Good morning. If the Los Angeles wildfires are bracing evidence of the general threat posed by the climate crisis, they have also brought home a specific problem: how can you make the insurance system work when the risks are so high?
That is not a question limited to California, or to the United States: the insurance industry has rated the climate crisis as the biggest threat to its future four years in a row, a very concrete riposte to those politicians who continue to question the reality of global heating. It is impossible to know whether a specific weather event like storm Éowyn in the UK has been caused by climate change – but we know that they, and the damage they leave in their wake, are only going to get more frequent.
If nothing changes, the consequences – for the industry, for homeowners, for the broader financial system, and for where human beings can choose to live – will be profound. Today’s newsletter, with Dr Eugenia Cacciatori, a co-author of Disaster Insurance Reimagined and a senior lecturer in management at Bayes Business School in London, explains some of the intractable problems, and the attempts to figure out solutions. Here are the headlines.
Five big stories
Israel-Gaza war | Donald Trump’s proposal that large numbers of Palestinians should leave Gaza to “just clean out” the whole strip has been rejected by US allies in the region. Trump’s intervention came as a deal was reached to allow Palestinians to return to northern Gaza and release a civilian hostage who Israel said should have been freed already.
Heathrow | Rachel Reeves has given her heaviest hint yet that she will back a third runway at Heathrow airport, arguing that she is willing to make difficult decisions while pursuing economic growth. Campaigners have warned that the move would be a severe setback for the UK’s climate commitments.
Southport attack | Prevent’s assessment of the danger posed by Axel Rudakubana followed policy at the time, an official review will find – but it will criticise the scheme for rejecting extra help to tackle his interest in violence. The review of the way three referrals were handled before Rudakubana committed an atrocity in Southport is due to be published this week.
AI | Ministers have shut down or dropped at least half a dozen artificial intelligence prototypes intended for the welfare system, the Guardian has learned, in a sign of the headwinds facing Keir Starmer’s effort to increase government efficiency.
Belarus | Alexander Lukashenko is set to win a seventh five-year term as Belarusian president with 87.6% of the vote in Sunday’s election, according to an exit poll. The US and the EU said in the run-up to the election that it could not be free or fair because independent media are banned and all leading opposition figures have been jailed or forced to flee abroad.
In depth: ‘The future of disaster insurance is under threat all over’
As well as the devastating human cost for the many people who have lost their homes, the wildfires in Los Angeles are expected to be the most expensive such disaster in American history. The price to insurers could be as high as $30bn, Wells Fargo and Goldman Sachs estimated. Premiums have already rocketed in California in recent years, rising by 43% between January 2018 and December 2023; many companies have pulled out of the state altogether. The reason the economics are changing is obvious: between 2004 and 2013, an average of 653 structures were destroyed each year by fire in the state, according to data from Cal Fire. Between 2014 and 2023, that number was 5,669.
The consequences are only likely to worsen as the market adjusts to the new reality in the years ahead. (This piece by Oliver Milman and Andrew Witherspoon sets out the impacts that are already being felt across the US.) But the wildfires are, of course, not an isolated catastrophe. “It is one of a pattern of recent events that is changing perceptions,” Eugenia Cacciatori said. “The future of disaster insurance is under threat all over.”
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What is the bigger picture on the future of insurance?
“Insurance is caught between two poles,” Cacciatori said. “On the one hand, there is a desire to charge people in ways that are proportionate to the risk, because that’s fair, and it allows insurers to balance the books. But that creates problems, because those who are at very high risk tend to have trouble getting the insurance they need.”
The other extreme, she added, is “a heavily regulated market that tends to produce affordable prices. But that creates the problem of funding reconstruction or new construction in places that are vulnerable to disaster. It is a very difficult problem to resolve.”
