The hidden costs of extreme heat

Today's newsletter looks at the "invisible peril" of extreme heat and how it's becoming a growing risk to businesses worldwide. Later, read our scoop on an internal US government memo outlining ways to abolish the Federal Emergency Management Agency. For unlimited access to climate and energy news, please subscribe.

The hidden costs of extreme heat

By Leslie Kaufman

When is it so hot that it is not just another heat wave, but one more piece of evidence of a growing threat to the financial system?

Fossil fuel emissions have been warming the Earth steadily in recent decades, but 2024, which was the hottest year on record, in retrospect appears to have been a turning point for the vast apparatus that evaluates and prepares for financial risk.

In its latest annual report on emerging insurance risks, Swiss Re, the Zurich-based reinsurance firm, focused in-depth on extreme heat – a natural catastrophe we don't normally associate with insurers.

As extreme heat events happen more often, and studies are conducted on them, we're beginning to better understand the consequences. The Swiss Re report makes clear those impacts are scarier than we previously understood.

"Up to half a million people globally succumb to the effects of extreme heat each year, according to recent scientific research," the report noted, "exceeding the combined impact of floods, earthquakes and hurricanes.

And it's not just the extent that heat stress kills and sickens people, there are increasingly other impacts that are of concern if you are in the insurance business.

These include the cascading effects of heat on drought and wildfire, for example. Heat waves contributed to dried flammable vegetation and other conditions that helped propel $78.5 billion in insured wildfire losses globally from 2015-2024, Swiss Re said. And that doesn't include the Los Angeles wildfires, which occurred this year. A study from the UCLA Anderson School of Business estimates insured losses for these fires to be as much as $45 billion.

Extreme heat can also contribute to subsidence, which causes fissures and cracks in homes, another rising concern in the property market.

There are also numerous industry-specific risks from extreme heat. The agricultural industry is very vulnerable to spikes in temperature. Cows, to take but one example, make less milk when stressed by heat. And proliferating data centers, which rely heavily on water and electricity to stay cool, can be knocked offline, as happened to both Google and Oracle centers during the European heat wave of 2022 that sent temperature in London soaring above 100F.

There is a belief in the insurance industry that extreme heat costs have been "hidden" because they are paid for by various different insurance policies. A construction firm, for example, might face rising claims in medical insurance as well as workers comp if outside workers are injured or die. They might also face liability if they failed to provide adequate water and cooling breaks. But since it wouldn't all come from one pool, they might not recognize that it was one issue affecting the bottom line.

Since the 1990s there have been financial instruments for utilities to allow them to hedge against the costs of an extreme heat wave. More recently we have seen a proliferation of extreme heat insurance products like parametric, which pays out if certain temperature thresholds are crossed, for data centers.

That market is only likely to increase as risk modelers for insurers and lending institutions offer clients the ability to see heat impacts on properties or types of businesses. For example, firms like Cotality, whose analytics are widely used by the mortgage-lending industry, offer heat hazard predictions at the individual address level. This is within the same forecast tool that shows the impact of hurricanes and floods.

"Extreme heat used to be considered the 'invisible peril' because the impacts are not as obvious as of other natural perils," says Jérôme Haegeli, Swiss Re Group's chief economist. "With a clear trend to longer, hotter heat waves, it is important we shine a light on the true cost to human life, our economy, infrastructure, agriculture and healthcare system."

Work hazard

1,200

This is the number of workplace injuries associated with high temperatures in Japan last year, according to the health ministry.

Not so cool Britannia

"We are seeing the number of hot days, the length of heat waves and that intensity increasing."

Gillian Kay

Senior scientist with the UK Met Office

Almost three years ago, the UK breached 40C (104F) for the first time on record. Now a new Met Office study shows that temperature — and even hotter conditions — are 20 times more likely to occur than in the 1960s, due to global warming.

The memo on 'Abolishing FEMA'

By Zahra Hirji, Jason Leopold, and Lauren Rosenthal

Homeland Security Secretary Kristi Noem directed the Federal Emergency Management Agency to prepare a memo on how to abolish itself and create a re-branded, radically smaller disaster response organization, according to a copy of the document reviewed by Bloomberg News.

As recently as last week, President Donald Trump and Noem said they wanted to wind down FEMA but offered few details publicly. The March 25 memo offers insight into how the administration has weighed which of its current functions to cut. Technically, only Congress can eliminate the agency.

Doug Burgum, US secretary of the interior, from left, US President Donald Trump, Russell Vought, director of the Office of Management and Budget, and Kristi Noem, secretary of the US Department of Homeland Security. Photographer: Ken Cedeno/UPI

Titled "Abolishing FEMA," the memo was addressed from then-acting FEMA head Cameron Hamilton to his bosses at the Department of Homeland Security and outlines a number of functions that "should be drastically reformed, transferred to another agency, or abolished in their entirety," possibly as soon as late 2025. Potential changes included eliminating long-term housing assistance for disaster survivors, halting enrollments in the National Flood Insurance Program and providing smaller amounts of aid for fewer incidents — moves that by design would dramatically limit the federal government's role in disaster response.

At the end of the memo, there were also proposals for possible new names for FEMA: the Office of Crisis Management (OCM), the Office of Crisis Response (OCR), the National Crisis Response Agency (NCRA) and the National Office of Emergency Management (NOEM) — an acronym that dovetails with the name of the Homeland Security secretary.

Read more details on Bloomberg.com.

More from Green

When Daniel Pope first floated the idea of submerging servers in liquid as an energy-efficient way to cool them a few years ago, his proposal was met with overwhelming skepticism from data center equipment makers. But now, Pope's startup — Barcelona-based Submer — is a multimillion-dollar business, teaming up with technology giants such as Intel Corp. and Dell Technologies Inc.

The change in attitude reflects a pressing challenge: figuring out how to run data centers with less energy. Among the possible pathways, liquid cooling — an umbrella term that includes solutions such as Submer's — will likely help lower the data center energy demand by more than 10%, according to Schneider Electric, a leading energy management firm.

"While 10% may not seem like a lot, consider the fact that a large AI data center can consume over 100 megawatts of power, equivalent to about 75,000 U.S. homes," says Steven Carlini, who specializes in data center solutions at Schneider Electric. "At this scale, cutting energy usage by 10% is progress to be excited about."

Submer uses a non-flammable synthetic liquid for cooling, which looks like baby oil. Photo courtesy of Submer

Microsoft's total planet-warming impact is 23% higher than it was in 2020 due to its vast expansion of emissions-intensive data centers. To help offset this, the company says it has made record carbon removal purchases this year.

A coalition of pension funds and insurance companies holding a combined $9.5 trillion of assets has called on investors to ensure their portfolios aren't supporting or enabling deforestation.

Top officials from central banks and finance ministries were forced to call a timeout at a meeting of the world's most powerful financial watchdog last week, amid clashes over the US stance on climate change.

Worth a listen

High-voltage electricity cables are in huge demand around the world, so much so that a lack of cabling has become a bottleneck throttling the clean energy transition. So why are cable manufacturers so hesitant to expand? Also, how are these giant cables made? And is China about to eat everyone's lunch? Claes Westerlind, chief executive officer of cable manufacturing company NKT, joins the latest episode of the Zero podcast to discuss. This is the third episode in Bottlenecks, a series exploring the lesser known obstacles standing in the way of our electrified future. Listen now, and subscribe on Apple, Spotify, or YouTube to get new episodes of Zero every Thursday.