Report Highlights Climate Change Risks Faced by Insurance Sector

September 17, 2018 by

A report that’s being touted as the “first important review of climate risk by an international financial standard setting body” may get the attention of the insurance community.

If it does, mission accomplished. That’s what the report from the International Association of Insurance Supervisors and the Sustainable Insurance Forum was designed to do, according to its authors.

The IAIS is an organization of insurance supervisors and regulators from more than 200 jurisdictions with a mission to promote effective and consistent supervision of the industry. The SIF, which is convened by UN Environment, is a network of insurance supervisors and regulators working with the goal of strengthening responses to sustainability challenges.

The report outlines climate change risks faced by the insurance sector and aims to raise awareness for insurers and regulators, or supervisors, of the challenges presented by climate change and how to respond.

The report asserts that physical, transition and liability risks, as well as figures on extreme weather events, point to a “growing trend of damages, both for insured and uninsured goods.”

The report, which was developed over seven months beginning with IAIS committee meetings in Kuala Lumpur, where the group confirmed climate and sustainability issues as a strategic priority, sets out a framework of observed approaches to address climate change risks and outlines approaches undertaken by SIF members — Australia, Brazil, France, Italy, the Netherlands, Sweden, the United Kingdom, and the U.S. states of California and Washington.

“It is important to recognise that insurers may be well-versed in understanding the dynamics of such extreme events, and may able to adjust exposures through annual contract re-pricing,” the report states. “However, the potential for physical climate risks may change in non-linear ways, such as a coincidence of previous un-correlated events, resulting in unexpectedly high claims burdens.”

SIF Secretary Jeremy McDaniels in an interview with Insurance Journal explained that recommendations made in the report aren’t guidelines or rules, but that the report “reviews practices and makes conclusions.” That doesn’t mean the groups, or those with authority who read and take the report to heart, won’t take ensuing steps.

“The process to advance specific guidance for supervisors is a next step,” McDaniels said.

The report notes that a first step for supervisors may be to identify the relevance of climate factors to their core supervisory mandates and objectives. Future actions could include legislation, requests from government, reconfiguration of institutional objectives or independent action.

“Supervisors and regulators can seek to raise awareness of climate change as a new and emerging risk to the insurance sector through market signaling — including public statements,” the report states.

It calls out a number of actions by regulators and governments, including the Australian Prudential Regulation Authority, which started a conversation on climate change beginning with a high-level speech to the national insurance council. That set out a rationale for action, intended next steps, and expectations from firms, according to the report.

The report notes there is strong scientific evidence to suggest that climate change is having an influence on the frequency, severity and distribution of natural catastrophes and extreme weather events.

Studies outlined in the report that have explored this evidence include:

  • Research by the World Meteorological Organization concluded that 80 percent of natural disasters between 2005 and 2015 were in some way climate-related;
  • An analysis of 59 studies in English-language scientific journals published between 2016-2017 found that 70 percent of studies concluded that climate change has increased the risk of a given extreme event, such as heat, drought, rainfall, wildfires and storms;
  • MunichRe has identified a long-term trend in an increase in the number of global natural catastrophes predominantly attributable to weather-related events like storms and floods. As there has been no relevant increase in geophysical events such as earthquakes, tsunamis, and volcanic eruptions, there is some justification in assuming that changes in the atmosphere, and global warming in particular, play a relevant role.

The report notes that natural disaster losses are apparently on the rise: total global economic losses from natural disasters between 2005 and 2015 were more than $1.3 trillion, with total direct losses in the range of $2.5 trillion since 2000; major hurricanes and other natural disasters in 2017 caused insured losses of $138 billion; overall economic losses from natural disasters in 2017 amounted to $340 billion, the second highest annual figure ever.

According to Aon Benfield, total economic losses from hurricanes in 2017 were nearly five times the average of the preceding 16 years, losses from wildfire were 14 higher, and losses from other severe storms were 60 percent higher.

McDaniels said he believes people in the insurance industry will pay attention to the report because “the industry has recognized this as a critical issue.”

Note: The full report may be found online in Insurance Journal’s Research and Trends section.