Business models across the industry must adapt to the effects of climate change on lives and property, experts stress.
Insurers need to rise to the challenges of climate change
The recent “absurd” temperature record in the Earth’s polar regions – with temperatures up to 40°C above seasonal norms in Antarctica, and between 20°C and 30°C above normal in Arctic locales—shows that climate change is gathering pace. Such extreme weather events are expected to continue increasing in frequency, and the last two years have already provided ample evidence for this worrying trend: from forest fires in Australia to stronger hurricanes in the United States to extreme floods in Germany.
In Europe alone, according to the European Environment Agency, a continued rise in mean temperatures is ushering in an era with more frequent and longer-lasting heat waves, storms and flash floods. Southern Europe will experience hotter summers, persistent droughts and increased fire hazards. In Northern Europe, heavy rainfall is set to become “normalized” while Central Europe “is likely to experience […] more frequent and stronger weather extremes, including heavy precipitation, river floods, droughts and fire hazards,” the EEA notes.
A case in point is Germany, where record rainfall unleashed deadly floods in July last year, killing at least 220 people and destroying vast amounts of property. The floods were up to nine times more likely because of climate change, according to a team of scientists. In fact, some parts of Germany and neighboring Belgium had more rainfall in a single day than they would normally have in an entire month.
Australian bush fires are expected to become more frequent and intense too: “It’s getting warmer and drier, so it can take longer to recover from fires — plus, you’re having more fires,” observes Brendan Byrne, a postdoctoral researcher at NASA’s Jet Propulsion Laboratory and an author of a new study on the effects of climate change on bush fires in southeastern Australia. Entire landscapes Down Under could become permanently altered as a result, with Byrne warning that “you end up in some kind of transition to a different type of ecosystem,” the scientist explains.
Entire landscapes down under could become permanently altered as a result, Byrne and his colleagues have found. “This is something people are really worried about — you end up in some kind of transition to a different type of ecosystem. That’s the kind of real concern in this area,” the scientist explains.
Insurance stepping up to the plate
These trends only increase the pressure for climate adaption action, which is progressing but at a snail’s pace. However, it also puts pressure to adapt on a sector which is all too often overlooked in the climate debate, which is nonetheless crucial: insurance companies. They are an important factor in how societies deal with the damage of lives and property resulting from extreme weather events, and whether progress can be made in making societies and economies more resilient. Consequently, climate risks affect not only insurance companies’ assets but their liabilities as well.
The risks associated with the increasing frequency and costs of extreme weather events will continue to have a direct impact on the pricing of insurance policies and may eventually raise the question of the insurability of certain risks. Climate change presents an altered risk landscape with associated higher burdens for insurers. A recent survey of 139 insurers conducted by Banque de France revealed that new and increasing risks associated with climate change are posing serious challenges to the sector.
However, forecasting remains difficult, with insurers grappling with the increased risks presented by a changing climate whose rate and long-term effect are yet to be fully understood. Under the circumstances, the reinsurance sector will become increasingly important. Reinsurers, who cover the risks of primary insurers, have been developing innovative ways of managing tail risk and have access to sophisticated catastrophe models allowing them to price and underwrite risks linked to climate change.
“There is a clear recognition that claims’ frequency and severity is rising as demonstrated by recent natural catastrophes or cyber incidents,” acknowledged the CEO of major reinsurer Swiss Re. “This means the need for protection is growing, and the [reinsurance] industry has important work to do in offering insurance and closing the protection gap”.
It’s not surprising, then, that the reinsurance sector is increasingly drawing prominent investments. French mutual insurer Covéa, for instance, has agreed on terms to acquire PartnerRe, the 12th biggest reinsurer in the world, for €7.8 billion. “The boundaries between the insurance and reinsurance sector are ever more porous”, Covéa CEO Thierry Derez explained about the acquisition, indicating that it’s the “right moment” to join the reinsurance sector. The move is seen by industry experts as a foresighted step towards maintaining reliable finances at a time when the reinsurance market is tending towards managing environmental risks while highlighting the role of the insurance industry in the fight for sustainability.
Reinsurers like Swiss Re and Munich Re, for instance, have pulled back from projects involving fossil fuels, which has allowed them to limit liability for climate-induced events, therefore preserving funds for when they are really needed, as well as for research into better climate models – another reason why Covéa’s entry into reinsurance is prudent.
Unexpected allies in climate policy
Even so, business models across the industry must adapt to the effects of climate change on lives and property, experts stress. By seeking to help their clients become more climate-resilient – a no-brainer given that this reduces the impact of natural disasters on people and infrastructure – they are playing an important role in encouraging sustainable methods and behavior, such as Environmental, social, and governance (ESG).
In fact, insurance firms can play a dominant role in fostering sustainability and climate resilience “through their underwriting decisions, their investment choices and by engaging with clients on ESG issues,” write Peter Manchester and Gill Lofts, two industry experts. “ESG factors are increasingly important in the assessment of the risks to insurers’ assets and liabilities — to the future value of insurance firms’ investment portfolios and to the size of the insurance claims that insurers are subject to each year,” Manchester and Lofts explain.
Insurers, therefore, ultimately have a strong influence on environmental policies on a broader level. In the face of longer droughts, stronger rainfall and more frequent abnormal weather patterns, their encouragement for sustainability could be yet another factor that pushes the world to accelerate climate change adaptation.