Climate change: The effects have already arrived for insurers
Climate-related losses in 2017 were the highest on record at US$340 billion dollars, as reported in the Munich Re “A stormy year” report on natural catastrophe trends. Severe flooding from Hurricane Harvey in Houston in combination with the accumulated losses from hurricanes, Harvey, Irma and Maria was rare and costly. Disaster events claimed more than 11,000 victims in 2017.
Climate experts predict that this intensity of extreme weather events is likely to become the norm, with raging wildfires and heatwaves also increasing losses.
According to the latest Intergovernmental Panel on Climate Change (IPCC) report ( United Nations group tasked with assessing the scientific evidence on climate change), “human activities are estimated to have caused approximately 1.0°C of global warming above pre-industrial levels, with a likely range of 0.8°C to 1.2°C. Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate.” Nations current commitments to the 2015 Paris Agreement (aimed at limiting global warming to under 2°C) currently put us on track to global average warming closer to 3°C by 2100. Increasing risks to insurers, Nations are failing to act on their current Paris Agreement commitments, with the planet is heading towards a 4°C or higher trajectory.
The Asset Owners Disclosure Project (AODP) a research group dedicated to measuring the management of climate change risks and action on climate change states that “weather-related financial losses, regulatory and technological changes, liability risks, and health impacts related to climate change have implications for the business operations, underwriting, and financial reserving of insurance companies.” The AODP survey ranked AXA, Aviva, Allianz, and Legal & General as global leaders on climate, with American and Australian insurers receiving much lower performance scorecards. Thomas Buberl, AXA’s CEO indicated that a “plus 4°C world is not insurable.” Even at lower degrees of warming, the insurance sector is concerned, with Mark Wilson, CEO of Aviva saying that “if we do not take urgent action to limit global temperature increases to within 2°C, the impacts upon the economy, society and our business will be nothing short of devastating”.
To respond, insurers can assess how climate-related impacts may affect their loss ratios and underwriting practices and then act to manage these risks. Insurers can also examine their investments and how they contribute to or could mitigate climate change. According to the AODP survey of more than 80 global insurers, the analysis of value at risk from weather-related events was commonplace, but few insurers reported assessing their liability risk (e.g. class action for underwriting insufficient policies in the face of known climate impacts) or other transition risks (e.g. carbon pricing exposure). Carbon footprinting is the most commonly reported technique used for investment portfolio risk analysis. Ceasing to underwrite thermal coal and other fossil fuel based assets was also common among leading insurers with a number of these same insurers increasing investment in low carbon options such as, renewable energy or green bonds.
Read the full report, General Insurance Industry Review