Severe weather – time for insurers to adapt to winds of change

There are few climate-change deniers in the global insurance industry – the increased frequency of extreme weather events over the past couple of years has taken a toll on their bottom line.

More than four decades ago, German insurance giant Munich Re warned about the economic impact of global warming when it noticed that global weather-related damages were rising, particularly due to flooding.

Since then, evidence of the trend has been overwhelming, even though some questions remain over whether the cause is natural or man-made.

In December last year, ClimateWise, a coalition of global insurers, brokers and industry service providers, said that weather-related “catastrophes” cost the global economy $170bn in 2016 – up five-fold from the 1980s and dwarfing the estimated $103bn worth of damage in the previous year.

Over the same year the “protection gap” – the difference between the costs of natural disasters and the amount insured – quadrupled to $100bn.

ClimateWise – which was initiated by the Cambridge Institute for Sustainability Leadership – also estimates that the frequency of weather-related catastrophes such as floods, windstorms and droughts have increased six-fold since the 1950s.

Munich Re, which is part of the coalition, pointed out that there had been an “exceptional” number of floods last year, which accounted for 34% of economic losses globally, compared with an average of 21% over the past decade.

South Africa was no exception, with flood events in Gauteng clocking up R700m in market losses, according to Pieter Visser, a catastrophe analyst at Aon South Africa.

The damage from fires and storms in the Western Cape was much worse, amounting to between R4bn and R5bn and affecting the entire industry in the country, according to Maria Philippides, insurance litigation lawyer at Norton Rose Fulbright. This capped three years of serious claims from flash storms, particularly in the motor industry.

The costs of extreme weather look set to soar even higher this year, with the losses from three record-breaking hurricanes – Harvey, Irma, and Maria – possibly amounting to as much as $300bn, according to Joel Myers, the founder of AccuWeather Inc in the US. 

The future looks even grimmer. A paper by the London School of Economics Grantham Research Institute forecast last year that a global temperature increase of 2.5°C would put at risk $2.5tr of the world’s financial assets.

Part of the equation is that cities and towns in vulnerable coastal locations are still growing while populations rise and building costs climb.

The question is: What should insurers and the general public do about these alarming scenarios? ClimateWise says that the industry’s traditional response to rising insurance risks – raising premiums or withdrawing cover – will not address the economic fallout and the industry’s role as society’s “risk manager” was under threat.

Insurers are investing heavily in improving their modelling of risk 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 working out 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 do not integrate climate change risks into their enterprise risk management, including products and services.

Nonetheless some in the insurance industry believe that it can take the lead in prodding policymakers in both the public and private sectors to better prepare for climate change.

Part of the practical approach being taken now involves “de-risking” insured properties by encouraging owners to direct runoff away from their houses, installing devices to prevent sewer backup, and making buildings more fireproof. These 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 through 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. One is “parametric” weather insurance for millions of people living in developing countries, who are least equipped to cope with natural disasters.

Munich Re, along with Allianz and Hannover Re, are backers of the Munich Climate Change Initiative, a public-private innovation lab developing and testing new ideas with regard to climate change-driven extreme weather events. 

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 5 October edition of finweek. Buy and download the magazine here.