks the evolution of prices in the construction sector, and not according to the increase in reinsurance premiums. This index allows, in the event of a disaster, to calculate the value of the property as new, with current prices, and not the price paid at the time of purchase. Which will therefore also benefit the insured, in fine.
Flood and storm risks are among the most frequent in Belgiumdetail several companies. Insurers also play an information role during an expected and predictable event. “AG Insurance communicates as much as possible during important events, with suggestions for last-minute preventive measures that can still be taken,” explains Lars Vervoort, in charge of communications for the insurer. AG also works on the structural improvement of homes at risk.”
In addition to these measures, insurers have understood their role, and their direct interest, in limiting the effects of climate change. By supporting more virtuous investments, limiting their own CO2 emissions and encouraging behavioral changes among their policyholders, they participate in the effort required to reduce human impacts on the environment and climate. So, potentially, on the damage caused by the upheavals affecting the globe as a whole. Not just material damage, either.
If the economic impacts of climate disasters allow us to coldly record the sums lost, they obviously say nothing of the human catastrophe which is playing out at the same time. Prevention has improved, particularly through communication or preventive evacuations, making it possible to save more lives. Which did not prevent the human toll of natural disasters in 2024 to remain heavy, with some 11,000 people having lost their lives.
A figure which reminds us that summarizing the fight against climate change with the preservation of the planet probably diverts attention from the real objective, which will always be to save those who live there.
