Increasing premium prices

Rising weather events is destabilising insurance industry, driving up premium prices.

Wildfire in Los Angeles

Wildfire in LA county of California, this January, 2025, is a somber reminder of insurance crisis brewing in a changed climate. Since january 7, there are instances of multiple wildfires, burning 23,000 hectares of land, killing at least 29 people, destroying 16,000 structures. The fire has been an outlier both in terms of rarity and severity.

Major insurers dropped out

Major insurers, accounting for 80% of California market, have dropped out or restricted issuance of new policies.

Wildfire season in coastal southern california starts from dry june and continues through october, not in the period between january and march, as it is rainy and cold, not conducive for fires.

According to global research non profit World Resources Institute, over 200 fire alerts detected in LA between january 7 and 22 - more than 130 times the average for the first four weeks of the year during 2012 - 2024.

According to World Weather Attribution (WWA), human induced climate change fuelled the hot and dry and windy conditions that made LA fires about 35% more likely.

According to Insurance Information Institute, LA wildfires are likely to rank among the 10 costliest natural disasters in global history.

On january 14, the estimated economic losses is between $250 - $275 billion.

The projected insurance losses costs around $35 - $45 billion.

California officials were working to stop insurance companies from fleeing the state.

Since 1950, the area burned by california fires each year has been inicreasing.

Of the 20 largest fires in california's history, eight occurred during 2017 - 2020. The 10 most expensive wildfires in the world, based on insured losses, have all taken place in the US.

State farm, one of the largest property and auto insurance providers in the state, cancelled around 1,600 policies in July, 2024.

The prime reasons insurers cite for such exit is growing natural disasters, increasing the cost of reinsurance. To avert total loss and possible collapse, insurance companies reinsure their products and the losses they could incur. They do so through reinsurance companies such as Swiss Re and Munich Re. This increases the premium cost.

Property that cannot be insured cannot obtain a mortgage. It is impossible to sell that property without cutting the prices. Slashing their resale value could crash housing markets.

FAIR plan (Fair Access to Insurance Requirements), a state backed last resort basic insurance program for properties. California FAIR plan caps payouts for natural disasters at $3 million per residential policy holder.

In California, the FAIR plan has only $700 million in its cash reserves. As the companies that form the FAIR plans collapse, the pressure eventually falls on US taxpayers. The US Senate budget committee's Staff report of December 2024, flags this concern.

Climate related extreme weather events will become both more frequent and more violent, resulting in ever scarcer insurance and ever high premiums.

Potential trigger a full scale financial crisis similar to what occurred in 2008.

Swiss Re, insured losses have insured at an annual rate of 5 - 7% in last 30 years. In 1.5degree celsius scenario by 2030, then insured natural catastrophe losses would increase by 68%.

World Economic Forum in the paper, "Insuring against extreme heat, navigating risks in a warming world", said, "highest losses would come from extreme heat in the next decade with $2.4 trillion losses to annual productivity by 2035 and $445 billion in losses to fixed assets."

According to UN, the share of global population living in urban areas has increased from 30% in 1950s to over 50% now. By 2050, this will increase to 70%.

33 mega cities across the globe of which 26 are in developing countries, as will be nine of ten mega cities that will be created by 2030. Most mega cities are close to water ways, coastal or riverine - ingredients towards wind, storm surge and river flood exposure.

Many of the insurance companies we have now were formed during peace time, which is when consequences of climate change were not visible.

Reports of dozen insurers in the US going bankrupt in the past few years. Prudential regulatory authority, UK's insurance regulator, has added climate risk to insurers stress tests in a bid to achieve greater financial resilience.

India experienced extreme weather events on 255 of the 274 days in 2024, which affected 3.2 million hectares of crop area. In 2023, the number of days stood at 318 days out of 365 days and in 2022, it was 314 days.

Over 54% of the 573 agriculturally relevant rural districts or 310 districts face very high or high risk, due to climate change. 10% face low or very low climate risk. 36% face medium climate risk.

Since 2016, Pradhan Mantri Fasal Bima Yojana (PMFBY) aims to provide insurance coverage and financial support to farmers in the event of failure of any of the notified crop as a result of natural calamities, pests, and diseases. It cover individual farmers for localised disasters as well as post harvest losses.

