Nature loss is insurers’ loss – and the public’s too

When nature is destroyed, insurers are among the biggest losers financially, with the public suffering detrimental knock-on effects.

By Dr Natacha Postel-Vinay

Technical Nature-Related Finance Lead, Global Canopy

“Protecting nature” makes many people think of saving pandas and whales, rather than their own insurance premiums. But damage to nature will increasingly hit the public in the pocket.

My latest report with collaborators, Evidence review on the financial effects of nature-related risks, finds wide-ranging evidence that damage to nature triggers and exacerbates financial damage to the economy. My review of existing research brought sharply into focus how much the insurance sector suffers financially when nature is destroyed.

Nature loss propels natural disasters – bad news for insurers

Climate change is driving up the rate of natural disasters like drought, fire and flooding – and nature loss intensifies this effect, making these events more frequent and more severe. In a critical but often overlooked ripple effect, human activity drives nature loss through, for example, deforestation, wetland loss, water pollution, water overuse and soil depletion. This can trigger or exacerbate droughts, floods, fires and disease outbreaks. These often interact with climate, damaging the economy in myriad ways.

Natural disasters are hazards to property, infrastructure and agricultural land. Insurers and reinsurers specialising in these sectors are particularly vulnerable to the financial fall-out as owners make claims on the ever-growing damage. Swiss Re estimates global insurance losses from natural disasters have been growing 5% – 7% annually in the last decade, and will likely reach US$145bn this year.

Floods

Our report looks to New Zealand as a powerful example. Exotic monocrop pine plantations and logging extracted a toll on insurers in the aftermath of Cyclone Gabrielle in 2023. Native vegetation once provided natural protection, like ground water retention, but this was no longer present with the monocrops. Logging left forestry land littered with dead trees. Consequently flood waters swelled, carrying debris that smashed into property and infrastructure, and exacerbated flooding by blocking river flows. This contributed to insurance claims reaching a record US$1.2bn, property insurers making a loss in the financial year, and an estimated 0.3 percentage-point rise in inflation. 

Elsewhere, the uncontrolled conversion of wetland to urban areas puts property and infrastructure at risk of periodic flooding, even with artificial flood defences in place. Loss of wetlands in Florida exacerbated the impact of Hurricane Irma in 2017, contributing to an estimated US$430m of insurance claims on property damage.

Drought

Native vegetation loss can trigger and exacerbate drought, which can damage buildings, including through cracks in soil leading to subsidence and the compromise of underground utility infrastructure. In France, public reinsurance costs attributed to property and infrastructure damage compensation during drought in 2022 totalled some US$4bn.

Fire

In Canada and California, replacement of native forests with monocrop tree plantations has reduced moisture in undergrowth and increased the use of the forestry management practice of ‘quick fire suppression’. This causes dead wood to accumulate, increasing the risk of intense ‘crown’ fires raging out of control, rather than regenerative natural fires. In 2016, these practices contributed to the Fort McMurray wildfire – among the costliest natural disasters in Canadian history. It led to US$2.6bn in insured losses and was compounded by flooding in 2020, leaving some insurers wondering whether Fort McMurray was still insurable.

Human health, and the next pandemic?

Deforestation and forest fragmentation increase the risk of human illness by exacerbating zoonotic disease transmission. A key hypothesis from scientists is that COVID-19 was originally spread by forest edge-dwelling animals to humans. This contributed to the cost borne by US life insurance companies due to the pandemic – US$90bn in beneficiary claims in 2020, a 15.4% year-on-year increase, the highest annual climb since the 1918 Spanish flu pandemic.

The knock-on impact to the public

When insurers take a financial hit, it’s bad news for the public. They can face higher insurance premiums or not get cover at all. In the wake of rising wildfire-related losses, California’s largest home insurer, State Farm, threatened to leave the state if regulators did not allow it to hike premiums by 22%. As the entwined nature and climate crisis worsens, insurers may withdraw cover from entire areas, which could lead to other financial services – from mortgages to investments – becoming unviable.

Insurers: shooting themselves in the foot?

How should insurers approach activities that damage the economy when nature is destroyed? Evidence suggests it’s in their best financial interests to steer clear. Yet some are stimulating activities that may fuel their own losses. 

When insurers invest policyholders’ money in deforestation and fossil fuel expansion, it ultimately drives up beneficiary claims and threatens the sustainability of their own business model. In November 2024, the European Insurance and Occupational Pensions Authority recommended fossil fuel stock and bonds held on European insurers’ balance sheets receive additional prudential treatment to accurately account for the higher risk of such assets.

The sector currently takes a siloed approach, where individual segments underwrite activities that end up costing fellow segments dearly. Taking the forestry sector as an example, tree plantation owners require forestry insurance to operate. Insurers who provide this, without regard to how the business activities damage nature, may contribute to financial damage to other insurance segments – real estate insurance and reinsurance may face escalating claims for flood damage exacerbated by monocrop plantations and logging. 

A path forward

To address these risks, a key step for insurers is to recognise the significance of nature’s influence on their financial performance and the sustainability of their business model. A holistic sector view would mean ensuring the activity they underwrite and invest in does not increase the likelihood of ramping up beneficiary claims in any segment of the insurance sector. And they could underwrite and invest in opportunities to restore and protect nature to help ensure the long term viability of their sector.

Governments and financial regulators could promote greater alignment between insurance practice and management of nature-related risks. A possible approach to this could be for central banks to include nature, as well as climate, in their supervisory scope which typically applies to insurers and banks. For instance, the Bank of England could amend CP10/25 (‘Enhancing banks’ and insurers’ approaches to managing climate-related risks’) to include nature.

Dr Natacha Postel-Vinay is Technical Nature-Related Finance Lead at Global Canopy. She is a co-author of the report, Evidence review on the financial effects of nature-related risks, which was produced by the TNFD, Global Canopy and the University of Oxford.