Innovating in the face of changing climate risks

Innovating in the face of changing climate risks | Insurance Business

Innovating in the face of changing climate risks

The Asia-Pacific region is no stranger to natural catastrophes. Being on the Pacific Ring of Fire and frequent occurrence of typhoons make the region quite exposed to disasters. Coupled with climate change, insurers in the region are fighting an uphill battle in mitigating disaster losses.

Insurance Business spoke with Tobias Farny (pictured), CEO of Munich Re for Greater China and Australasia, on how the region can keep up with rapidly rising natural disaster losses and protect its inhabitants and their property.

According to Farny, most of the outstanding overall and/or insured losses in Asia have been due to flooding, either in the context of land-falling cyclones (Typhoons Jebi, Trami, Hagibis) or monsoon phenomena (floods in China in 2016 and in Japan in 2018).

“Given the high magnitude and frequency of major natural catastrophes and the possible links between them, we are working with insurers to examine whether these events were already on their models’ radar or whether they need to realign their risk management and underwriting,” he said.

In order to do this, the insurance gap in the region must be addressed. Farny said that while the region comprised 39% (or US$16.4 billion) of the overall global losses in the first half of 2019, it constituted only 6% (US$0.9 billion) of the insured losses. He noted that Japan and Australia are exceptions as they have a much higher share of insured losses.

Read more: Munich Re sees huge opportunity in Asia-Pacific

In terms of societal impact, Asia has also historically suffered the highest death toll from natural catastrophes. Since 1980 it has experienced 39% of events, but 71% of fatalities.

“To close the insurance coverage gap, insurers need to gain a better understanding of their catastrophe risks, determine their risk management strategies and identify appropriate mitigation measures, including optimization of their insurance coverage according to their own risk appetite,” Farny said.

“State-of-the-art data analytics can help raise risk awareness, while ex-ante financing instruments will allow prompt distribution of financial relief soon after a disaster hits – a pivotal tool to ensure economies can recover faster. Parametric triggers can be tailored to such a scheme and adjusted to the specific exposure patterns and individual needs of a society. Large amounts of data – in conjunction with sophisticated risk analysis and assessment – will improve the risk management capabilities across Asia.”

Responding to climate change
According to Farny, Munich Re has played an active role in a range of national and international institutions, aiming towards climate change mitigation and adaptation to changes in hazard and risk. The company sees the need to promote adaptation to climate change in the form of insurance-related risk management mechanisms, particularly in emerging and developing countries.

Read more: Climate change – what are the key issues for insurance brokers?

In response to the challenges posted by climate change, many financial institutions, including a number of major insurers, have cut investment in fossil-fuel-based and promoted low-carbon economies. Meanwhile, regulatory bodies have started to analyse the resilience of insurers and banks to climate change impacts.

“From both an industry and governmental level, more needs to be done to close the insurance gap and Munich Re is committed to this effort,” Farny said. “Advances in technology and digitalisation and new, innovative approaches are driving change in the industry and helping carriers adjust existing insurance schemes. New types of insurance solutions will help address the challenge of low insurance levels and reduce the economic consequences of natural catastrophes in Asia-Pacific.”

Nat cat evolving alongside climate risk
Farny noted that future climate change projections are always conditioned by assumptions on political willingness to mitigate risk and to globally develop low-carbon economies. Aside from physical risks caused by climate change, there are also economic risks. These economic risks are due to shifts in technology, turning away from industries exclusively based on fossil fuels, new regulation, and climate policy (transitory risks).

He said that the most important challenge for nat cat insurance is to understand the current extent risk (in particular tail risk) that has been altered by climate change over recent decades.

“We need good information to overcome this challenge, and Munich Re is confident that we already have and continue to develop this knowledge in accordance with scientific findings,” he said.

An example Farny gave was flood hazard, which include extreme precipitation events and associated substantial losses. According to him, the latest assessment report of the Intergovernmental Panel on Climate Change (IPCC) identified large parts of Asia where a one in a hundred year river flooding event could become twice as common under a business-as-usual emissions scenario until the end of the 21st century.

“Apart from our expertise on the climate risk side, Munich Re is an enabler in terms of aiding the breakthrough of climate-friendly and sustainable technologies by providing insurance solutions where we protect against specific risks related to these new technologies, thereby enhancing their appeal for investors and strengthening their bankability and financial viability,” he said.

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“For example, we provide performance guarantee for 25 years for manufacturers of photovoltaic modules that gives our clients added security for the quality of their products and relieves the module manufacturer of the need to make provision for any warranty claims.”

He added that Munich Re is also the first insurer to offer a performance cover for battery storage, which enables battery manufacturers to offer their customers long-term performance guarantees. The product, he said, covers the repair costs and replacement value of battery modules that exceed a specific cost threshold.