The insurance market sees money in your climate change travel anxiety

Insurance models are being upended by extreme weather. Whether it’s wildfires or tropical storms, disasters linked to climate change have gotten more common and creating upheaval in how insurers generate profits — and the losses they might be on the road to soak up.

Property insurers are pulling out of states where the chance cannot justify the potential return; states are bailing out their insurance sectors and the federal government is getting more anxious concerning the situation.

But one insurance area of interest is getting a lift amid the chaos. More travel and disrupted travel plans have meant more interest in travel insurance, which covers trip cancellation, lost luggage and delays.  

“The baseline of normal has modified significantly,” said Jeff Rolander, vp of claims at Faye Travel Insurance. Rolander, who has been within the insurance industry for over 30 years, said a decade ago, there’d be a pair of huge hurricanes per season. 5 or 6 years ago, the hurricanes would occur more closely together. Now, storms are on the horizon quite regularly, and it is a matter of severity, not if it would hit.

There’s greater than just anecdotal evidence. The Actuaries Climate Index, which measures the frequency of maximum weather — temperature, precipitation, dry days, sea level, extreme wind — shows warming temperatures in North America in recent a long time, fewer cool or cold temperatures, higher sea levels, more heavy precipitation and more drought.

More travelers searching for out trip insurance

Consumers are reacting to increasingly extreme and unpredictable natural disasters by more often opting into travel insurance. In accordance with Squaremouth.com, a travel insurance quoting and comparison engine, the travel insurance market has grown significantly since 2020, when travel got here to a halt. It now exceeds pre-pandemic levels, with Squaremouth reporting a 410% increase in sales in comparison with 2020 — with the magnitude of that annual jump no surprise given the Covid standstill — but additionally a 126% increase in comparison with 2019.

A part of the rationale for the trend is pandemic-linked: travelers have been spending more on “revenge” trips after feeling locked up for a couple of years. And through a period of high inflation, the common trip is dearer — 15% dearer this yr than in 2020. But increased delays as a result of extreme weather are also contributing to the expansion.  

“People used to similar to sort of jump right 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, in accordance with Swiss Re. Of that quantity, $125 billion was covered by insurance, marking the second straight yr where insured losses from natural catastrophes exceeded $100 billion. Over the past three a long time, there was a 5% to 7% average annual increase in insured losses, in accordance with Swiss Re.

“The insurance industry is amongst the primary to be affected by climate change. As an entire, the industry is attempting to determine what to do,” said Mike Newman, chief operating officer at Parhelion Underwriting, a risk finance company that insures investments in clean energy, climate finance and the environmental commodity markets.  

The disruption to travel creates challenges and opportunities for travel insurance providers and the insurance industry on the whole.

“In some ways, it is a wait-and-see moment,” Newman said.

When risks and the variety of claims rise, insurance firms typically react by putting down restrictions or limitations and raising prices, and that is already happening in some areas of insurance. In states where regulators are pushing to cap premiums to “reasonable” levels on property insurance, insurance firms are simply leaving or not offering things like wildfire or flood insurance.

While homeowners are seeing significant price hikes of their property insurance, travel insurance consumers haven’t experienced a price shock. No less than not yet. Considered one of the explanations is that travel insurance may be very short-term, generally just a couple of days or even weeks. The price — e.g. airfare and hotel — are also relatively small, predictable amounts and are settled fairly quickly

Expanded coverage and recent policy competition 

The disruptions do encourage recent insurers — which usually are not saddled with legacy costs — to are available in, undercut the competition and alter the industry as an entire. The rise of insurtech reflects a few of that business motivation. Because the industry comes under pressure from several aspects, including climate change, the variety of tech-driven insurance startups has risen. Global enterprise capital investments into insurtech hit a high of $16.3 billion in 2021, double what it was in 2020, before dropping to $9.3 billion in 2022, in accordance with PitchBook. Similarly, global enterprise capital investment into the insurance sector (not specifically tech-led insurance firms) jumped to $9.2 billion globally in 2021, up from $4.8 billion in 2020, then declined to $5.8 billion in 2022. Within the small subset of travel insurance, global enterprise capital investments totaled $59.6 million in 2022, $65.7 million in 2021, and $22.1 million in 2020.

Meanwhile, incumbent insurance firms are adjusting to travel issues, though not necessarily linked only to weather, by switching up their offerings. Allianz made several significant changes to its travel insurance products in December of last yr. Among the many changes: higher profit levels for a visit cancellation and trip interruption coverage in response to increased travel costs. The insurer also raised profit limits for medical emergencies and added 12 recent covered events for trip cancellation and interruption. Latest covered reasons include first responder call to duty, school yr extension, veterinary emergency, denied boarding as a result of a medical reason, inability to receive a vaccination, adoption, recent employment, visa refusal, theft or mechanical breakdown, covered illness/injury of a business partner, illness/injury/death of a caregiver, and theft of travel documents. These recent covered reasons are along with the list of 20-plus covered reasons for trip cancellation and/or interruption included in most Allianz Travel Insurance retail plans.

There are also recent entrants carving out highly specific niches. Nick Cavanaugh, a weather data scientist who previously worked as a quantitative analyst at a hedge fund, began Sensible Weather, which offers insurance to cover any bad weather that impacts a visit. Cavanagh, an outside enthusiast, saw a growing outdoor recreation market that’s increasingly impacted by weather events. Unlike travel insurance, which covers trip cancellation, Sensible Weather can cover events corresponding to rain, extreme heat or other incidences that may spoil an outside trip corresponding to climbing or skiing.

The startup draws on weather data, technology and analytics to assist businesses mitigate the impact of uncontrollable natural events. If a camping trip gets rained out, out-of-luck campers will be reimbursed the associated fee of camping reservations. Fees will vary in a dynamic pricing model that gives different levels of coverage (e.g. camping fees plus the associated fee of a hotel) and can vary depending on the time of yr, geography and other risk aspects. The corporate also partners with other outdoor businesses like waterparks, boat rentals or resorts to supply refunds to disenchanted customers. 

“People at the moment are beginning to take into consideration this stuff on a world scale and there are answers that we are able to do for various problems that folks have just felt helpless about for a very long time,” Cavanaugh said.