Extreme heat: the insurance fallouts

Extreme heat poses a growing threat to the insurance industry, with property, specialty and L&H business most exposed. It increases the risk of electrical outages and wildfire risk, and can damage and cause disruption to transport, water and energy infrastructure, thus driving up property and specialty claims. In L&H, heat-related health impacts can increase medical, life, and workers’ compensation claims, particularly among vulnerable and outdoor-working populations. Extreme heat can put additional stress on healthcare systems. Liability exposures may also rise as employers and institutions face legal risks for failing to mitigate heat-related harms.

2024 was the hottest year on record. ¹ Likewise, July registered the three hottest days on record. ² With temperatures rising, so too is the incidence of extreme heat events (ie, temperatures hotter than the 90% percentile of those locally recorded). During June 2023-April 2024, there were 76 heat waves in 90 countries. ³ More than 6 billion people (about 78% of the global population) experienced at least 31 days of extreme heat. Since 1991, such conditions have become twice as likely to occur.

The first symptoms of heat stress may be light but prolonged exposure can have severe health effects. These can include exhaustion, heatstroke, kidney problems and exacerbate pre-existing conditions like cardiovascular and respiratory diseases (and even death). ⁴ The incidence, intensity and length of heat waves are increasing. Vulnerability factors include advanced age, pregnancy and lower socioeconomic status. ^5 6 One study estimates that currently around 489 000 people in the world die annually as a result of conditions of extreme heat. ⁷ This makes heat the deadliest natural peril, more so than floods, hurricanes and earthquakes combined. ⁸

In the US, the frequency of heat waves has increased steadily from an average of two to six per year during the 2010s and 2020s. The average heat wave in major urban areas – cities being hotspots of heat risk – is now four days long, about a day longer than in the 1960s. Heat wave season length has also grown in many locations, including in cities. ^9 10 Timing matters, as heat waves occurring earlier in spring or later in the autumn can catch people off guard.

Property and specialty: According to the World Economic Forum (WEF), conditions of extreme heat will likely cause damage to corporate fixed assets, driving annual losses of USD 404-448 billion across all listed companies by 2035. ¹¹ Disruption to infrastructure systems such as power delivery, and damage to roads, bridges and buildings can bring property damage and also business interruption claims. Extreme heat is leaving its own, subtle mark on the built environment. Called an “invisible hazard” given the not readily obvious impacts, ¹² extreme heat can cause infrastructure problems in very hot places like Arizona. It can also do so in historically cooler locations like the Pacific Northwest that today experience unprecedented high temperatures. Often, local infrastructure has not been designed to withstand changing climates. High temperatures can cause damage to and disrupt transportation, water and energy systems, among others. Ongoing risk assessment is necessary to ascertain how resilient infrastructure is. Assets that are poorly maintained are more vulnerable.

Droughts and heatwaves can increase the likelihood of wildfires. ¹³ Global insured losses due to wildfires have increased dramatically in the last decades, reaching USD 74 billion during 2014-2023. ¹⁴ Droughts and heatwaves, co-occurring strong winds, and increased development in the wildland-urban interface are fueling property damage and loss, as well as business interruption, injury, death, air pollution, loss of harvestable lumber and land for agriculture. In agriculture, temperature extremes can cause animal and crop mortality and reduce yields, leading to livestock and crop insurance claims.

L&H: Extreme heat effects on health and safety could spark rising claims in life and medical insurance, and also workers’ compensation. As of 2020, around 71% of the world’s working population was exposed to excessive heat. ¹⁵ Populations more vulnerable to heat risk are often in areas less well-served by L&H insurance; at the same time mortality is expected to be more modest for insured populations. Extreme heat can put stress on healthcare systems, leading to an increase in hospital admissions, putting additional burden on facilities and equipment. Hot weather has impacted ambulance call-out response times, and led to cancellations of surgeries and overheating in surgical theatres. ^16 17 Heat stress on electrical grids increases the risk of blackouts, in turn increasing mortality and morbidity risks, particularly when vulnerable groups rely on air conditioning to not be at risk. ¹⁸ Further, disruptions to cold-chain storage and transit infrastructure may cause active medical ingredients to degrade, leading to financial losses and outbreaks of vaccine-preventable diseases, particularly in developing countries. ¹⁹

Workplace accidents are more likely to occur when staff operate under conditions of heat stress. This could see an increase in medical and workers’ compensations claims. Employers failing to provide adequate hydration, rest breaks and other preventive measures may face employers’ liability claims. Similarly, organisers of outdoor events, municipalities and schools etc. could be exposed to liabilities if they do not perform corresponding duty of care. In helping to prevent such situations, insurers can offer innovative covers like parametric insurance for earnings protection during extreme heat events. ²⁰

Liability: There could be litigation against those having alleged responsibility for the causation of extreme heat events and its impacts. As in the case, for example, of a lawsuit filed by a county in Oregon (US) in 2021 against fossil fuel companies and a consulting firm. ²¹ A heat dome event had led to at least 69 associated deaths. The plaintiff claimed USD 52 billion for losses caused by the effects of climate change on extreme weather events. Liability lawsuits based on extreme heat add to the larger trend of climate change-related liability lawsuits. ²² Along similar lines, engineers could face construction professional liability claims in cases where infrastructure design shows to be not heat tolerant.

Financial markets & insurers’ assets: Extreme heat waves are increasingly recognised as a material risk to asset valuations and financial markets. Prolonged heat events can disrupt energy supply, reduce labour productivity, and reduce agricultural output, directly affecting company earnings and asset valuations.²³ Utilities face strain from surging electricity demand for cooling systems, while higher temperatures reduce the operational capacity of power plants. ²⁴ The power grid may falter under thermal stress, increasing maintenance costs and operational downtime while increasing the risk of wildfire ignition.²⁵ As frequency and severity of extreme heat events intensify, markets will likely increasingly price in the risks posed by extreme heat events. Heat-induced economic disruptions may also weaken sovereign credit profiles, particularly in emerging markets where adaptation capacity is lower. ²⁶

Energy

• Extreme heat increases demand for electricity demand, stressing the power grid and increasing the risk of blackouts and power shortages.
• It also affects thermoelectric power generation by impacting water availability and temperature, both critical for cooling operations.
• Power transmission becomes inefficient in high temperatures, reducing the capacity of generators, transformers and transmission lines.
• Solar panels and wind turbines also experience reduced efficiency.

Transportation

• High heat can cause road ruts, buckling and pavement cracking, leading to damage to rail tracks, bridges, and power cables for railways and streetcars.
• Train rails and bridges are vulnerable to heat-induced deformation.

Telecommunications

• High risk due to sensitivity of data centres and network infrastructure to extreme heat, more so where there are limitations to access to water.
• Fixed asset losses projected at USD 518-563 million/year by 2035. ²⁷
• Extreme heat can cause terrestrial cable materials to expand and contract, leading to sagging, equipment malfunction, and insulation degradation.
• Strain on data centre cooling systems, potentially leading to overheating or equipment failure.

Batteries

• Prolonged exposure to temperatures above 30°C can cause pre-mature degradation of lithium-ion batteries.
• Battery degradation can reduce electric vehicle range by 20%. Elevated risk of thermal runaway, which can potentially lead to battery fire or explosion. ²⁸

Construction

• Extreme heat can damage building materials, accelerate rust, and cause steel and iron beams to expand, leading to structural vulnerabilities.

Agriculture

• Extreme heat and drought cause economic losses in forest productivity, and also crop and livestock farming.