According to a 2012 Ceres Report the worldwide impacts of climate change are already being felt. Global average temperatures for land and ocean have increased.
These climatic changes have the ability to produce a profound impact on the insurance industry. Insurers will need to better understand and predict the climate and weather extremes in order to price accordingly as well as promote effective risk management strategies to consumers. However making the linkages and assessing the impacts between rising temperatures and extreme weather events remains a highly technical and imperfect science. As a consequence it is a no brainer to suggest that the future of the insurance industry will see us, the consumers, having to pay higher premiums. The insurance industry will be underwriting business without being able to fully comprehend or assess the probability and severity of the increased likely losses.
Extreme weather events like the recent Hurricane Sandy and floods in India will pose massive challenges for the insurance industry in a sector where many companies are already seeing growth challenges. These challenges also have massive consequences for the consumer. Thus far New Zealand has relied on insurance for peace of mind and financial security, though recent events in Christchurch would suggest that this was/is a naive expectation.
The reality is that continued extreme weather events are likely to pose real threats to the insurance industry’s financial viability. This will have a flow on effect leading ultimately to a crisis of affordability and availability for consumers as well as solvency problems for industry itself.
Larger extreme weather losses in the future make these scenarios ever more likely. Whether you believe in climate change or not, is beside the point, the fact is that over the last 30 years there have been more and more reported cases of volatile weather events on the rise. Nine of the top ten catastrophic events around the globe (in terms of numbers of property insurance claims for structures damaged or destroyed in 2011) were related to extreme weather events. Severe weather events are significantly impacting major population centres as we have just witnessed with Hurricane Sandy. Add to this the devastating flooding and landslides which have caused widespread damage and loss of life in Italy, France, Spain, Guatemala, Pakistan, Thailand, Australia and Brazil. Severe winter storms and cyclones took place across Europe and Australia, while droughts and wildfires affected Somalia and Canada.
It is not my intention to scare monger, my intention is to draw your attention to the fickle and unstable nature of this product we call ‘insurance’.
These extreme weather events are already causing more businesses and properties to be uninsurable in the private insurance markets, leaving the higher risks and costs to be borne to governments, taxpayers and individuals. Property insurance affordability and availability is already coming under increasing pressure due to these extreme weather events and consequent losses e.g. the insurance industry pulled out of Florida after Hurricane Wilma in 2005. After the recent earthquakes in Canterbury, property insurance was suspended for some months and serious discussion about future availability took place.
As one insurance provider put it “With 40 percent of industrial insurance claims that Allianz now pays out being due to natural catastrophes, climate change represents a threat to our business…Insurance companies need to adapt their products and services to take climate change risks into account. Already, insurance payments relating to climatic events are increasing rapidly, with a 15-fold increase in weather-related claims over the past 30 years.”
On the Allianz website it states that “Since global warming is most probably causing more frequent extremes of weather – heat waves, droughts, floods and tropical storms – it materially affects insurers’ operations across all lines of business. Weather extremes impact insurers in two ways: through policies covering hurricane or flood damage, for example, and as large-scale institutional investors with significant stakes in companies affected by weather extremes. Payments on claims for damage and loss caused by such phenomena have increased significantly in the past 30 years and totalled approx. 24 billion US-dollars in 2010.”(Munich Re; TOPICS GEO; Natural Catastrophes 2010; Analyses, assessments, positions, February 2011; own calculations).
And it is not just the insurance industry that is concerned – the reinsurers too are watching the statistics carefully. “The number of natural catastrophes has risen fairly dramatically. Reinsurers are concerned that these experiences are in fact a window on the future—more extreme precipitation events, more droughts, more heat waves, more intense tropical storms and more wildfires“, according to Frank Nutter, President of the Reinsurance Association of America.
Industry observers suggest that climate change has the potential to undermine insurers’ current business models and risk management practices. These actuarially based insurance pricing (actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms) and industry diversification models are the fundamental tenets of the insurance product. If underwriting can be challenged by climate change then so can the concept of insurability itself in some parts of the world.
But climate change is only one part of the equation. More on this in the next post.
~Future Proofing for a sustainable, participatory, democratic society.
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H. C. Kunreuther & E. O. Michel-Kerjan, “Climate Change, Insurability of Large Scale Disasters, and the Emerging Liability Challenge” Uuniversity of Pennsylvania Law Review, (2007) [Vol. 155: 1795- 1842]. See http://www.pennumbra.com/issues/article.php?aid=148
C. McHale & S. Leurig, “Stormy future for U.s. Property/Casualty Insurers: The Growing Costs and Risks of extreme Weather events”, Sept 2012, A Ceres Report.