Featured: Climatic Catastrophes and the role of the insurance industry

Climatic Catastrophes and the role of the insurance industry

It was as early as the 1970’s when German insurance giant Munich Re first warned about the economic impact of global warming, after it noticed that weather-related damages across the planet were rising, with flooding being the major perpetrator.

Some forty-odd years later and clear evidence of this phenomenon is now overwhelming, even though some question whether the cause is natural or man-made, while the naysayer leader of the free world continues to blatantly deny its existence.

In December 2016, ClimateWise, a coalition of global insurers, brokers and industry service providers, reported that weather-related ‘catastrophes’ cost the global economy $170bn in 2016 alone. A staggering five-fold increase from the 1980’s and dwarfing the estimated $103bn worth of damage in 2015. During the same year the ‘protection gap’ (the difference between the costs of natural disasters and the amount insured) quadrupled to $100bn.

ClimateWise, initiated by the Cambridge Institute for Sustainability Leadership, also estimates that the frequency of weather-related catastrophes such as floods, windstorms and droughts has increased six-fold since the 1950’s. Munich Re, which is part of the coalition, noted that there had been an ‘exceptional’ number of floods in 2016, which accounted for 34% of economic losses globally, compared with an average of 21% over the past decade.

Our country was not spared the worldwide water wrath either. Flood events in Gauteng washed away R700m in market losses.
Of course, the adverse weather-ravaged Western Cape was hit the hardest, with fire and storm damage amounting to between R4bn and R5bn and affecting the entire industry in the country, according to an insurance litigation lawyer at Norton Rose Fulbright. This capped three years of serious claims from flash storms, specifically in the motor industry. The costs of extreme weather look set to soar even higher, thanks to monumental, record-breaking hurricanes Harvey, Irma, and Maria, possibly amounting to as much as $300bn, as reported by US-based AccuWeather Inc.

Sadly, the future doesn’t look bright. It looks even grimmer. A paper by the London School of Economics Grantham Research Institute forecast that a global temperature increase of 2.5°C would put at risk a whopping $2.5tr of the world’s financial assets.

It’s also important to note that cities and towns in vulnerable coastal areas are still growing, as populations rise and building costs climb.

So what should insurers and the general public do about these catastrophic scenarios? ClimateWise says that the industry’s traditional response to rising insurance risks, that being raising premiums or withdrawing cover, will not address the economic fallout and the industry’s role as society’s ‘risk manager’ was under threat.

The good news is that insurers are investing heavily in improving their modelling of risk, as posed by climate change-related events, but so far the models have been described as only ‘directionally correct’. Despite close monitoring of scientific reports and weather trends, the sector is still determining how to price premiums to reflect the risks.

Ceres, a US charity which advocates for more sustainable business practices, estimates that more than two-thirds of property and casualty insurers in the country have not incorporated climate change risks into their enterprise risk management, including products and services. Be that as it may, some in the industry believe they can take the lead in persuading policymakers in both the public and private sectors to better prepare for climate change.

A part of the hands-on approach being adopted now involves ‘de-risking’ insured properties. This encourages owners to direct runoff away from their houses, install devices to prevent sewer backup and fireproof their buildings. Just these basic practices would cut statistical risk, benefitting the bottom line of insurers and property owners.

ClimateWise recommends that the industry use its estimated $30tr of investments to fund the resilience of society and financial markets to floods, storms and heatwaves, by supporting resilience impact bonds, green bonds and resilience-enhancing infrastructure. The coalition is also advocating a resilience rating system to help asset managers and policymakers integrate this factor as a consideration into their investment portfolios.

Some insurers, like Munich Re, are developing new climate change-related products, such as ‘parametric’ weather insurance for millions of people living in developing countries, who are least equipped to cope with natural disasters.

International industry heavyweights Munich Re, Allianz and Hannover Re, are staunch supporters of the Munich Climate Change Initiative, a public-private innovation lab that develops and tests new ideas with regard to climate change-driven extreme weather events.