The recent fires in Los Angeles have rightly captured global attention. A rising death toll, thousands of lost homes, and close to 40,000 acres reduced to ash has left Southern California reeling.
While official figures have not yet been released by the state government, AccuWeather estimates the total damages will fall between $250 billion and $275 billion. For perspective, the annual average in economic losses related to disaster events in the 21st century is $310 billion.
While political shaming and finger-pointing has dominated the news cycle – with Los Angeles Mayor Karen Bass facing the brunt of the criticism – the real culprit is not the local government but an increasingly volatile climate.
California’s rain cycles have long played a critical role in wildfire patterns, but climate change has intensified these cycles to dangerous extremes. Years of above-average rainfall encourage lush vegetation growth, which then dries into tinder during subsequent drought years, creating the perfect conditions for catastrophe.
Disasters are becoming increasingly disastrous.
As we know, the impact of climate change extends far beyond California. Globally, extreme weather events are becoming more frequent and more severe. In a 2024 Study, World Weather Attribution (WWA), found that climate change was responsible for a 10% increase in rainfall and a 21 km/h increase in wind speed during Hurricane Helene (2024). Similarly, WWA found that extreme 1 day downpours like that which caused flooding across Spain, are 12% more intense and twice as likely to occur due to climate change.
While the destruction of these amplified events is devastating in its own right, the human impact is taking on an even more sobering character as insurers are walking away from high risk areas and many are left to rebuild without the financial safety net they once relied on.
Insurers have become the barometer of climate risk.
When the smoke clears in Los Angeles, many affected residents will face the harsh reality of rebuilding without insurance coverage.
State Farm General, California’s largest home insurance provider, announced last year that it would not be renewing policies for homes in high-risk areas like Pacific Palisades and Altadena beginning in July 2024. Similarly, Allstate stopped issuing new policies in California back in 2023.
The withdrawal of major insurers is a warning. Armed with vast data sets and predictive models, the insurance industry has become a barometer of climate risk. Insurers have increasingly accurate pictures of the growing dangers posed by extreme weather and are recalibrating their portfolios to reflect this new reality. But given the scale of the insurance industry and its role in stabilising financial systems around the world, it has the potential to be so much more than a gauge for climate change impacts.
Insurance could become our climate gatekeeper.
The industry’s financial decisions have a direct impact on the insurability of the world. Investments in climate-positive projects reduce risks which stablize the insurance market. On the other hand, funding carbon-heavy projects amplifies climate impacts, leading to more frequent disasters, higher claims, and an increasingly uninsurable world.
This self-reinforcing cycle places the insurance sector at the heart of the fight against climate change. By aligning their financial power with their predictive capabilities, insurers can act not just as risk managers but as stewards of a more sustainable future. This means doing more than recognising that climate change is impacting balance sheets and limiting exposure accordingly. It means seeing the opportunities and making a concerted effort to redirect capital towards climate resilience.
Redirecting Capital Toward Climate Resilience
Insurers are uniquely positioned to influence the global economy through their investment strategies. By prioritising renewable energy projects, sustainable infrastructure, and low-carbon technologies, the industry can help drive us towards a greener future.
Thankfully there are many examples of actors in the industry taking the right steps. Nippon Life Insurance has made significant investments in start-ups committed to addressing Sustainable Development Goals as well as renewable energy infrastructure throughout the US. Likewise, industry giants Zurich and Aon have created a platform for underwriting hydrogen projects in an effort to aid the green energy transition.
Divesting from carbon-intensive industries.
The sector also has an ethical obligation to divest from projects and industries that accelerate climate change. By perpetuating a cycle of increasing climate risk, investments in coal, oil, and other fossil fuels conflict with insurers’ long-term stability.
Some leading firms, such as Allianz and AXA, have committed to significant fossil fuel divestment plans. Others, like Berkshire Hathaway’s insurance arm and State Farm, remain attracted to the shorter-term benefits of carbon-intensive investments. While most insurers have stepped away from fossil fuel investments to some degree, they have increased their fossil fuel positions by USD 200 billion in the last ten years.
The clock is ticking.
The growing vulnerability of our planet is clearly signalling an urgent need for change, not just in how we manage and anticipate risks but in how we prevent them. The insurance industry, with its immense financial power and predictive capabilities, stands at a crossroads. By encouraging the flow of capital toward climate-positive projects and divesting from fossil fuels, insurers have the opportunity to ensure a more resilient future.
But the clock is ticking. Every investment that flows into carbon-intensive industries intensifies the cycle of climate risk, while every dollar directed toward renewable energy or sustainable infrastructure has the potential to expedite our transition to a more stable and insurable world.
Insurers must rise to the challenge and fulfil their potential not just as risk managers but as climate gatekeepers, enabling a future where climate resilience and sustainability guide financial decisions.
Be curious!
- Continue reading about this topic over on McKinsey & Co’s ‘Capturing the climate opportunity in insurance’ report.
- Put your money where your mouth is! Triodos Bank finances organisations that have a positive impact on our world, including the environment. They offer current accounts in the UK for only £3/month.
- If you are interested in the actions and intentions of specific insurers, search for their annual sustainability report. Here is a link to Zurich’s 2023 report.
Featured image by Vlad Deep, Unsplash
