No insurer will insure a house on fire – California wildfires embody the growing risks of climate change

In California, damages and economic losses from the wildfires running rampant are so far estimated to reach up to 275 billion dollars according to AccuWeather’s preliminary estimates. According to National Public Radio (NPR), current estimates put insured losses from the fires at more than 20 billion dollars.

The damage is massive, as is the human suffering. While the current wildfires are only the latest in a long line of major natural disasters, this time the fires are raging through neighbourhoods with some of the most expensive real estate in the world, making them one of the costliest natural disasters in US history. In lower-income areas, the amount of human suffering could have been even greater, but the economic losses and particularly the insured losses would have been smaller. The same unfortunately goes for the media coverage.

Some US insurance companies have sought to cut their losses by raising premiums, stopping to write new insurance policies or even cancelling existing fire insurance policies in fire-prone areas. Insurance is a way to prepare against risks. If a risk is realised, the insurer will pay out for the loss. But no insurer will insure a house that is already on fire, nor will insurance be the answer if catastrophic losses become the rule rather than the exception.

The business model of insurance does not work with risks that occur frequently and have the potential for a very high total amount of damages. Record-setting climate events have brought about so many new factors of uncertainty that many waterfront cities, for example, are fast becoming partially uninsurable.

These waterfront cities – in addition to the fire areas in California – are the houses that are already on fire.

California’s huge insured losses will not have an immediate effect on the Finnish insurance sector as insurance companies that offer insurance policies to households operate locally.

But although the natural conditions in the Nordics are relatively calm compared to those in many other regions, even Finland is not safe from the risks arising from climate change. This is something the insurance sector must prepare for. Potential risks in Finland include stormy winds and heavy rainfall, which can raise sea levels and cause flood damages in coastal areas. Spring river flooding has also become more extreme and has introduced new risks.

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Uncontrollable climate change equals an uninsurable world.
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The insurance sector has regarded climate change as a major risk already since the 1980s. The sector has a vital role in climate change mitigation and adaptation: while the sector itself is not a significant source of emissions or in a position to lay down climate policies, it is in a key role in building society’s socio-economic resilience and steering economic development towards climate goals.

The Finnish financial sector is highly committed to climate change mitigation. In 2021, Finance Finland published a report titled ‘Non-life insurance and climate change’, which was put together to offer the financial sector in-depth information on the role of non-life insurance in climate change mitigation and adaptation. Climate change affects the insurance sector significantly, requiring insurers to implement new risk management and new practices. Uncontrollable climate change equals a world that is uninsurable in terms of natural catastrophe damages. This makes the insurance sector’s role in finding solutions to climate change all the more essential.