One month after the Paris climate accord, the insurance business is expected to play an increasing role in dealing with the effects of a warming world.
Article eight of the accord articulates the long-debated issue of loss and damage, and cooperation is called upon in the areas of “risk assessment and management” and “risk insurance facilities”.
Switzerland, together with other developed countries, was concerned about unlimited claims of compensation for damage caused by the effects of climate change.
While the article sidesteps mention of historic responsibility of industrialised countries in global warming – which developing countries wanted the agreement to spell out – it highlights a huge problem:
The average annual loss burden from natural catastrophes averaged $180 billion (CHF180 billion) over the last decade, but only 25% of that was insured, according to Michel Liès, CEO of reinsurer Swiss Re, at the COP 21 plenary in Paris.
Most of the small amount that was insured was in industrialised nations, meaning that most climate victims in developing countries were left with unrecoverable losses.
Liès said developing countries were paying a price for not being properly insured. Insurance would put a “price tag on risk and incentivise investment in prevention measures”, he said. In other words, affected countries would gain an understanding of the benefits associated with having insurance, and investment would be made to adapt to the increasing weather risks.
In Paris, a group of so-called vulnerable countries, anxious about the onset of starvation from droughts and displacement due to flooding and erosion, pointed to scientific studies showing the perils if warming went beyond 1.5 degrees Celsius.
From an industry perspective, “a two degree world remains by and large an insurable one,” David Bresch, Swiss Re’s head of sustainability, told swissinfo.ch. Bresch worked as an insurance advisor to the Swiss negotiating team in Paris.
Many countries in Paris acknowledged that their national climate pledges, known in UN jargon as INDCs – intended nationally determined contributions – will have to be boosted further, following research showing that the cumulative effect would still be a 2.7 degree Celsius rise.
Cooperation and other opportunities
While insuring against rising seas, melting glaciers and possibly death would not be possible, Bresch explained that one could “manage risk pre-emptively” by building resilience, thus lowering vulnerability.
Last year, his company committed to advise 50 governments and sub-national institutions on climate risk resilience by 2020, and to offer $10 billion against the risk.
A pilot programme, arranged by the World Bank, known as the Pacific Catastrophe Risk Insurance Pilot, last year had the Swiss reinsurer work with the public sector to pay out funds in Tonga following a category five cyclone. Thousands of people were displaced by the storm, which caused tremendous devastation to infrastructure.
Under the pilot, a “risk transfer arrangement modelled on an insurance plan” is set, where insurance companies facilitate the governments’ quick payment of funds to meet urgent needs for repairs and rebuilding.
Zurich, the largest Swiss insurance company, also supports climate resilience programmes in developing countries via a network of NGOs on the ground.
But business opportunities, particularly in the poorly insured developing countries, exist for the industry, which in Switzerland employs approximately 10% of the population.
“For the purely financial impact of natural catastrophes, most of it would lend itself to insurance arrangements,” Bresch said. “We will see more of that being considered or pursued. In that sense there is an element of opportunity.”
He added that the introduction of new technologies in a greener global economy also involved risk. “By de-risking some of these undertakings we might be able to support or even speed up the transition to a low carbon economy."
Gilles Carbonnier, a professor of international economics at the Graduate Institute, said large reinsurers Swiss Re and the German Munich Re have long been “concerned about climate change” due to the frequency and intensity of disasters.
He explained that the development of public-private mechanisms or sovereign insurance policies allow such risk to be spread between the insurance companies and authorities.
Preparing for disasters would indeed make financial sense for governments. According to Geneva-based United Nations Office for Disaster Risk Reduction (UNISDR), every dollar spent on disaster risk reduction – including insurance mechanisms – saves up to $7 in disaster response.
Carbonnier said that furthermore, for some developing countries sensitive about their sovereignty, “insurance products are a way of being less dependent on aid organisations”.
But for others “it may be easier not to pay insurance premiums, using taxpayers money, and to wait for the disaster, and when it hits to be seen as actively involved in the aid response”.
“But at the end of the day, for governments it is an issue of legitimacy. Citizens expect the state to be the insurance of last resort.”
Following Hurricane Sandy, which hit the eastern coast of the United Stated in 2012 and caused some $75 billion in damage, an initial attempt by the government to reduce government subsidies to a national insurance scheme was reverted, as premiums for coastal residents would have become too high, presenting a political risk for the administration.
For many poor countries on the frontline of climate change, Swiss Re’s CEO Liès said that the industry’s experience can serve a useful purpose nonetheless.
“We aren’t the solution to everything. We are simply the window looking at the consequences,” he said in Paris.
Background: climate change fallout for the middle class
A UBS report published on January 11 said climate change was eroding the wealth of the world’s middle class. The investment bank warned that “once the middle class is affected by climate change, there are likely to be economic, political and/or social consequences, which are likely to prompt a policy response”.
The report - entitled “Climate change: A risk to the global middle class” - stated that in developing countries, middle class populations were “typically underinsured”. Insurance penetration – defined as premiums as a percentage of GDP - in emerging markets, was very low compared with property values. In China, for example, insurance penetration is only 0.12% while in India it represents only 0.07%. In the industrialised countries this number is 0.77%.
The study estimated the cost to the middle class of adapting to changing temperatures, extreme weather patterns and rising seas between 1980 and 2014, at $1.5 trillion (CHF1.5 trillion). Record temperatures set in 2015, made the year also one of the costliest to date.
Globally, the middle class numbers some one billion people, most of whom live in southeast Asia. UBS described the region’s growing population to be most affected by climate change.