According to a recent UN report, 2021 is a “make or break year” in the fight against climate change. Experts have long predicted the dreadful effects of climate change, but recent disasters demonstrate how dire the situation is.
Climate change, according to a UN report released this year, “will get progressively worse and cannot be stopped over the next 30 years.” Furthermore, studies show that the amount of CO2 in the atmosphere is so high that planting trees willno longer save us because there isn’t enough space in the world to plant the trees required to prevent a 3.60F temperature increase. As a result, the best the world can do is manage the situation.
We have already witnessed several unprecedented climate disasters in 2021.
The recent drought resulted in high temperatures and high winds, resulting in the largest active wildfire in the United States.
Hundreds of fires destroyed properties and burned and displaced people in Canada, Turkey, Greece, Algeria, and Spain.
Europe experienced some heat waves as well.
Flooding has occurred this year in central China, parts of Europe, and African countries, destroying property and killing and displacing people.
Furthermore, for the first time in 2021, rain fell on the summit of the Greenland ice sheet.
Hurricane Idaho is a prime example of how climate change is making hurricanes stronger. All of these events occurred in 2021.
In the United Kingdom, we recall:
The St. Jude storm of 2013
The 2013 heatwave in the United Kingdom and Ireland,
The East Coast Tidal Surge of 2013
The 2013-14 Winter Storms
The 2018 Coldwave in the United Kingdom and Ireland
As examples of recent climate disasters, consider the 2018 British Isles heatwave, the 2018 UK fires, and the 2019-20 UK floods.
One concerning fact is that some of these disasters were missed by the UK’s Environment Agency, leaving people unprepared and causing damage and loss of life.
What is the impact of the increasing frequency of climate-related disasters on the insurance industry?
Storms, floods, and wildfires have a direct impact on the insurance industry by causing damage to insured and uninsured property, as well as indirectly through subsequent events such as resource scarcity and disruption of global supply chains.
Windstorms, wildfires, floods, and other natural disasters have an impact on property-related insurance businesses, which fall under the liability side of insurers’ balance sheets.
Inflation-adjusted insurance losses from these climate-related disasters have skyrocketed, from around US$10 billion per year in the 1980s to more than US$50 billion in the last decade. This increase is due to an increase in insurance payouts, which insurers refer to as losses.
Insurance loss influencing factors
The factors influencing these losses are complex. While most research findings point to increased exposure from industry expansion as the primary factor, there are indications that climate change is also playing a role.
For example, Lloyd’s of London estimated a few years ago that the 20cm of sea-level rise since the 1950s increased Superstorm Sandy’s (2012) surge losses by 30 percent in New York alone. Superstorm Sandy alone caused nearly $70 billion in damage (2012 USD) and, as expected in the industry, increased insurance payouts.
In the event of such losses, insurers pass on the risk by raising premiums and reinsurance premiums. As a result, insurers tend to manage the current level of direct physical risks through catastrophe risk modelling, alternative risk transfer, portfolio diversification, and short-term contracts.
As previously stated, these complex approaches for modelling risks for climatic disasters are for current climate trends. As climate disasters become more common, insurance and reinsurance premiums are more likely to rise when insurers renew annual contracts, as is common practise. Reinsurance and alternative risk transfer assist insurers in balancing their peak exposures. To provide resilience to climatic changes, the basic insurance business model and regulatory capital requirements are required.
The Effects of Natural Disasters on Insurer Balance Sheets
In the future, increased physical risks from natural disasters could have a variety of effects on the liability side of general insurers’ balance sheets.
First, it may disrupt established insurance arrangements and associated risks, causing public policy issues.
Second, increased risk volatility and higher correlation between modelled risks may have an impact on insurers’ capital requirements and diversification benefits. Third, growing physical threats may affect indirect risks and financial assets, such as real estate investment, or large parts of portfolios via real-economy effects.
What Should Insurance Companies Do?
For insurance companies, the status quo can work in your favour or against you. Because of the increasing number of these disasters and the lack of insurance coverage for many properties, insurance companies with ample capital can expand their coverage. Yarab Capital, a venture capital firm that specialises in capital funds for insurance companies, has noticed an increase in capital demand for several UK-based reinsurers. Group CEO Niraz Buhari has stated that the firm is working closely to raise a billion-dollar capital from a public fund based in the Middle East that has the risk appetite to participate in these types of catastrophic risk.
Risk consultants predict a significant increase in annual premium revenue for insurers. As a result, reinsurance companies that sell flood and other disaster insurance may wish to continue selling these policies for a few years. The cost of managing such insurance is the issue here.
According to Niraz Buhari, Group CEO of C&C Insurance Group, many insurance systems and programmes have not been well developed to deal with rising risks. Flood risk management, according to Konrad Schoeck, a flooding specialist at Swiss Re, requires a collaborative effort from the insurance industry, private homeowners, and the government. It is critical that financial services firms promote businesses such as Smart Cover, which provides insurance for household appliances, Gadgets, and homes, extending the lifetime of these Gadgets and assisting consumers in reducing their household carbon footprint.
Insurers can use their sophisticated understanding of evolving risks and the annual policy cycle to restructure portfolios and price in order to avoid long-term exposure to climate events.
The increase in risk value can increase demand for new and different solutions and services, which can expand the industry. Nonetheless, insurers must exercise caution to avoid underestimating the true threat of climate change. If catastrophic events become too common, they can endanger business models due to changing regulatory requirements. Furthermore, certain risks may become uninsurable for insurers and prohibitively expensive for customers.
Forecasts of an increase in floods and fires may result in underinsurance or no insurance at all. As a result, a significant market disruption could result in higher self-insurance rates, premium losses, and increased public-sector demand for insurance.
Insurance companies that plan ahead of time can begin offering policies that help customers who haven’t yet considered the consequences of natural disasters.
