Tourists wait in the airport during wildfire evacuations on the Greek island of Rhodes on July 23, 2023.
Will Vassilopoulos | Afp | Getty Images
Insurance models are being upended by extreme weather. Whether it’s wildfires or tropical storms, disasters linked to climate change are becoming more common and creating upheaval in how insurers make money — and the losses they may be on the line to absorb.
Property insurers are pulling out of states where the risk can’t justify the potential return; states are bailing out their insurance sectors and the government is getting more anxious about the situation. But one insurance niche has seen a boom amid the chaos. Travel insurance that covers cancellations, delays, and lost luggage has become more popular as a result of the chaos. Jeff Rolander is the vice president of claims for Faye Travel Insurance. He said that “the baseline of normal” has changed dramatically. Rolander, an insurance professional with over 30 years of experience, says that a decade back, there were a few large hurricanes each season. In the past, hurricanes were more frequent and closer together. There’s more to it than anecdotal data. The Actuaries Climate Index, which measures the frequency of extreme weather — temperature, precipitation, dry days, sea level, extreme wind — shows warming temperatures in North America in recent decades, fewer cool or cold temperatures, higher sea levels, more heavy precipitation and more drought.
More travelers seeking out trip insurance
Consumers are reacting to increasingly extreme and unpredictable natural disasters by more often opting into travel insurance. Squaremouth.com is a comparison and quoting engine for travel insurance. According to them, the market has grown since 2020 when travel was halted. Squaremouth reports a 410% jump in sales from 2020, which is not surprising given the Covid stoppage. However, it also reported a 126% rise compared with 2019.
Partly due to the pandemic: travelers are spending more money on “revenge trips” after feeling trapped for a few year. In a time of high inflation, trips are more expensive. The average trip this year is 15% more costly than it was in 2020. The growth is also attributed to increased delays caused by extreme weather.
“People used to just like kind of jump into a trip, and now they’re just they’re watching the hurricanes very closely,” said Nick Lazzari, owner of Cross Border Coverage, which provides auto insurance to U.S. and Canadian vehicles driving to Mexico.
More natural disasters mean big losses for insurers, and more costs passed along to policyholders.
In 2022, natural disasters resulted in global economic losses of $275 billion, according to Swiss Re. In 2022, natural disasters will result in global economic losses of $275 billion, according to Swiss Re. Of this amount, $125 was covered by insurance. This is the second consecutive year that insured losses from a natural catastrophe exceeded $100 billion. Swiss Re reports that insured losses have increased by 5%-7% per year on average over the last three decades. The industry as a whole is still trying to decide what to do,” Mike Newman, Chief Operating Officer at Parhelion Underwriting. This risk finance company insures investments made in clean energy, climate financing, and environmental commodity markets. Insurance companies usually react to rising risks by increasing restrictions and prices. This is already happening with some insurance. In states where regulators are pushing to cap premiums to “reasonable” levels on property insurance, insurance companies are simply leaving or not offering things like wildfire or flood insurance.
While homeowners are seeing significant price hikes in their property insurance, travel insurance consumers have not experienced a price shock. Travel insurance consumers have not experienced a price shock, at least not yet. Travel insurance is usually only for a short time, like a few weeks or days. Costs — such as airfare and hotel — are also relatively small, predictable amounts that can be settled fairly quickly. airfare and hotel — are also relatively small, predictable amounts and are settled fairly quickly
Expanded coverage and new policy competition
The disruptions do encourage new insurers — which are not saddled with legacy costs — to come in, undercut the competition and change the industry as a whole. Insurtech is a reflection of this business motivation. The number of tech-driven startups in the insurance industry has increased as the industry is under pressure due to several factors including climate change. According to PitchBook, global venture capital investment into insurtech reached a high in 2021 of $16.3 billion, which was double the amount in 2020. However, it dropped to $9.3 in 2022. Global venture capital investments into the insurance industry (not just tech-led companies) increased to $9.2 Billion in 2021 from $4.8 Billion in 2020. Then, they dropped to $5.8 Billion in 2022. In the small subset of travel insurance, global venture capital investments totaled $59.6 million in 2022, $65.7 million in 2021, and $22.1 million in 2020.
Meanwhile, incumbent insurance companies are adjusting to travel issues, though not necessarily linked only to weather, by switching up their offerings. In December last year, Allianz made a number of significant changes to their travel insurance products. In response to rising travel costs, Allianz increased the benefit levels of trip cancellation and interruption coverage. In addition, the insurer increased benefit limits for medical emergency and added 12 additional covered events. These new covered reasons include: first responder call-to-duty, school year extension and veterinary emergencies, as well as visa refusals, adoptions, new jobs, sickness/injury/death for caregivers, and thefts of travel documents. The new covered reasons join the 20+ covered reasons included in many Allianz Travel Insurance retail policies for trip interruption or cancellation. Nick Cavanaugh is a weather data analyst who worked previously as a quantitative analyst at a large hedge fund. He founded Sensible Weather to offer insurance that covers any bad weather which impacts a vacation. Cavanagh is an avid outdoor enthusiast who saw that weather events were affecting the outdoor recreation market. Sensible weather can cover rain, extreme heat, or other incidents that can ruin outdoor trips such as skiing or hiking. In the event that a camping trip is canceled due to rain, campers who are unlucky can receive a refund for their camping reservations. The fees will be determined by a dynamic pricing system that provides different levels of protection (e.g. Camping fees and hotel costs will be based on time of the year, location and other risk factors. The company partners with outdoor businesses such as waterparks or boat rentals to provide refunds for disappointed customers. Cavanaugh stated that “people are starting to think of these issues on a global level and that there are solutions we can offer for different problems people have felt helpless for a very long time.”