Part of the problem is that the insurance system has traditionally worked by using past events as a guide to future risk, and pricing their policies accordingly: indeed, the law in California requires that they do so. But that model no longer works, and it isn’t easy to work out a new one. “The long term global trends are very clear,” Cacciatori said. “But translating them into reliable local projections, especially when different risks intersect – for example, somewhere that’s vulnerable to fire and flooding – is very complicated.”
If a particular country’s insurance industry fails, that is obviously a huge problem for the people who rely on it. But there are wider risks as well: if insurance becomes unaffordable, property values collapse. That could easily create a 2008-style financial crisis.
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What does the future look like in the UK?
At the moment, the UK is not prone to the kinds of climate disasters that are becoming increasingly common in other parts of the world. But the past two years were among the wettest on record here, and the risks are increasing: about 6.3m properties are now at risk from flooding, with that figure likely to rise to about 8m by 2050. In April last year, the Association of British Insurers said that the annual cost of weather-related home insurance claims had risen by more than a third, to a record £573m.
One useful initiative in the UK, Cacciatori said, has been the creation of Flood Re, a public-private partnership where insurers pay a levy that goes into a scheme to cover homes that have previously been flooded – essentially a subsidy for the homeowner. “That has been very useful and innovative,” Cacciatori said.
But it is also a project with a limited shelf life: as this excellent Bloomberg feature (£) explains, it will end in 2039, and is meant as a bridging exercise so that private insurance companies have some protection until better flood defences are in place. And it will only get more expensive over time. Meanwhile, the Environment Agency has confidence that only 15% of flood-defence projects will be completed on time – even as the government has doubled its investment.
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What can be done to fix the system?
There are past examples of the insurance industry in other sectors playing a role in improving safety or resilience: in the car industry, for example, insurers have pushed for the standardisation of safety features, because it reduces the cost of claims. But there are major obstacles to implementing the same kind of approach in disaster insurance.
One well known intervention, reduced premiums for customers who take those measures, isn’t a great tool, Cacciatori said: “The companies only have a very limited sense of what the risk reduction will be, and there’s a danger that customers switch insurance a few years later, so it’s a complicated model for them.”
One alternative is the model in place in Switzerland, where local insurance companies have a monopoly on coverage in many areas and insurance is compulsory.
“They can’t charge according to risk under that model, so they have the incentives and the means to contribute to resilience,” Cacciatori said. “They are heavily involved in discussions of building standards in which insurers in other countries are only beginning to be involved.”
It would be very difficult to repeat that approach in countries with longstanding systems where major insurers are in constant competition nationwide. “But there are some elements that you could learn from,” she added. For example, insurance associations could pool their expertise and would be collectively incentivised to push for reduced risks.
“Insurers shouldn’t be investing directly in resilience or mitigation measures,” she said. “Ultimately the responsibility for those decisions to be taken in the public interest has to lie with governments.”
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How likely is that to happen?
There are huge obstacles to the kinds of reforms that will mean that people living in high-risk areas can find affordable insurance.
For one thing, the incentives for politicians with an eye on the next election to advocate for models that would probably push up premiums aren’t straightforward. And there are competing priorities that work in very different directions.
It obviously isn’t realistic to imagine that the entire population of somewhere like Los Angeles could up sticks and recreate the city somewhere safer, which means that a viable insurance industry is a non-negotiable; but if the world in 2050 looks very different to the one of 2000, it may not make sense to create incentives for people to live in places that are becoming much more dangerous.
Part of the problem is that humans just aren’t very good at weighing long-term risks against short-term benefits – a significant problem for the insurance system but also a fundamental feature of how the climate crisis has unfolded. A classic example of that tendency is the way that people have kept on buying coastal condos in Florida even though many of them may well be underwater in a few decades’ time.
But there is evidence that reality is starting to set in: with major weather events causing more than $1bn in losses in the state in 2024, four of the 10 US cities where house prices dropped most last year were in Florida. “We are starting to see signs that people are adjusting their expectations,” Cacciatori said.
