Tue, Nov 14, 2017 - Page 10 News List

Climate risks make insurers wary of future

Bloomberg

After one of the worst Atlantic hurricane seasons in history, the world’s biggest insurers say the industry needs to get its act together if it wants to survive climate change.

Insuring against weather natural disasters could reach unaffordable levels for households and companies, while the potential damage is so unpredictable it might be impossible to model — an unacceptable risk to insurers.

“Sometime in the future there will be the situation where people cannot afford any longer to buy catastrophe insurance — this is what we want to avoid,” Ernst Rauch, the head of the Corporate Climate Centre at Munich Re.

Munich Re, the world’s largest reinsurer, suffered a 1.4 billion euro (US$1.63 billion) loss after hurricanes Harvey, Irma and Maria sent claims soaring.

Contrary to Warren Buffett’s view that climate change will spur demand for coverage and boost profit at his insurance companies, the risk is that the opposite unfolds as shifting weather patterns render disaster-prone areas uninsurable. Finding ways to prevent this is on the agenda of UN-backed climate talks in Bonn, Germany, this week.

The onus of bearing the expense of rebuilding after hurricanes, floods and earthquakes already falls disproportionately on governments.

Insurers are on the hook for only about 10 percent of US$75 billion of damage in Texas caused by flooding after Hurricane Harvey, according to AIR Worldwide. That is because most standard US home insurance policies do not cover flooding as covered by most policies. It is a similar story in Fiji, hit last year by its worst cyclone ever, where less than one in 10 people own insurance.

“It’s a big concern of Swiss Re that there’s such a huge gap between the economic losses and what is insured,” said Peter Zimmerli, the head of atmospheric perils at Swiss Re, the second-biggest reinsurer. “Some of the signals of global warming are just there — they can’t be debated anymore.”

Climate change is causing temperatures to get warmer, sea levels to rise and natural disasters to get more severe, trends that are set to worsen as the planet keeps heating up, scientists at the International Panel on Climate Change said.

Insurers have not kept up with the shifting tides because they still assess future risk based on what has happened in the past, said Tom Herbstein, who runs an insurance project called ClimateWise at the University of Cambridge.

As conventional insurance gets pricier, communities might opt to invest in risk mitigation, he said.

“We’re living in a world where risk is growing exponentially,” said Herbstein. “Climate change fundamentally challenges the existing insurance business model because it is rendering actuary analysis in many places obsolete.”

Steps to adapt to the new normal are under way. At this week’s talks in Germany, the G7 is to discuss a plan to increase access to direct and indirect insurance coverage against climate changed to as many as 400 million people in developing countries by 2020.

Swiss Re’s Zimmerli pointed to parametric insurance, which pays out predetermined sums in the event of disasters, as a way of making catastrophe policies more widely accessible. Swiss Re backed such a plan in China that allows people living in coastal provinces susceptible to typhoons to buy coverage on their mobile phones, eliminating administration costs. If a storm strikes, they need to only upload a photo of the damage to trigger payment.

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