A leading insurance executive said the best way to keep price increases in check for property insurance in regions exposed to climate change is to mitigate the impact of natural disasters.
Prevention needs to become “a mandatory part” of insurance “to avoid climate risks not being insurable anymore,” Axa SA Chief Executive Officer Thomas Buberl said in an interview. The idea would be to shift “our own activities toward helping the customers to better protect their properties.”
Buberl cited the recent wildfires in Los Angeles as a case in point, indicating that the reconstruction underway should focus on non-flammable building materials in an effort to reduce the damage caused by future blazes.
“How will these buildings be rebuilt?” he said. “Concrete buildings didn’t burn, only wood buildings did.”
The LA catastrophe drew global attention to a crisis in the California insurance market after carriers had pulled back from wildfire-prone areas in recent years. They have argued it has become unprofitable to offer protection as the costs of disasters keep rising while state regulation has limited the ability of insurance companies to raise rates.
It’s something that has played out around the globe as rising temperatures are making natural disasters more frequent, increasing the damage they deal to properties. In response, insurers either hike prices or, if that’s not possible, cut exposure, sometimes leaving homes uninsured.
Piggy-Bank Mechanism
The prevention measures proposed by Buberl to counter that development should include “public-private partnerships,” he said in the interview.
An existing insurance scheme in France that seeks to spread the losses caused by natural disasters across a wider group of payers could serve as a model, Buberl said, labeling it a “piggy-bank mechanism.” The idea is to “put money aside frequently instead of suffering from a big peak when the natural catastrophes end up happening,” he said.
The CEO was referring to a French compensation system known as Cat Nat that has been in place for more than four decades. Under the scheme, all property and casualty insurance policies include protection for natural disasters, which is financed by an extra premium set by the French government. The country’s insurers can also get unlimited reinsurance by state-backed reinsurer CCR.
Cat Nat’s payouts in 2023 exceeded its revenue for a seventh consecutive year, prompting it to almost double the rate it charges home owners, CCR said last year. It pointed to climate change as a main reason for the decision.
The “insurability of climate risks” has become a tangible problem as “some insurers started to plan their withdrawal from geographic regions previously considered hazard-free,” CCR said in its 2023 annual report published last April.
Less Affected
Axa said in its full-year earnings report published Thursday it expects losses totaling about €100 million from the LA wildfires.
“We are large in the US but very much focused on commercial properties, which were less affected by the fires than residential properties,” Buberl said in the interview.
Speaking about the renewals of reinsurance contracts that happen at the beginning of each year, Buberl said this time around they came at prices that were”much lower” than in previous years and “even negative” in some cases. However, the LA wildfires are likely to “give a spike for a tighter market.”
Buberl has been leading Axa since 2016 and has shifted its focus from life insurance to property & casualty and health insurance.
Photo: Thomas Buberl. Photographer: Chris Ratcliffe/Bloomberg
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