Explore how recent U.S. climate policies and natural disasters like the Los Angeles wildfires are reshaping global financial stability and insurance markets. Picture: Reuters.
“Whe America sneezes, the world catches a cold”. This phrase originates from the 1929 Wall Street crash that sent markets around the globe into a tailspin and wiped off trillions of dollars in market capitalisation and it signalled the start of a depression.
1. On January 20, 2025, President Donald Trump signed an executive order to withdraw the United States from the Paris Climate Agreement. The order, which Trump signed with public fanfare just hours after taking office, collides with a rise in climate havoc around the world, including the devastating Los Angeles wildfires and revelations that last year was the hottest ever recorded. It marks the launch of an aggressive agenda to roll back U.S. climate policy, driven by an emboldened president who invites confrontation over the scientific underpinnings of climate change. “I’m immediately withdrawing from the unfair, one-sided Paris climate accord rip-off,”
“When the U.S. steps away from the Paris Agreement a week after entire towns in California are erased, it says something,” said Frances Colón, senior director for international climate policy at the liberal Centre for American Progress.
In addition to the above statement, he went on to say; “We will drill, baby, drill. We have something that no other manufacturing nation will ever have, the largest amount of oil and gas of any country on Earth, and we are going to use it.”
2. Individuals living in South Africa are affected by load shedding and are anxiously watching helplessly each time Eskom announces their latest price increases. As we are dependent on finding less expensive energy solutions one can only wonder how the latest developments will play out.
According to greenly.earth, transportation is the largest consumer of oil, accounting for approximately 60% of global oil demand. Oil-derived fuels (gasoline, diesel, and jet fuel) power most cars, trucks, ships, and planes that move goods and people worldwide. Road transportation alone represents about 45% of global oil consumption, making it a significant driver of demand. What is the future of electric cars for instance? OR Tambo has jet fuel for the moment.
3. Global leaders met in Baku, Azerbaijan, for COP29, the UN's annual climate talks. The high-stakes negotiations aim to agree on a new fund to help developing countries ditch fossil fuels - the main cause of climate change - and adapt to harsher weather in a hotter world. Concessional capital is finance offered at more favourable terms than the market. Concessional capital is crucial in reducing the average cost of capital in investments, creating markets, and fostering enabling conditions for private actors to fill the multitrillion-dollar climate investment gap. Climate Policy Initiative’s Global Landscape of Climate Finance 2023 (the Landscape) found that concessional finance was only 11% of total climate finance with the rest focusing on market-rate debt and equity instruments (CPI, 2023 a) About 360 institutions provided international concessional finance for climate action between 2019 and 2022. About 10 institutions provided 70% of concessional finance.
Least-developed countries (LDCs) received approximately 33% (USD 21 billion annual average) of total international concessional climate finance. The rest of the EMDEs (excluding China) received a further 60% of these flows. Sub-Saharan Africa was the primary destination of international concessional climate finance, receiving 30% of the total.
Approximately 37% of international concessional finance supported the direct infrastructure costs in the transport, energy systems, and water and wastewater sectors. A further 15%, or about USD 28 billion, provided policy and capacity-building support to national governments in developing countries, mainly in the form of technical assistance grants.
4. "Climate change isn't a distant threat," said Dr Friederike Otto, co-founder and lead of World Weather Attribution. The World Weather Attribution (WWA) group at Imperial College London stated the following that the ten deadliest weather events in the International Disaster Database since 2004 were:
Bangladesh, Cyclone Sidr, 2007: 4,234 died.
Myanmar, Cyclone Nargis, 2008: 138,366 died.
Russia, heatwave, 2010: 55,736 died.
Somalia, drought, 2010-2012: 258,000 died.
Uttakarand, India, flood, 2013: 6,054 died.
Philippines, Typhoon Haiyan, 2013: 7,354 died.
France, heatwave, 2015: 3,275
Europe, heatwaves, 2022: 53,542
Europe, heatwaves, 2023: 37,129
Libya, Storm Daniel, 2023: 12,352
5. How have the Los Angeles fires affected the short-term insurance industry in the USA and will it influence the financial stability elsewhere?
The recent Los Angeles wildfires have had a significant impact on the short-term insurance industry in the USA. Here are some key points:
Increased Premiums: Insurers are expected to raise premiums due to the high costs associated with wildfire-related claims. This means higher costs for homeowners in fire-prone areas.
Reduced Coverage Options: Some insurers are reducing coverage options or even withdrawing from high-risk areas, leaving homeowners to rely on state-backed insurance plans like the California FAIR Plan.
Regulatory Changes: There may be regulatory reforms to improve insurance accessibility and alleviate the strain on the FAIR Plan. However, these changes will take time to implement.
Financial Strain: The increased costs and reduced coverage options are putting financial pressure on both insurers and homeowners, potentially affecting home affordability and property values.
While the immediate financial impact is primarily localized to California and other wildfire-prone areas in the USA, there could be broader implications:
Economic ripple effects: The economic damage from the wildfires, estimated between $250 billion and $275 billion, could affect the broader economy. This includes business interruptions, lost wages, and increased healthcare costs.
Insurance industry stress: The strain on the insurance industry could lead to higher premiums and reduced coverage in other regions, affecting affordability and financial stability in those areas as well.
Investment and growth: The increased risk and higher costs associated with insuring properties in wildfire-prone areas could discourage investment and slow economic growth in those regions.
Overall, while the immediate impact is significant, the long-term effects on global financial stability are less clear but could become more pronounced if similar events continue to occur with increasing frequency.
The devastating wildfires in Los Angeles have made one threat very clear: Climate change is undermining the insurance systems American homeowners rely on to protect themselves from catastrophes. This breakdown is starting to become painfully clear as families and communities struggle to rebuild.
But another threat remains less recognised: This collapse could pose a threat to the stability of financial markets well beyond the scope of the fires. Many California wildfire survivors face insurance struggles, as this CBS Evening News report shows. For years, central bankers at home and abroad have raised similar concerns. So, let’s talk about the risks of large-scale financial contagion.
Anyone who remembers the Great Recession of 2007-2009 knows that seemingly localized problems can snowball.
In that event, the value of opaque bundles of real estate derivatives collapsed from artificial and unsustainable highs, leaving millions of mortgages around the U.S. “underwater.” These properties were no longer valued above owners’ mortgage liabilities, so their best choice was simply to walk away from the obligation to make their monthly payments.
Lenders were forced to foreclose, often at an enormous loss, and the collapse of real estate markets across the U.S. created a global recession that affected financial stability around the world.
Forewarned by that experience, the U.S. Federal Reserve Board wrote in 2020 that “features of climate change can also increase financial system vulnerabilities.” The central bank noted that uncertainty and disagreement about climate risks can lead to sudden declines in asset values, leaving people and businesses vulnerable.
The Fed now has another scenario to consider – one that’s not hypothetical. It recently put U.S. banks through “stress tests” to gauge their vulnerability to climate risks. In these exercises, the Fed asked member banks to respond to hypothetical but not-implausible climate-based contagion scenarios that would threaten the stability of the entire system.
Let us hope that the insurance industry related to Los Angeles does not spread across the globe. That so many insurance companies cancelled policies ahead of the fire shows one thing. “These risks are predictable!” Here in South Africa one can be sure our industries are paying attention and will be reassessing their risk.
* Kruger is an independent analyst.
** The views expressed herein are not necessarily those of Personal Finance or Independent Newspapers.
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