Vicious hurricanes in the southeastern United States. Massive flooding in Ontario and Quebec. Wildfires in Los Angeles.
What these events have in common — besides the fact that climate change has made them more extreme — is that they are pummelling insurance companies.
Preliminary estimates suggest the fires that devastated L.A. — already the costliest wildfires in California history — could put insurers on the hook for between $28 billion and $45 billion US ($40 billion to $65 billion Cdn).
Meanwhile, the Insurance Bureau of Canada recently reported that as a result of events like the Jasper wildfire and flooding in eastern Canada, 2024 set a record for insurance payouts in Canada: $8.55 billion.
This will inevitably lead insurers to raise rates as they try to manage the broader risk. But as premiums rise and some regions become uninsurable, it could have a cascading effect that could lead to a financial crisis, says Gary Yohe, Huffington Foundation professor emeritus of economics and environment at Wesleyan University in Connecticut.
“What’s happening now is that the really, really dark [climate events] are just catastrophic and all in one place, happening at the same time,” said Yohe.
In terms of insurance, he said, “it creates a societal problem, not just an individual problem.”
As Southern California gets some much-needed rain, a new analysis suggests the conditions that led to January’s wildfires were 35 per cent more likely because of human-fuelled climate change. And the more likely those fires become, the more expensive insurance will get for everyone.
The L.A. fires are a good illustration of this. The flames that swept through the Pacific Palisades and Altadena areas burned about 15,000 hectares, killing 29 people and destroying an estimated 16,000 homes.
As Yohe points out, many of the properties will no longer be worth as much as the principal on the homeowner’s mortgage. Some people will walk away from their mortgage and stop repaying the bank.
But it doesn’t end there. A lot of that debt is packaged and sold to investors.
“That gets spread around. That doesn’t just happen in the local California banks,” said Yohe. “They’re part of national chains. Big banks make bundles of derivatives and they sell them to banks all over the world.”
The financial impact of the L.A. wildfires seems contained so far. But Yohe argues a similar weather disaster could very quickly lead to a situation that looks like the 2007/2008 subprime mortgage crisis, which led to a global recession and the loss of millions of jobs and businesses.
Evidence of climate-related mortgage defaults
Not a lot of people have entertained this idea, but as an economist, Yohe has been thinking about the larger impacts of climate change for a while.
Back in 1982, he participated in a preliminary study by the National Academy of Sciences in the U.S. on global warming and the potential for it to become a significant economic vector.
“There were probably five economists in the world that knew about climate change at the time,” Yohe joked.
Fast forward several decades. A report earlier this month from the Institute and Faculty of Actuaries in the U.K. said that unless political leaders take greater action to reduce carbon emissions, the GDP of the global economy could be cut in half between 2070 and 2090 due to climate shocks.
Dave Jones, director of the Climate Risk Initiative at UC Berkeley School of Law’s Centre for Law, Energy and the Environment in California, believes a financial collapse stemming from insurance losses is distinctly possible.
“In the United States, you’re required to have insurance if you have a mortgage. And if your insurance price is going up, as it has been, that makes it increasingly difficult for you to be able to afford a mortgage,” said Jones, a former insurance commissioner for the state of California.
“We’re starting to see some evidence that folks are defaulting on their mortgage, not just in California, but elsewhere in the United States, as these insurance prices go up.”
A new report from First Street, a U.S.-based organization that measures climate risk, says that extreme weather could wipe out $1.47 trillion in U.S. real estate value in the next 30 years.
Some areas of the U.S. and Canada are so vulnerable to climate impacts that they are increasingly uninsurable. In the last few years, a number of major insurance companies have pulled out of California, Florida and Louisiana, for example, because of their susceptibility to a variety of environmental risks.
North of the border, about 1.5 million homes in Canada are now ineligible for flood insurance, according to Craig Stewart, vice-president of climate change and federal issues for the Insurance Bureau of Canada.
‘Severe convective storms’
As Stewart recently told the CBC Radio program What on Earth, flooding comprises the biggest chunk of insurance payouts in Canada, accounting for about $3.7 billion in 2024.
But the sheer unpredictability of global warming is leading to freak occurrences.
The most expensive event in Canada last year was a 20-minute hailstorm near Calgary that resulted in 70,000 claims.
“It obliterated cars, damaged houses — it came in at about $2.8 billion for that one event,” said Stewart.
Jones said that “climate change is creating whole new things to kill us, injure us, damage our properties and make insurance unavailable.”
He specifically cited “severe convective storms,” which are basically atmospheric rivers that loom over a region and dump large volumes of rain for long periods of time.
“If you had asked insurance professionals 20 years ago what a severe convective storm is, they would have looked at you blankly,” said Jones. “Sometimes it’s hail, sometimes it’s heavy rain, sometimes it’s wind.”
He says severe convective storms accounted for more than 50 per cent of insured losses in the U.S. last year.
Yohe notes that until about 15 years ago, insurance companies in the U.S. were regulated to determine their premiums based on actuarial data from recent history.
“But just ordinary climate change was beginning to tell a story that the last 10 years are a very bad predictor of the next 10 years in certain circumstances, like property on the coastline,” he said.
Eventually, regulators in various states, led by Connecticut, have allowed insurers to use projections of possible futures — like sea level rise — to set premiums.
Reinsurance, political factors
Another reason localized disasters can have a broader economic impact is reinsurance, which is what insurance companies buy to minimize their liability in the event of a major catastrophe.
The big reinsurance companies are multinational corporations, and when they have to pay out for disasters around the world, they end up raising the premiums for insurers — and that inevitably trickles down to consumers, says Yohe.
As a result, Canadian homeowners could feel the effects of the L.A. wildfires.
Yohe says that politics, particularly in the U.S. right now, could exacerbate the problem of insurance losses. In the wake of the Los Angeles fires, President Donald Trump baselessly criticized California for poor water management and threatened to withhold disaster funding unless the state agreed to some unrelated policy changes.
Then-president Joe Biden put no such conditions on federal help when Hurricane Helene caused roughly $60 billion US in damage last September in North Carolina, which typically votes for a Republican president.
“This isn’t a political statement: insurance works when it is spread widely. The wider, the better,” said Yohe. “Putting constraints on the federal government’s contribution to recovery is an act in the wrong direction. Putting [the recovery] all in the hands of the states is an act in the wrong direction.”
He sees federal funding as an insurance policy itself.
“People who live in Connecticut, not happily but not begrudgingly, know that a lot of their tax money that goes to the federal government is going to North Carolina. And that’s good.”
