Making climate change insurable

Private and public sectors must work together before "irreversible" tipping points are reached, says expert

Making climate change insurable

Risk Management News

By

Numerous studies have identified climate change as one of the largest systemic risks affecting the global economy and financial system. With rising economic development and urbanization worldwide, losses caused by natural catastrophes have also risen.

According to Clarence Wong (pictured), chief economist, Asia-Pacific at Swiss Re Institute, total economic losses from disaster events stood at US$146 billion for 2019, while insurance losses came up to US$60 billion. Of the insured losses, US$52 billion (or roughly 87%) were due to natural catastrophes.

One of the factors that amplifies the effects of climate change is urbanization. In the 1950s, around 30% of the global population lived in urban areas. Presently, more than 50% are city dwellers, and the proportion is projected to rise to almost 70% by 2050.

Wong said that widespread urbanization increases the loss potential from weather events due to a larger number of people and assets exposed, “particularly when risk mitigation measures do not keep pace with the rise in value accumulation in terms of both human and physical capital.”

This is shown by even small changes in rainfall intensity resulting in huge increases in flood damage in urban areas, with sealing of surfaces in so-called “concrete jungles” leading to more damage due to water run-off.

“In fact, Swiss Re Institute estimates that if population density increases by one percentage point, economic losses per capita go up by 1.2%,” Wong said. Developing economies in Asia and Africa are most susceptible to this, he added, due to many urban developments being situated in low-lying and coastal areas.

Despite advances in insurance penetration worldwide, Wong pointed out that the protection gap, which is the difference between insured and total losses, has widened in absolute terms over time, but has reduced in proportion. This, he said, highlights the ongoing under-insurance of societies even with growth in penetration. It also points to the still large insurance opportunity to fill the gap and build resilience.

Taking action before reaching irreversible “tipping points”
The wider scientific community is in agreement that human activity impacts Earth’s climate. Wong cited Professor Adam Sobel of Columbia University, who said that while the full extent of climate change’s impact is difficult to predict, the lack of proof does not mean that there has been no change.

Changes in weather patterns have been observed – warmer average temperatures, rising sea levels due to melting ice caps, more frequent and longer heatwaves, greater weather extremes, and erratic rainfall patterns. Warmer temperatures are linked to more frequent severe weather events, leading to rising losses in the coming decades. These impacts have also manifested as more intense secondary perils events. These are small- to mid-sized events, or secondary effects of a primary peril. For example, in 2019, the heavy rains that came with Typhoon Hagibis in Japan and monsoon rains in Southeast Asia resulted in widespread flooding.

However, according to Wong, weather-related risks remain insurable, but only with immediate action. The long-term risk of unmitigated climate change is irreversible “tipping points”; and in this scenario, climate change effects could bring the insurability of assets, particularly in highly exposed regions, into question.

New risk models
According to Wong, the industry needs to actively embed and dynamically track the effects of the warming climate, adapting models to a profoundly changing risk landscape so that insurers can respond accordingly.

He continued that many catastrophe models are already outdated, and do not fully account for rising exposure from increased value concentration due to rapid urbanization.  Furthermore, the term “secondary perils” is becoming a misnomer, due to the sheer amount of damage they cause.

“It is important, now more than ever, to ensure the sustainability of the insurance risk-transfer model by adapting outdated models to an ever-changing risk landscape, as represented by current climate change effects, and all other trends,” Wong said.

One solution he proposed is public-private partnerships. While convincing individuals to take out insurance remains a challenge, the public sector can share the burden. By partnering with insurers, corporate clients and public sector clients, existing expertise and resources can be better harnessed to create scalable solutions aimed at mitigating and adapting to climate change, Wong said.

In turn, this facilitates the closing of the protection gap and more effective building of societal resilience.

“As the sustainability agenda gains momentum in the years ahead in tandem with climate issues, so must our collective response,” said Wong. “Our actions today determine our future, and we must do everything in our power to secure a safe one for the generations to come.”

 

Keep up with the latest news and events

Join our mailing list, it’s free!