Insurance: A bigger splash

1st May 2018


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The part insurers play in paying claims for financial loss is well known, but increasingly they are taking on a wider role in response to climate change, writes Gemma Gregson

My father can vividly recall the harsh winter of 1963. A farmhand at the time, he saw firsthand the threat the snow posed to the farming community. My children have fonder memories of the snow, but remember our local river bursting its banks during the storms of 2014 when businesses closed and homes flooded.

Communities recovering from extreme weather know the role that insurers play in protecting against financial losses. However, their actions in mitigating the effects of climate change go beyond simply paying claims, and are becoming increasingly important as climate change affects weather patterns.

According to recent research by Newcastle University, European weather could become more extreme in the future, with a worsening of floods, droughts and heatwaves. Professor Richard Dawson, co-author and lead investigator of the study, said: “We are already seeing at firsthand the implications of extreme weather events in our capital cities. In Paris, the Seine rose more than four metres above its normal level [in January]. And as Cape Town prepares for its taps to run dry, this analysis highlights that such climate events are feasible in European cities, too.”

Extreme weather events might be memorable because of the effects they have on society, but they also have economic consequences. Addressing the insurance market at Lloyd’s of London in 2015, Mark Carney, governor of the Bank of England, said: “The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity.”

Supply chain disruption

Increasing global temperatures can affect economic outputs such as productivity, inflation and household wealth, but an important consideration for the Bank of England is the stability of the financial system, which can be threatened by physical risks such as droughts, floods, storms and sea-level rises. These can damage property as well as lead to a scarcity of resources and subsequent disruption to global supply chains.

Losses from physical risks can be large. If losses are insured, the insurance industry will cover the costs of claims, but that in turn will affect insurers’ balance sheets and investments. The claims are typically funded through insurance premiums paid by policyholders, as well as through returns on investments held by the insurer. Legislation, such as Solvency II in Europe, exists to protect policyholders and make sure that insurers have adequate levels of capital to fulfil their claims obligations. This legislation also protects the stability of the financial system, as it reduces the likelihood of insurer failure.

If losses aren’t insured, there is an increased burden on individuals who may not be able to afford the cost of repairs. There may also be wider economic disruption, through effects such as lower productivity.

The gap between insured losses and total losses is known as the ‘protection gap’. Amounting to around $180bn (£126.4bn) globally for natural catastrophe and weather risk in 2016, this is a problem that needs addressing. In a 2016 report looking at the ways in which technology can be used to narrow the protection gap, Anna Maria D’Hulster, secretary-general of international insurance thinktank the Geneva Association, says: “The global insurance protection gap is one of the most pressing issues facing our society. It leads to a severe lack of societal resilience in many developing and emerging countries, where insurance today hardly plays any role when it comes to mitigating the impacts of natural disasters or pandemics.”

As experts in risk management as well as being risk carriers and investors, insurers play an important role in helping to achieve a more resilient society. The insurance industry is already responding to climate change challenges, including action through the UN-backed Principles for Sustainable Insurance, which aim to reduce risk, develop innovative solutions, improve business performance and contribute to environmental, social and economic sustainability.

To adapt to climate change, innovation is key, so products are being launched to meet the changing needs of global communities. Earlier this year, a parametric insurance policy was launched for a coral reef in Mexico. Carlos Joaquín González, governor of the Mexican state of Quintana Roo, said: “The Mexican Caribbean is visited by nearly 12 million tourists a year, who generate around $9bn [£6.4bn], but these benefits are threatened by possible natural disasters, such as hurricanes and storms, that cyclically put us at risk.”

Unlike traditional insurance policies where claims payments depend on actual losses, the payment of claims under a parametric policy is related to triggers such as a major hurricane or storm.

Martyn Parker, chairman of global partnerships at Swiss Re, a global reinsurer that supported the design of the product, said:

“By combining private capital with public resources in a trust to fund premiums, we can help governments in vulnerable regions plan ahead more consciously to protect important natural assets, crucial to both the planet and the economy, such as the coral reefs."

"In helping to speed up the recovery after a natural disaster, this type of innovative insurance will also help reduce the hit to the local and national economies overall.”

Insurers have also responded to the protection gap in the UK. After a collaboration between the government and the insurance industry, Flood Re was launched to address the availability and affordability of flood insurance.

Speakering in December 2017, Andy Bord, chief executive of Flood Re, said: “Eighteen months after its creation, it is clear that Flood Re has changed the home insurance market. 142,000 at-risk households have accessed more affordable home insurance. There has been a continued improvement in both the availability and affordability of home insurance for those with prior flood claims, as well as those who have not yet been flooded but are in ‘at risk’ areas.”

Sustainability support

Other examples of actions by insurers to tackle the physical effects of climate change include: offering premium reductions if policyholders implement preventative risk measures; speeding up post-disaster claims payments; and engaging in research and thought-leadership. With global assets in the order of trillions of dollars, the insurance industry is also a significant institutional investor. This asset base can be leveraged to support investments that align with sustainability objectives, with potential benefits for insurers and society.

It is not just insurers that are considering climate change. A growing number of insurance supervisors are taking sustainability issues into account. The UN-backed Sustainable Insurance Forum (SIF) is a global network of insurance supervisors and regulators that aims to promote supervisory and regulatory leadership on sustainability challenges and opportunities for the insurance sector. The work of SIF could have a bearing on the actions of insurers over the coming years.

Insurers are key players in the economy and have a role to play in maintaining financial stability as it comes under threat from climate change. Former UN secretary-general Ban Ki-moon has said: “Around the world, climate change is an existential threat – but if we harness the opportunities inherent in addressing climate change, we can reap enormous economic benefits.” Insurance can provide a means of reaping those benefits but, perhaps more importantly, there are societal benefits to be gained, too.


Rising Tide

$180bn (£128bn) - The extent of the ‘protection gap’ – the gap between insured losses and total losses – worldwide in 2016 for natural catastrophe and weather risk

142,000 - The number of UK households at risk of flooding that accessed more affordable home insurance in the 18 months following Flood Re’s launch in April 2016

4 metres - The height above its normal level to which the River Seine in Paris rose in January this year. The weather in Europe could become more extreme, with a worsening of floods, droughts and heatwaves


Gemma Gregson works in the insurance industry but is writing in a personal capacity as a freelance journalist

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