Insurers look to heatwave protection products

With this summer witnessing temperatures of 43 degrees Celsius in Washington DC and even soaring to 48 degrees Celsius in Phoenix, Arizona, the insurance market is now considering innovative products to protect against the risk of future heatwaves.

According to a report by the Thomson Reuters Foundation, the charitable arm of news agency Reuters, a wider range of heat insurance offerings – likely aimed initially at city authorities or similar government buyers around the world – are now being explored as the risks and costs of heatwaves rise.

The developments come as Athens Mayor Kostas Bakoyannis told an online event in August that rising heat is now “one of our city’s greatest challenges”.

Longer and hotter heatwaves driven by climate change are becoming an increasingly dangerous – and costly – menace, with sweltering cities often picking up the tab for everything from repairing melted roads to running more cooling centres.

So, is heatwave insurance the answer?

Since the 1990s, utility companies in cities like Chicago have used weather derivatives to hedge the cost of buying additional power on hot days when electricity demand outstrips supply, according to Daniel Osgood of the International Research Institute for Climate and Society (IRI).

Heat has also been an indirect part of parametric products for poorer farmers for some time now, providing automatic pay-outs for assumed crop losses if, for instance, enough days pass without rain.

Michael Spranger, chief risk management officer at the Caribbean Catastrophe Risk Insurance Facility (CCRIF), said insurance cannot fix the problem of heatwaves, which will increase in frequency if climate-heating emissions continue to rise, but can help to absorb some of the financial consequences.

At present there is no standard product that is heatwave insurance, but options are being explored. For example, potential triggers could be whether the client experiences three consecutive days over 43C (110F), or a summer deemed by the meteorological authorities to be significantly above average temperatures.

The difficult aspect of such cover would in effect be working out which aspects of the new policy or parametric product would not ordinarily be included in existing products.

Other questions that need to be resolved to make heat insurance work include determining who would be financially responsible for losses and so needs to pay for policies, according to Sophie Evans of the London-based Centre for Disaster Protection:

“When the roads start to melt, whose job is it to manage those risks? Whose job is it to make sure people can get to work?” she asked. “That risk ownership is crucial.”