The heat waves broiling tens of millions of Americans can warp roofs, shrivel crops, buckle roads and disrupt power supplies.
Much of that damage is hard to quantify—and isn’t covered by insurance.
Now cities, regulators and companies are sounding the alarm about the escalating costs of heat waves, which cause tens of billions of dollars in damage each year.
“Extreme heat is not just a weather event,” said Ricardo Lara, California’s insurance commissioner, after issuing a report this month on the economic and human toll of heat waves. “It’s a silent, escalating disaster wreaking havoc on…health, economy and infrastructure.”
Hotting UpThe number of heat waves a year is rising steadilySource: Environmental Protection Agency1960s1980s2000s2020s01234567Heat waves have become more intense, longer lasting and three times as frequent as they were 60 years ago, according to government data. The upward trend is expected to persist as climate change makes more areas vulnerable to the record-breaking temperatures of recent weeks.
Standard insurance policies are designed for sudden and accidental damages, such as those caused by fires, storms and theft, and often don’t cover the effects of intense heat, which can be gradual.
“Extreme heat leads to damage that often unfolds with time,” said Karen Collins, a vice president at industry group the American Property Casualty Insurance Association.
The U.S. agriculture and construction industries alone lose an estimated $100 billion of productivity a year due to extreme heat, according to a report by insurance broker Aon in March.
That can include a jump in worker injuries on blistering hot days. Injuries to construction workers, for example, were 20% higher when the temperature climbed above 95 degrees Fahrenheit, compared with milder days, according to the Workers Compensation Research Institute.
Danger ZonePercent increase in workplace injuries as temperatures rise above 65 – 70ºFSource: Workers Compensation Research Institute70 – 75ºF75 – 80ºF80 – 85ºF85 – 90ºF90 – 95ºF95 – 100ºFAbove 100ºF0%1234567Heat can also stunt the quality of and volume of crops, losses that may not be apparent until harvest. A federal insurance program covers heat damage for some crops, but excludes some fruit and vegetables including watermelon, squash and lettuce.
Manufacturers are also hard hit by high heat, which can cause machines to malfunction and leave workers needing more breaks. The California study of seven heat waves estimated they cost the sector more than $700 million in lost productivity. Yet companies often find they have few ways to recoup such losses.
One option that is increasingly being pitched to businesses and local governments: policies where payouts depend on the temperature. Known as parametric insurance, they are essentially a bet on how hot it will get, and let companies hedge risks that are hard to cover with traditional insurance.
Such temperature-triggered payouts have been used by utilities and other energy companies for some time, said Cole Mayer, a managing director at Aon. But he said the firm is seeing more interest from other industries, including construction and agriculture.
“We are just scratching the surface in terms of utilizing this tool,” Mayer said.
Heat waves are more predictable than other natural disasters, however. That can make the coverage expensive, compared with just setting aside money to pay for the added costs, said Ted Lamm, associate director of the University of California Berkeley’s Center for Law, Energy & the Environment.
“If it’s well known that Phoenix is going to suffer a certain number of days of 90 degrees Fahrenheit or more each summer, there’s not much value in insuring that risk.” Still, he said the policies could benefit businesses facing a certain combination of risks.
The damage caused by heat can lead to significant underwriting losses for insurers as well, even if not directly.
If searing temperatures were to warp or crack shingles, for example, that could make roofs more prone to leaks or wind damage. Losses for the latter are generally covered by home insurance. Similarly, extreme heat can crack foundations, warp window frames and exacerbate mold growth.
The overheating of car engines can also cause breakdowns, resulting in more claims on auto insurance for tows or roadside assistance.
The far-reaching impact of severe heat waves means they pose a significant risk to the insurance industry, said David Flandro, head of industry analysis at reinsurance broker Howden Re.
“Extreme heat impacts infrastructure, strains energy systems, jeopardizes agriculture and heightens the risk of other natural disasters,” he said.