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

Finweek English Edition - - Contents -

tOver the past years, in­sur­ance com­pa­nies have seen a dra­matic in­crease in claims as prop­er­ties and busi­nesses are dam­aged by an in­creas­ing num­ber of fires, storms and floods. How can the in­dus­try adapt to this new re­al­ity?

here 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 re­silienceen­hanc­ing 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 chan­g­ere­lated 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. ■ ed­i­to­rial@fin­ 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.

Hur­ri­cane Irma strik­ing Mi­ami, Florida, in Septem­ber. It is es­ti­mated that Irma caused up to $65bn worth of prop­erty dam­age.

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