Hurricane Milton: Can We Insure a Climate-Ravaged World?

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The cost of Hurricane Milton is anticipated to be one of the highest in recorded history | Credit: Joe Raedle, Getty Images
RBC analysts forecast US$60bn in insurance losses after Milton. How will this disaster shape the future of insurance in a climate-uncertain world?

Hurricane Milton, hitting Florida's Gulf Coast as a Category 5 storm, has unleashed devastation and sparked major concerns within the global insurance and reinsurance markets.

Analysts are predicting that the insurance losses could soar to as high as US$60bn, a staggering sum that could send ripples through financial markets around the world.

The storm led to the evacuation of more than one million people. It is now considered one of the most destructive storms to impact the area in recent times.

Initial damage assessments suggest that Milton could rival the destruction caused by Hurricane Ian, which also hammered Florida in 2022.

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Heightened losses amid climatic threats

Should Milton's estimated US$60bn in losses come to pass, it would rank as one of the costliest storms in history, only overshadowed by Hurricane Ian and Hurricane Katrina.

Adjusted for inflation, Katrina inflicted more than US$125bn in damages and US$65bn in insured losses, alongside a massive loss of lives.

This raises the question: How have natural disasters influenced the insurance industry since Katrina?

Analysis from the Swiss Re Institute highlights a worrying trend of insurers facing escalating losses from extreme weather events, accentuated by climate change.

In response to the increasing frequency and severity of these disasters, insurance and reinsurance firms have started to hike premiums, especially for high-risk properties, and are tightening contracts to limit their exposure to these unpredictable catastrophes.

Total destruction in New Orleans after Hurricane Katrina, 2005

How does the insurance industry brace itself for hurricanes?

Analysts from RBC Capital Markets suggest that, despite the formidable losses, the insurance industry stands in a solid position to absorb the financial shock. They note that since Hurricane Ian in 2022, the sector has significantly augmented its reinsurance and financial robustness.

RBC asserts that advancements in reinsurance contracts and the bolstering of financial reserves mean that insurers are more equipped to handle monumental events like Hurricane Milton.

Hurricane Milton ripped through the Gulf of Mexico on October 9th, making landfall in Florida | Credit: Getty

Reactions in the market

Following the disaster, shares of global reinsurers such as Swiss Re, Munich Re, and players at Lloyd’s of London like Beazley, Hiscox and Lancashire have witnessed steep declines.

The market's knee-jerk reaction underscores the unease surrounding Milton’s long-term effects.

Still, RBC maintains a positive outlook on the industry's capacity for recovery and adaptation, anticipating that reinsurance rates will strengthen post-Milton.

This would enable insurers to recoup some losses, albeit at the expense of people who take out insurance policies in high-risk zones like the Gulf of Mexico.

The underwriting room at the Lloyd's of London HQ, one of the companies whose shares have declined in value in the wake of Milton | Credit: Lloyd's

The stark truth about insuring against climate change

Regrettably, many of Hurricane Milton's victims lacked insurance against flooding or similar damages.

Bloomberg's Mark Gongloff says: "An inch of water can do US$25,000 damage to a house. That means you don’t need a massive storm like Milton to suffer a life-changing financial problem. And yet most of us don’t have insurance against flooding."

The devastation wrought by similar-sized storms in the past, like Katrina, often hit economically fragile areas hardest.

With the imminent rise in insurance premiums after yet another calamity, those in high-risk areas may find insurance increasingly unaffordable, a situation bound only to be worsened as climate change intensifies.

Mark Gongloff, Opinion Editor at Bloomberg | Credit: Bloomberg

The enduring impact of climate on insurance

Andrew Robinson, CEO and Chairperson at Skyward Specialty Insurance Group, says that Florida's insurance market "has been living on borrowed time for 20 years," suggesting that Hurricane Milton could change the outlook of the market "forever".

This sentiment is echoed by local residents like Bill Young, who comments on the unsustainable premium hikes. Bill says: "The premium increases each year are insane. The market here is operating on US$4,000-$8,000 a year for Homeowners Insurance, if you can qualify."

He explains: "The broken market is simply driven by global warming, which not many want to accept."

Andrew Robinson, Chief Executive Officer and Chairperson of the Board at Skyward Specialty Insurance Group

Is our world insurable against climate change?

While some insurers may be ignoring the glaring reality, the harsh truth is that climate change will invariably cause and/or exacerbate the weather-related disasters they insure people against.

Insurers in California have already begun withdrawing coverage from areas prone to wildfires, leaving many without necessary protection. A similar trend could unfold in hurricane-susceptible regions around the Gulf of Mexico, as climate change continues unabated.

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The insurance industry faces urgent and complex challenges that will demand attention sooner rather than later.

As summarised by AXA's former CEO Henri de Castries in 2015: "A world warmed by two degrees Celsius might be insurable, but a world warmed by four degrees certainly would not be.”

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