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Jun 2020

A low-carbon world is necessary to reduce future losses of Nat CATs: Swiss Re

Source: Middle East Insurance Review | May 2020

In Swiss Re’s latest sigma report, the reinsurer expects climate change to increase the intensity and frequency of severe weather events and lead to more uncertainty in their assessment.
 
“Economic development and ever-increasing population concentration in urban centres, alongside changes in climate, will continue to increase losses due to weather events in the future,” said Swiss Re Institute chairman and Swiss Re group chief underwriting officer Edouard Schmid. 
 
“Our industry can play a key role by partnering with clients and governments to develop scalable solutions that support the transition to a low-carbon world by managing risks associated with renewable energy projects and making these more attractive to investors with reinsurance risk-transfer backing.”
 
According to the sigma report, global economic losses from natural and man-made disasters in 2019 amounted to $146bn, lower than the $176bn in 2018 and the previous 10-year annual average of $212bn. The global insurance industry covered $60bn of the losses, compared with $93bn in 2018 and $75bn on average in the previous 10 years.
 
The decrease in losses were primarily from the lack of large and costly hurricanes in the US in 2019, with severe weather events still the leading cause of overall losses throughout the year. This was amplified by socio-economic developments in affected areas and climate-change effects.
 
Of the economic losses in 2019, $137bn were due to natural disasters, with man-made events causing the remaining $9bn loss. Of the $60bn in insured losses, Nat CATs accounted for $52bn. The biggest industry loss events of 2019 happened in densely populated and developed parts of Japan: typhoon Faxai in September (insured losses of $7bn); followed by typhoon Hagibis in October (additional insured losses of $8bn).
 
Socio-economic development obscures impact of climate change
Economic development and population spread leads to changes in land use resulting in, for instance, deforestation and construction in flood plains and wildland-urban interface. Another variable is the scale of risk mitigation infrastructure like flood barriers and sea defences. This all influences the scale of losses inflicted by extreme weather events and other natural disasters.
 
The ways increasing temperatures change Nat CAT risks are not fully understood due to the short history of observational records and other factors, said Columbia University professor Adam Sobel in the sigma report.
 
“However, it could take decades to gather the proof points to confirm the impact of climate change. Failure to take immediate tangible action could lead to climate systems reaching irreversible tipping points. This, in turn, could jeopardise insurability, particularly in areas where urbanisation and economic development have led to high levels of concentration of asset (human and physical) value exposure,” he said.
 
Insurance might not be ‘economically viable’ in high-risk areas
If the sea levels continue to rise, low-lying flat coastal areas such as in Florida will start to lose their economic viability for insurance. “Not that it’s uninsurable, but when it is more or less a certain loss, the premium gets so high that it becomes no longer viable to pay for insurance,” said Swiss Re group chief economist Jerome Haegeli.
 
There are construction projects occurring in high exposure areas that should not be happening at all, he said. “But the pressure on growing cities, you do not always get the most favourable locations that suffer from overbuilding. The human impact on climate change is an important one, such as the failure to plan in these cases. From an economic perspective, these areas are not a good value proposition for insurance.”
 
Human mitigation will reduce some of the risks that arise from such overbuilt, overexposed areas, but it is more likely that people will leave before the question of insurability even comes up, he said. M 
 
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