Extreme weather phenomena have steadily been increasing in recent decades. The cost of these natural disasters has increased by more than $870 billion (adjusted for inflation) since 1980. Many industries are affected by extreme weather, which can impact economic output. The bitter cold that held much of the U.S. in a firm grip this past winter lowered American output by as much as $3 billion (2014 USD) a week. Insurance companies face particularly challenging issues in the wake of climate change, including assessing risk and setting prices.
Risk assessment has become difficult for insurance companies, who traditionally rely upon historical data to determine risks. Flooding and other disasters have grown more widespread since 1990, occurring in historically low-prone areas. As a result, the insurance industry has been faced with an increased demand for storm-related insurance. Some regions may become uninsurable due to high risk relating to the frequency of extreme weather phenomena (e.g. wind-damage insurance along gulf coast states).
Additionally, pricing policies are becoming more uncertain for insurance agencies. Setting a reasonable price for weather-related insurance has become problematic as the frequency and intensity of natural disasters are hard to predict. Setting prices too low risks huge losses in the wake of an extreme weather phenomenon (e.g. extra-tropical cyclone Sandy in the Northeast U.S.). On the other hand, setting prices too high for insurance policies will cause consumers to drop their protection policy. Finding an equilibrium in the insurance market is tough, but imperative for the survival of individual insurance agencies.
The insurance industry is working with other industries to curb the effects of climate change by reaching out to consumers and encouraging a drive toward renewable energy and use of sustainable products. Furthermore, insurance companies are pressuring businesses and individuals affected by natural disasters to rebuild in a sustainable manner (i.e. adhering to more strict building codes) so that disasters will not have as big of an impact in the future.