There are many seemingly intractable problems with reaching a sustainable solution, she added. “But if I want to cheer myself up, I think about the way the status of green energy generation has changed over the last 15 or 20 years, and the incredible progress that has been made which wasn’t thought to be possible. We can find ways to deal with these problems. But I’m very worried.”
What else we’ve been reading
The Wicked promo tour was intense, to say the least. For weeks, my feed was flooded with talk of “holding space” and users belting out “wooOooO.” That said, Zoe Williams’ interview with Cynthia Erivo (pictured above) is a gem, brilliantly unpacking her winding journey to the big screen. Nimo
Shon Faye thought that her relationship with B would lead to her release from “the constant inner chorus that sang to me about my unworthiness”; but, “naturally, this didn’t fucking happen”. Her essay about that break-up, and about love and heartbreak as a trans woman, is superbly written. Archie
ICYMI: The most recent edition of You be the judge featured a housemate dispute straight out of a nightmare. Richard works from home full-time, and Maeve thinks he should cover more of the bills. It’s the kind of petty clash that can make cohabiting unbearable. What’s your verdict? (Mine: Maeve needs to stop nitpicking.) Nimo
“In the justification for what has been done to Gaza’s children hides the most extreme form of dehumanisation from which all Palestinians suffer,” writes Nesrine Malik. Her column does a remarkable job of communicating the depths of that loss. Archie
Aida Edemariam’s conversation with neuroscientist Camilla Nord about her latest book The Balanced Brain is an interesting exploration on how the centuries old “conceptual division between mind and body” that has underpinned western medicine is causing “preventable and relievable harm”. Nimo
Sport
Football | Leicester piled the pressure on beleaguered Tottenham manager Ange Postecoglou (pictured above) with a 2-1 win at White Hart Lane leaving Spurs 15th in the table. Lisandro Martínez’s deflected winner gave Manchester United a 1-0 win at Fulham to ease the pressure on Ruben Amorim. Elsewhere, Aston Villa drew 1-1 with West Ham, and Brentford defeated Crystal Palace 2-1.
Tennis | Jannik Sinner and Madison Keys triumphed in the Australian Open over the weekend. Here are the best images from the year’s first grand slam.
Rugby union | Finn Russell inspired Bath to a 23-32 victory at Sale, who were missing eight England players due to international commitments.
The front pages
“Trump accused of ‘ethnic cleansing’ over call for Palestinians to quit Gaza” is the Guardian’s lead story. The Express says “Never forget” to mark the 80th anniversary of the liberation of Auschwitz, while the Mirror runs one survivor’s story under the headline “I’m here for my family”. “Smuggler gangs logged out” – the Metro reports that 8,000 social media accounts promoting illegal Channel crossings have been taken down. “A&E patients may be treated at home in Streeting’s overhaul of NHS” says the i. The Times splashes with “Starmer to defy Trump over cash for defence” while the Telegraph has a more muted take: “Starmer and Trump set path for state visit”. Top story in the Daily Mail is “4 million face monster hike to council tax” and in the Financial Times it’s “EU faces mounting pressure to slash ‘frivolous’ climate change red tape”.
Today in Focus
The radical new treatment helping people with psychosis
Jenny Kleeman reports on a new therapy where patients who suffer from psychosis create a digital avatar of the voices they hear
Cartoon of the day | Edith Pritchett
The Upside
A bit of good news to remind you that the world’s not all bad
There’s nothing more universally delightful than majestic animal photos, and this picture essay showcasing some of the week’s best wildlife photography is a real treat. It whisks you away, from the undergrowth of Kenya, where wild kittens roam, to a drowsy fur seal lounging in New Zealand. One shot of fluffy wild goats foraging in a snowy landscape looks like a scene straight out of Narnia. And the image of two hares intently eyeing up a crow on an icy German field is utterly, and hilariously, charming.
Bored at work?
And finally, the Guardian’s puzzles are here to keep you entertained throughout the day. Until tomorrow.
