An insurance industry perspective on the latest IPCC report

By Jane Strachan

Last Friday saw the release of the International Panel on Climate Change (IPCC) Special Report on Managing the Risk of Extreme Events and Disasters to Advance Climate Change Adaptation (SREX). This report has sparked much interest in the insurance sector, an industry I work with through a Knowledge Transfer Partnership – connecting climate research with insurance industry risk assessment.

The report provides a timely summary of how natural climate variability and human-generated climate change is affecting extreme weather and climate events. This summary isn’t the most reassuring of reads, yet the report then goes on to looks at how integrating expertise in climate science, disaster risk management and adaptation can inform discussions on how to reduce and manage the risks of extreme events and disasters in a changing climate.  It is good to see a report that contains not only a summary of the scientific findings, but also suggestions for action. As Chris Field, the other Co-chair of Working Group II, said: “We hope this report can be a scientific foundation for sound decisions on infrastructure, urban development, public health, and insurance, as well as for planning—from community organizations to international disaster risk management.”

Here is a summary of the headline changes in the behaviour of extreme events expected during the next century:
  • Heavy precipitation: increased frequency over many regions.
  • Warm/cold daily temperature extremes: increased/decrease frequency on a global scale.
  • Heat waves: 90-100% probability of an increase in length, frequency, and/or intensity over most land areas.
  • Tropical cyclones: likely increase in maximum wind speed in some (but not all) ocean basins, but with a likely overall decrease (or essentially no change) in the number of tropical cyclones.
  • Drought: medium confidence in increased intensity in southern Europe and Mediterranean region, central Europe, central North America, Central America and Mexico, northeast Brazil, and southern Africa.
  • Sea level rise: average sea level rise will contribute to upward trends in extreme sea levels in extreme coastal high water levels.
  • Flooding: projected precipitation and temperature changes imply changes in flooding.

So how can insurance play a role in managing these changes in climate-related hazards? Well, the insurance industry as we know it has been used as a mechanism to help people deal with risk and uncertainty for over 300 years.  The main concept of insurance is to spread risk, and insuring against damage to property can boost resilience in the event of a disaster. Risk sharing does this through providing a way to finance recovery of livelihoods and reconstruction, disaster relief and reducing vulnerability. Additionally, if insurance is priced correctly (i.e. by charging premiums that reflect the true level of risk) then it also can provide knowledge and incentives to encourage society to keep risks manageable, therefore lessening the impact of future extreme events. If premiums become too high, reflecting an unmanageable level of risk, then hopefully this will act to discourage the risk being taken.

However, managing risk in this way relies on an understanding of the underlying hazard. Which is why integrating knowledge from climate science into the industry is so important, particularly when faced with potential shifts in weather patterns and the behaviour of extreme events.

So on Monday, when I attended the Annual Meeting of ClimateWise, a leadership group on climate change within the global insurance sector, it was reassuring to hear that the sector was increasingly taking climate science into account not only as part of their corporate and social responsibility policies (e.g. through reducing their carbon footprints), but also in their core business operations. The principles of ClimateWise include:
  • taking a lead in the risk analysis of climate hazards;
  • supporting climate research and improved forecasting of weather-related hazards;
  • working with policy makers to develop and maintain an economy that is resilient to climate risk;
  • supporting climate awareness and adaptation amongst customers; and
  • incorporating climate change in their investment decisions.

These principles are ambitious, but encouraging in a year that has been a challenging one for the global insurance industry. Economic instability alongside series of natural catastrophes has posed huge operational challenges. Yet the year’s events appear to have increased the urgency for action.

The department is already adding to the integration of climate science into the industry through its involvement in the Willis Research Network – a partnership between scientific institutions undertaking research relevant to catastrophe risk and Willis, a global reinsurance broker. Reinsurance, by the way, is effectively the insurance of insurance, and comes into play when a large disaster triggers multiple insurance claims. The majority of large disasters are natural catastrophes, and a high proportion of natural disasters are weather and climate related. Our work with the industry involves integrating climate hazard understanding into the sector, and exploring ways in which simulation of extreme events by high-resolution global climate models can be integrated into catastrophe assessment tools used by the the industry, to broaden their view of climate-related risk.

So we look forward to the release of the full SREX report in February (currently only the Summary for Policymakers is available). Meanwhile we will continue investigating ways in which our work with the industry can add to the dialogue on the managing the risks of extreme events in a changing climate.

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