Page 46 - The Insurance Times August 2024

FEATURE

Extreme heat is causing billions in

damages that insurers won't cover

T he heat waves broiling tens of millions of Americans Manufacturers are also hard hit by high heat, which can

can warp roofs, shrivel crops, buckle roads and
cause machines to malfunction and leave workers needing
more breaks. The California study of seven heat waves
disrupt power supplies.
estimated they cost the sector more than $700 million in
Much of that damage is hard to quantify-and isn't covered
by insurance. lost productivity. Yet companies often find they have few
ways to recoup such losses.
Now cities, regulators and companies are sounding the
alarm about the escalating costs of heat waves, which cause One option that is increasingly being pitched to businesses
tens of billions of dollars in damage each year. and local governments: policies where payouts depend on
the temperature. Known as parametric insurance, they are
"Extreme heat is not just a weather event," said Ricardo essentially a bet on how hot it will get, and let companies
Lara, California's insurance commissioner , after issuing a hedge risks that are hard to cover with traditional insurance.
report this month on the economic and human toll of heat
waves. "It's a silent, escalating disaster wreaking havoc Such temperature-triggered payouts have been used by
on health, economy and infrastructure." utilities and other energy companies for some time, said
Cole Mayer, a managing director at Aon. But he said the
Heat waves have become more intense, longer lasting and firm is seeing more interest from other industries, including
three times as frequent as they were 60 years ago, construction and agriculture.
according to government data. The upward trend is
expected to persist as climate change makes more areas "We are just scratching the surface in terms of utilizing this
vulnerable to the record-breaking temperatures of recent tool," Mayer said.
weeks. Heat waves are more predictable than other natural disasters,
Standard insurance policies are designed for sudden and however. That can make the coverage expensive, compared
accidental damages, such as those caused by fires, storms with just setting aside money to pay for the added costs, said
and theft, and often don't cover the effects of intense heat, Ted Lamm, associate director of the University of California
which can be gradual. Berkeley's Center for Law, Energy & the Environment.
"If it's well known that Phoenix is going to suffer a certain
"Extreme heat leads to damage that often unfolds with
time," said Karen Collins, a vice president at industry group number of days of 90 degrees Fahrenheit or more each
the American Property Casualty Insurance Association. summer, there's not much value in insuring that risk." Still,
he said the policies could benefit businesses facing a certain
The U.S. agriculture and construction industries alone lose combination of risks.
an estimated $100 billion of productivity a year due to
extreme heat, according to a report by insurance broker The damage caused by heat can lead to significant
Aon in March. underwriting losses for insurers as well, even if not directly.
That can include a jump in worker injuries on blistering hot The overheating of car engines can also cause breakdowns,
days. Injuries to construction workers, for example, were resulting in more claims on auto insurance for tows or
20% higher when the temperature climbed above 95 roadside assistance.
degrees Fahrenheit, compared with milder days, according The far-reaching impact of severe heat waves means they
to the Workers Compensation Research Institute. pose a significant risk to the insurance industry, said David
Flandro , head of industry analysis at reinsurance broker
Heat can also stunt the quality of and volume of crops, losses
that may not be apparent until harvest. A federal insurance Howden Re.
program covers heat damage for some crops, but excludes "Extreme heat impacts infrastructure, strains energy
some fruit and vegetables including watermelon, squash and systems, jeopardizes agriculture and heightens the risk of
lettuce. other natural disasters," he said. (Source: Mint)

42 August 2024 The Insurance Times