"As this paper shows, we are heading for a potential mortgage crisis which would have a drastic impact on the whole economy."
- Mark Campanale - Carbon Tracker Initiative
The escalating impact of the climate crisis will lead to homeowners and businesses having their cover withdrawn, an anonymous group of senior insurance professionals warned in a memo released on 14th October.
The group is made up of UK, Swiss and EU-based executives from insurers, reinsurers and brokers, including many with global coverage responsibilities.
The memo says that current practice "will not deliver the protection society needs" and warns UK government and customers not to assume that insurers will cover future losses, instead arguing that insurers will use the 12-month renewal cycle to withdraw or limit cover before crisis hits.
The group also claim that the severity of projections for climate impact on the insurance market is leading some firms to be pressured to downgrade risks, and that forecasts are being downplayed in conversations with government and not mentioned to customers as insurers plan to 'time their exit'.
It adds that restrictions are already being introduced for wildfire, coastal erosion, subsidence and flood-affected areas, with farmers also being affected, while communities in mountain and coastal regions, flood plains and wildfire-affected areas will be disproportionately affected.
The warning says that whilst significant damage has already been done, the extent of future emissions will determine the severity of the losses, and an expansion of uninsured mortgaged properties could lead to a major financial crash.
"The undermining of the mortgage market drove the Global Financial Crisis – we are worried a major increase in uninsured, high-risk properties could manifest in a similar way," it says.
The warning continues by saying that if the industry fails to withdraw cover in time, the risk could have major financial implications for insurers, reinsurers and their investors.
"Insurance is necessary to access a mortgage, allowing providers to manage their own financial exposure," it says. "As both domestic and commercial property insurance is limited or withdrawn at a significant scale, we foresee an economic risk that could precede a financial crash in the way that the sub-prime mortgage crisis catalysed the Global Financial Crisis."
"We are writing this as a call to policymakers and regulators to realise that our models show a protection gap - impending damage that insurers cannot and should not be expected to cover," it continues. "We are also writing this as a call to investors to understand that in this less predictable and more extreme context, we could end up with losses that financially hurt our industry and therefore their investments."
"Instead of looking at how we play a strategic role in making sure such a situation is avoided, we are moving ahead with plans to side-step through unprecedented upheaval."
"Through the products we sell, the information we choose to share or withhold and the ways in which we engage with public policy, our choices will influence how severe the impacts become."
READ MORE: Just 16% of full-time employees have income protection cover
Lord Nicholas Stern, IG patel professor of economics and government, chair of the Global School of Sustainability, and chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, added: "Twenty years ago in the Stern review, I said that the cost of inaction was much greater than the cost of action on climate change and described greenhouse gas emissions as the greatest market failure the world has ever seen.
"Now the people who price risk for a living are warning, from the inside, that our models have underestimated the danger and that mispriced risk is building to potentially unmanageable levels.
"Cutting emissions fast is not a cost to avoid; it is the soundest insurance we can create against a far more expensive and dangerous future. And in so doing we can embark on a much more attractive story of growth than the dirty, destructive models of the past."
Sir David King, chair of the Climate Crisis Advisory Group, commented: "It is inevitable that with extreme heat and drought we will have more subsidence and more wildfires across the US and Europe. You then combine that with extreme levels of rainfall, winds, hurricanes, and you end up with intensified coastal erosion and flooding.
"These are the real-world impacts of climate change, that mean a report from insurance insiders saying that a mortgage crisis is a significant concern is no surprise to me. Of course, the more emissions globally, the more severe these impacts will become, and the more homes and businesses and farms affected and the greater the financial risk."
Mark Campanale, founder & CEO of the Carbon Tracker Initiative, added: "As this paper shows, we are heading for a potential mortgage crisis which would have a drastic impact on the whole economy.
"But this is not a static situation - if both the financial services sector, including insurance, and policymakers continue to enable fossil fuel expansion, it will be significantly worse than if emissions reduce materially.
"The two key questions are who pays for all this damage and how bad will the damage become?
"As it stands, the ordinary customer is likely to pick up future costs with higher premiums, if they can even get insurance. And the average taxpayer will have to sit behind government if they have to pick up the cost of a failing insurance system."