PMFBY dashboard as on December 2024, shows that 24.1 million farmers were covered under the scheme.

Article 4.8 of the UN Framework convention on Climate Change, includes insurance as one of the actions to meet the specific needs and concerns of developing countries with respect to both the adverse impacts of climate change and the adverse impacts of response measures.

In 2018, KfW, a german state owned investment and development bank, set up InsuResilience Solutions Fund for developing and emerging countries.

Colombian city of Medellin, which is highly vulnerable to floods and landslides, ISF offers a parametric risk coverage for extreme rainfall, flooding and resultant landslides. The insurance is based on extreme rainfall.

The International Water Management Institute (IWMI) based in Colombo, with other institutes implemented an Index Based Flood Insurance (IBFI) project in Zambia;s Magoye river basin. The insurance payouts are activated as per the flood depth.

The projects monitors rivers every 10 days aligning with the cropping cycles so that the payouts are made in timely manner.

In 2024, Nagaland became India's first state to insure its entire area under Disaster Risk Transfer Parametric Insurance solutions to protect the state's infrastructure and reduce economic losses due to disaster. Damage to any infrastructure, a little over 1 lakh per kilometre for the repair works.

In August 2024, the NSDMA signed an MoU with SBI's General Insurance for 3 years, under which the entire state is insured against extreme rainfall with the coverage amount of 150 crore rupees.

The state first entered into pilot parametric insurance agreement with TATA AIG as the insurer and Swiss Re as the reinsurer from 2021 to 2022.

Unfortunately we cannot access and analyse the IMD dataset for continuous days for free and paying for it would expensive for us.

Debt's climate link

Exacerbating climate emergency in developing countries

Facts

• #Total external debt service for Low and Middle Income countries except China is $970.71 billion
• Annual external climate finance needs of Low and Middle Income countries excluding China is $1000 billion

Nauru

The cost of citizenship of Nauru, a small island country in the south west Pacific ocean, spanning just 21kms, is $105,000. The country is issuing "Golden Passports" with the aim of raising money to fund climate action. It is the world's third smallest country with a population of 12,500 people and its contribution to global greenhouse gases emission is estimated to be 0.01%. But, still it faces an existential threat from rising sea levels, storm surges, and coastal erosion as the planet warms.

80% of population in developing countries

Many developing countries, which are home to 80% of global population is grappling with severe economic and financial hardships, making them dependent on borrowings from foreign countries.

Total external debt service

Sum of principal repayments and interest actually paid in currency, goods and services on long term debt and interest paid on short term debts and repayments (repurchases and charges)

Global Public Debt stock

Money borrowed by governments worldwide, from within their country or from abroad.

UN Conference on Trade and Development (UNCTAD) report, 2024

In its report in 2024 said that, "Global public debt stock has reached record levels of US $97 trillion in 2023 from"

Average income grown by 22%

This means that the average income of an individual in the world has grown by 22% to $13,065 between 2013 and 2023.

Per capita debt increased by 61%

However, the person's share in global debt has increased by as astounding 61% reaching $12,034.

Debt repayment > Development financing

This is an unequal growth between public debt per capita and gross national income per capita and leaves a significant portion of income to be likely spent on debt repayment, leaving little room for financing development and climate priorities in line with countries nationally determined contributions (NDCs) to reduce green house gases emissions and adapt to climate change impacts.

$488 per person climate finance till 2030

While the climate finance needs of a citizen of the developing world (low and middle income countries, excluding China) stand at about $488 annually till 2030, developing countries are also often the most vulnerable to climate change impacts and will require the lion's share of increased investments for climate action.

Aid cuts and reduced international cooperation from the developed world exacerbates the situation. The US withdrawal from the Paris Agreement The outcome of the New Collective Quantified Goal (NCQG) on climate finance at the COP 29, in Baku, Azerbaijan in 2024, has been a failure, especially for developing countries seeking climate justice through public finance. International financial institutions are quietly stepping away from net zero alliances and scaling back climate pledges Major donors like US, UK, Belgium, France, Netherlands, Sweden are slashing their foreign aid budgets

• [!] An 22% decrease in foreign aid in the coming year can be expected - global consultancy firm, McKinsey and company said in May 2025

One crucial piece of this stalled progress is the growing external debt crisis or borrowing to repay the debt.

