• The insurance industry is being affected by climate change arguably more so than any other sector of the market.
• The Actuaries Climate Index is keeping track of a changing environment and weather patterns, and finding the evidence is much more than anecdotal.
• Travel insurance is a small niche, but it's a growing one related to consumer fears about experiences and vacations being upended by extreme weather and natural disasters.

Insurance models are being upended by extreme weather. Whether it's wildfires or tropical storms, disasters linked to climate change are becoming more common and creating upheaval in how insurers make money — and the losses they may be on the line to absorb.

Property insurers are pulling out of states where the risk can't justify the potential return; states are bailing out their insurance sectors and the government is getting more anxious about the situation.

But one insurance niche is getting a boost 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 changed significantly," said Jeff Rolander, vice president of claims at Faye Travel Insurance. Rolander, who has been in the insurance industry for over 30 years, said a decade ago, there'd be a couple of large hurricanes per season. Five or six years ago, the hurricanes would happen more closely together. Now, storms are on the horizon quite frequently, and it's a matter of severity, not if it will hit.

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

More travelers seeking out trip insurance

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

Part of the reason for the trend is pandemic-linked: travelers have been spending more on "revenge" trips after feeling locked up for a few years. And during a period of high inflation, the average trip is more expensive — 15% more expensive this year than in 2020. But increased delays due to extreme weather are also contributing to the growth.  

"People used to just like kind of jump into a trip, and now they're just they're watching the hurricanes very closely," said Zach 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, according to Swiss Re. Of that amount, $125 billion was covered by insurance, marking the second straight year where insured losses from natural catastrophes exceeded $100 billion. Over the past three decades, there has been a 5% to 7% average annual increase in insured losses, according to Swiss Re.

"The insurance industry is amongst the first to be affected by climate change. As a whole, the industry is trying to figure out 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 in general.

"In many ways, it's a wait-and-see moment," Newman said.

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

While homeowners are seeing significant price hikes in their property insurance, travel insurance consumers have not experienced a price shock. At least not yet. One of the reasons is that travel insurance is very short-term, generally just a few days or weeks. The cost — e.g. airfare and hotel — are also relatively small, predictable amounts and are settled fairly quickly

Expanded coverage and new policy competition 

The disruptions do encourage new insurers — which are not saddled with legacy costs — to come in, undercut the competition and change the industry as a whole. The rise of insurtech reflects some of that business motivation. As the industry comes under pressure from several factors, including climate change, the number of tech-driven insurance startups has risen. Global venture 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, according to PitchBook. Similarly, global venture capital investment into the insurance sector (not specifically tech-led insurance companies) jumped to $9.2 billion globally in 2021, up from $4.8 billion in 2020, then declined to $5.8 billion in 2022. In the small subset of travel insurance, global venture capital investments totaled $59.6 million in 2022, $65.7 million in 2021, and $22.1 million in 2020.

Meanwhile, incumbent insurance companies 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 year. Among the changes: higher benefit levels for a trip cancellation and trip interruption coverage in response to increased travel costs. The insurer also raised benefit limits for medical emergencies and added 12 new covered events for trip cancellation and interruption. New covered reasons include first responder call to duty, school year extension, veterinary emergency, denied boarding due to a medical reason, inability to receive a vaccination, adoption, new 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 new covered reasons are in addition to the list of 20-plus covered reasons for trip cancellation and/or interruption included in most Allianz Travel Insurance retail plans.

There are also new entrants carving out highly specific niches. Nick Cavanaugh, a weather data scientist who previously worked as a quantitative analyst at a hedge fund, started Sensible Weather, which offers insurance to cover any bad weather that impacts a trip. Cavanagh, an outdoor enthusiast, saw a growing outdoor recreation market that is increasingly impacted by weather events. Unlike travel insurance, which covers trip cancellation, Sensible Weather can cover events such as rain, extreme heat or other incidences that can ruin an outdoor trip such as hiking or skiing.

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

"People are now starting to think about these things on a global scale and there are solutions that we can do for various problems that people have just felt helpless about for a long time," Cavanaugh said.

Correction: Zach Lazzari is the owner of Cross Border Coverage, which provides auto insurance to U.S. and Canadian vehicles driving to Mexico. An earlier version of this article misspelled his name.