The impact of climate on insurers is undoubtedly high on their risk agenda. Extreme weather conditions create high risk. Increased risk is not good for Insurers.
Global impact of climate on Insurers
A recent article in the Financial Times (FT) posed the question, Climate change: Will the insurance industry pick up the bill? The article focuses mainly on risk from flood. This was the costliest individual peril according to the Catastrophe Loss estimate for 2019 from the Global re/insurance broker Aon. The FT concludes that we have not yet reached a position where hard choices have to me made. However, according to Arno Hilberts, vice-president at risk modelling company RMS, “As levels of risk rise, there will be more questions about uninsurability and what you do about it. You will reach a threshold where insurance systems don’t really work!”
UK impact of climate on Insurers
The impact nearer to home has been only too evident recently. Over the past couple of weeks, the UK has suffered from havoc wreaked initially by Storm Ciara, followed closely by Storm Dennis. The effects are shown dramatically in pictures published by Farmers Weekly in their article, Storm Dennis deluge takes its toll on farmers. NFU Mutual are quoted “Just as with Storm Ciara, our regional claims teams, agency network and suppliers are prepared and ready, to ensure we’re able to meet the needs of our members should they be affected by Storm Dennis.” They will not be the only Insurers to be prepared. Indeed, experts at PwC predicted Storm Ciara expected to cost up to £200 million in insurance claims – and that was before the onslaught of Dennis. These two examples alone illustrate the impact of climate on insurers.
How to mitigate climate risk?
Firstly, this is not an insurer problem, it is a global issue. The article from the FT quotes Konrad Schoeck, a flooding specialist from Swiss Re. “Flood risk management cannot be done by the insurance industry alone. It needs to be the insurance industry, the government and private homeowners.” This holds true of all climate risk, not just flood
Most recently has been the announcement of an investment of £1.2 billion for the worlds most powerful weather and climate supercomputer. Forewarned is forearmed. However, this is only going to predict the symptoms of the risk. Far more difficult is the need to treat the causes. ‘Megafires’ have hit hard in the Australian summer. As a consequence they hosted a climate emergency summit this month, calling for urgent and dramatic climate action. There are no easy answers, but the summit highlighted these three big objectives:
- Commitment to reduce greenhouse gas emissions to zero
- Draw down carbon emissions already in the atmosphere
- Integrate adaption and resilience methods into national and global economies.
No one individual can make a significant impact to the risks from climate and severe weather. However, working together we can make a difference. Firstly, we can all take preventative action to try and ensure extreme conditions have as little impact as possible. In addition to prevention comes the harder challenge. That of helping towards the reduction of gas emissions. Often this includes difficult life choices such as:
- Travel less in general, avoid planes and use more efficient/electric cars
- Make your home as energy efficient as possible
- Waste less…and recycle waste effectively
As with individuals, Insurers can exert influence in two ways. Firstly, they can adopt a ‘prevention’ model designed to help their clients avoid major insurance risks. In our blog, The insurance business model needs fixing, we explored ways that Insurers are helping clients avoid potential claims. More recent examples include Hiscox who offer Leakbot’s leak detection system for free alongside Nationwide in the US who have launched a smart home solution.
Insurers are also taking a much broader responsibility to alleviate the adverse effects of climate change. To conclude with a quote from the Climate Change article on the ABI website:
“… The biggest thing the industry can do is to use its sizeable investment portfolios to move funding away from things that are polluting the planet and into greener initiatives. Current structures and regulation make that harder to do than it should be – so let’s fix them.”