The fourth International Conference on Financing for Development (FfD4) from june 30 - july 3, 2025 in Seville, Spain, will address the critical issue of debt in the context of global development. focus on international financing for SDGs reforming global financial architecture advancing climate financing for developing countries recognising the unique needs, circumstances and capacities of the developing countries.

How large is Sovereign debt?

Also known as Public debt, in the words of IMF, "Borrowings by governments to confront the hardships and invest in public goods and services that support development and complementing revenues raised through general taxation."

Governments borrows from creditors like

• local private institutions
• house holds
• other countries
• development banks
• multilateral institutions
• private investors

Government guarantees for private entities

Government can also guarantee debt for private entities, taking on the obligation to repay the loan if the debtor is unable to.

Such publicly guaranteed debt is used strategically by governments to lower costs for investments that support their policy objectives.

UN Conference on Trade and Development (UNCTAD) report, 2024

Public debt can be powerful tool for development enabling governments to finance critical expenditures and invest in better future for their people.

There is a alarming surge in global public debt, that have been driven by cascading crises in recent years as well as sluggish and uneven performance of global economy. In 2023, global public debt was US $97 trillion, from US $5.6 trillion in 2022.

Developed countries account for 2/3rds of the global public debt, developing countries also categorised as Low and Middle Income countries, by World Bank, are contending with staggering $29 trillion in public debt.

Since 2010, public debt in developing countries has grown twice as fast in developed countries - with its share in global total increasing to 30% in 2023 , from just 16% in 2010.

Vulnerability to economic shocks, such as currency fluctuations when the domestic currency weakens against the currency of debt.

If the country's ability to repay the debt to foreign creditors in foreign currency is compromised. External debt can even lead to economic crises, like happened in Sri Lanka and Kenya.

What broke the pearl of the Indian Ocean? - Journal of the Financial stability, in February 2024 - The key crisis in Sri Lanka was large budget deficits financed through foreign borrowings, causing external debt to rise to almost 50% of the central government debt by 2018 - the highest in 20 years. The COIVD 19 pandemic, stopped the capital flows inside. Unable to borrow money from abroad to service foreign debt, the country used it foreign exchange (FX) reserves to finance the current account deficit. Sri Lanka eventually defaulted on its external debt in April 2022.

World Bank shows similar unsettling patterns for many other developing countries. 2013 and 2023, developing countries dependence on external debt increased by 55% from $5.71 trillion to $8.84 trillion.

The countries external debt stock is mounting at a rate higher than their gross national income (GNI).

Majority of these borrowings from foreign creditors are by public sector bodies in developing economies, which indicates that the borrowed money is being used to fill important budgetary gaps.

An total external debt stock to GNI ratio, indicates the share of debt in a country's income and the government's capacity to repay the debt, shows that in 2023, the ratio stood at 36.44% for Low income countries, and 24.06% for middle income countries.

The number of low and middle income countries whose external debt liabilities exceeded 50% of GNI, almost doubled growing from 36 to 52 between 2013 and 2023.

Mozambique's external debt in 2023 was 350% of its GNI - the highest among all low income countries.

Mongolia's external debt was 189% of its GNI.

Mauritius was 128% of its GNI.

Such high levels of external debt increase repayment pressure and can push countries towards economic crisis.

Asia and Pacific region has consistently borne the highest government owned external debt stocks over the past decade within the global south.

Between 2013 and 2023, the region's government owned external debt stocks almost doubled from $829 billion to $1.63 trillion.

The debt stock increases by 1.7 times from $676.6 billion to $1.16 trillion, if one excluded China , which has the highest public debt in the world after US and also a major creditor.

Sovereign debt stock of Latin America and Caribbean rose by 1.6 times from $574 billion to $940 billion.

In Africa, the debt doubled reaching $689 billion in 2023.

Why sovereign debt rising in developing world?

Oil price rise of the 1970s, resulted in financial squeeze in oil importing developing countries. Arab oil wealth was deposited in western bank vaults. These PETRODOLLARS provided much of the cash lent to borrowers in the developing world.

