Climate change driving up insurance risk

During December at COP 17 in Durban the insurance industry warned that certain impacts of climate change have become unavoidable, and that there is an urgent need to adapt to them. A just released report by the world’s largest re-insurer indicates that 2011 was the highest insurance claim-year for natural disasters in history to date – some $4 billion more than the previous record year of 2005 in the wake of the Katrina cyclone disaster in New Orleans.

While negotiations at the United Nations-sponsored COP17 conference focused on the reduction of greenhouse gas emissions, the insurance sector, which facilitates the mechanism by which society pools its resources to cope with risk, hosted a side event to underpin the critical importance of adapting to climate change.

The event was hosted by Santam, South Africa’s largest short-term insurer, ClimateWise, the United Nations Environment Programme Finance Initiative  and the National Business Initiative.  Santam is a member of both ClimateWise and UNEP FI and has played an active role in facilitating the industry’s transition to active participation in climate discussions.

Paul Clements-Hunt, head of the United Nations Environment Programme Finance Initiative (UNEP FI), who moderated the side event, stressed the importance of immediate action.

“With a very high degree of scientific certainty, it is expected that if there is no immediate and significant reduction in emissions, the physical impacts of climate change will be too strong to adapt to.  Equally, it is expected that the climate will change no matter how successful governments and the international community are in reducing emissions.”

Adaptation is about making communities, societies and economies resilient to the adverse impacts of a changing climate.

Risk categories

According to Clements-Hunt, climate change-related risks can be viewed in two categories of environmental change.  The first is an increase in the frequency and severity of extreme weather events, such as floods, storms, hurricanes and droughts and the second relates to ongoing, long-term changes, including a rise in sea levels, desertification and the disappearance of glaciers as freshwater reservoirs.  To be holistic, adaptation efforts need to address both categories.

Remco Fischer, head of climate change at UNEP FI, reiterated this in presenting the key findings from a global survey which assesses how the insurance industry can support society to improve its resilience to the climate. “I think the ultimate question is how the insurance industry can work with governments and legislators, both at the national and international level, to enable quicker and more effective adaptation to climate change, particularly among the most vulnerable“

Insurers already hard hit

The survey, which contains insights from over 60 insurers in both developed and developing economies, confirms that insurers are being hard-hit by the increasing climate risk.

“Insurance companies are seeing the evidence of climate change. But not only that, they have started, in their self-assessment, feeling it. This is the reason why insurers have already undertaken changes in all areas of their business to address this issue, as revealed by our survey,” says Fischer.

Collaborative risk management

The survey also explores the benefits associated with loss prevention and reduction, and emphasises the importance of collaborative risk management.

“An encouraging outcome is that risk management approaches, such as land-use management, ecosystem conservation and flood-resilient improvement, score high in terms of both benefits and cost-effectiveness. This implies that there are factors which we can influence to improve overall resilience of society.“

A recent local study conducted by Santam, the CSIR, the University of Cape Town and WWF also demonstrates that the insurance industry can play a strong role in risk management.

The study, which was conducted in the Southern Cape, where insurers have experienced an increase in losses due to a number of environmental, social and governance factors, reveals three major findings in relation to the changing risk landscape:

Climatic changes are driving risks higher;

The human impact on the ecological environment is as important in determining our vulnerability to climate risk (for example deforestation greatly increases the damage from floods); and

In a socio-ecological landscape, the actual level of risk is determined by the non-linear interactions between the different drivers of risk.

The implications of the study are significant, as they illustrate that human-induced impacts on the ecological buffering or ‘bounce-back’ capacity of the system have an equal or greater impact on risk, as compared to future climate change predictions.

Dr Deon Nel, head of the WWF biodiversity unit who presented the findings at the event, said …”the proactive management and restoration of these ecological systems has the potential to offset most of the future increases in risk related to climatic changes. This is positive news for us as there are actions which we can already take, right here and right now, to improve our resilience in a changing risk landscape.”

Dr. David Bresch of Swiss Re, the world’s second largest reinsurer and a member of ClimateWise, highlighted the importance of strategic investments in risk reduction and risk transfer activities.

“It is widely recognised that if risk transfer initiatives are designed and operated accordingly, they can play a strong role in physical risk reduction on the ground. Furthermore, our recent analysis on a number of these initiatives in developing countries reveals that the full potential of utilising risk transfer for adaptation is far from exhausted,” he said.

Public-private partnership approach

The analysis indicated that there is a strong case for a public-private partnership approach. Many existing insurance schemes are still in the pilot stage and a partnership approach can bring them to scale and enable them in helping to improve the climate resilience of communities.

Bresch referred to a few examples such as the R4 Rural Resilience Initiative, a multi-stakeholder partnership which makes weather insurance available to poor farmers and rural households by giving them the option to pay for premiums with their labour. This innovation builds on the success of the Horn of Africa Risk Transfer for Adaptation (HARITA) project in Ethiopia.

Around 85% of all Ethiopians depend on farming for their livelihoods. But drought regularly threatens their harvests and incomes. Climate change could make things even worse as rainfall becomes more unpredictable. To protect Ethiopia’s rural poor against rising drought risks, Swiss Re is working with Oxfam America and other partners.

According to the Swiss Re website these partners together designed a risk management package that innovates with a new idea about insuring the poor. With the support of aid organisations, it gives people the initial option to pay for their premiums with their labour, engaging them in community-led and locally designed climate adaptation initiatives in return for insurance cover. These include reforestation and crop irrigation projects. This innovative risk management approach has allowed a growing number of rural households, many led by women, to benefit from insurance. Since the launch of the project in 2008, uptakes have increased rapidly, from an initial 200 households in the first year to 1,300 households in 2010.

“It also makes sense for us to collaborate with government to address the issue of systemic risk”, added John Melville, the executive head of risk services at Santam. “The absence of a viable insurance industry will shift greater risk exposure onto governments and other societal structures. It is therefore in the interest of governments and society that the private insurance industry remains viable and covers as broad a segment of society as possible”, he said.