Recycling oil money to the developing world meant that they could keep buying western exports, despite bigger oil bills, and thus help keep numerous factories in Europe and North America open, staving off a descent into recession.

During 1970s, the private commercial banks in the west began to overtake official lenders.

At the height of their lending in 1982, banks were lending $63 billion a year to the developing world, nearly twice the amount lent by government sources.

The economies of the several borrowing countries grew rapidly during 1970s.

1980s saw a recession in industrialised countries. Economic activities slowed down and interest rates on bank loan went up. Developing countries which could not pay their earlier loans now had to take more and more loans just to pay interest on the loan they had taken.

This vicious debt trap of Brazil, between 1972 and 1988, the nation paid $176 billion as interest on a debt of $124 billion to the industrialised countries.

The situation has not changed much in the past 40 odd years.

Developing countries spent a record of $1.4 trillion to service their foreign debt as their interest costs climbed to a 20 year high in 2023 - World Bank's International Debt report, December 2024.

Currently more than half of developing countries allocate at least 8% of the government revenues to interest payments, a figure that has doubled over the past decade. The rising pressure of interest payments is substantial across regions, particularly in Africa and Latin America and the Caribbean. - United Nations Conference on Trade and Development (UNCTAD)'s A World of Debt report.

In 2023, 54 developing countries, equivalent to 38% of the total, allocated 10% more of government revenues to interest payments, with nearly half of them in Africa.

Developing countries interest payments are growing fast and also outpacing growth in critical public expenditures.

In 2023, a report, "Beyond Climate Finance" by Delhi based think tank Centre for Science and Environment (CSE) - many low and middle income countries are spending more money on debt payments than what it will cost them to meet their climate goals.

The annual external debt service bill of governments in LMICs has doubles over the past decade, reaching $368 billion in 2023 from $182 billion in 2013.

For 1$ of GNI earned, the average developing economy spent 1.6 cents on external sovereign debt servicing in 2013, which rose to 2.5 cents in 2023. For LMICs, this increase from 1.8 cents in 2013 to 2.8 cents in 2023.

The key reason is the high interest being charged by creditors.

The UNCTAD report states that, developing regions borrow at rates that are 2.4 times higher than that of US and 6 - 12 times higher than that of Germany.

This varies significantly with countries' ability to repay it, exacerbated by inequality embedded in the international financial architecture.

Developing countries are perceived to have a more high risk environment and thereby face higher cost of borrowing.

Sovereign credit ratings are meant to be independent measure of a country's ability to pay its debts.

They determine the interest rates of a country faces in the global financial market and therefore its borrowing costs.

Sovereign credit ratings are negatively biased towards the Global south.

The 2023 report by the United Nations Development Programme (UNDP), "Reducing the cost of finance for Africa" - Unequal country ratings have cost African states more than $24 billion in excess interest and over $46 billion in forgone lending.

Cameroon and Ethiopia's credit ratings were slashed after they requested relief from Debt Service Suspension Initiative (DSSI) - a G20 initiative launched in May 2020, to help eligible low and lower middle income countries to recover from economic impact of the COVID 19 pandemic.

Rating downgrade increased the costs of Cameroon and Ethiopia's debt , prolonging recovery by straining their budgets.

A report by the IMF shows, Global North countries averaged 12% of GDP on pandemic related spending. Emerging market and low income economies were 6% and 3% respectively. Yet, emerging and developing states accounted for 95% of the sovereign rating downgrades in 2020.

This highlights how developed economies get additional leeway from rating agencies to ramp up speeding or cut taxes during downturns to stimulate growth.

all rating agencies are centered in the global and the only benefit their countries. why can't the global south have their own rating agencies and their own financial institutions.?

India got its own global standards credit rating agency recently.

These countries can recover more quickly from crisis. Global south nations meanwhile cannot increase government expenditures due to threat of rating downgrades.

Africa has had the highest rise in interest payments on sovereign debt, increasing by 3.2 times from $7.8 billion in 2013 to $25.1 billion in 2023.

Asia and Pacific region has seen a similar rise, with sovereign debt interest payments more than tripling in value from $20.9 billion in 2013 to $64.1 billion in 2023 - accounting for the highest share of interest paid in 2023 at 48.7%

Latin American and the Caribbean saw a similar rise in interest payments of 1.6 times.