Climate change is altering weather patterns and causing an increase in the intensity and frequency of adverse weather conditions. With this, insurers are required to reflect on their risk appetite and models and determine how to underwrite the additional risks that climate change brings to the covers they provide.
FAnews spoke to Santam and Old Mutual Insure about the short term insurance industry’s role in climate change, the changing risk landscape, as well as the demand for revised thinking around responding to the risks of climate change.
Our understanding of climate change
We are wrestling with our understanding of what climate change (aka global warming) may mean and what impact it may have on business and society, says Vanessa Otto-Mentz, Head of Santam Group Strategy, she goes on to say, “We are in good company in growing our understanding. Michael Bloomberg (former New York mayor) also references the global economic risk that climate change poses in his foreword to the recently published report of the Task Force on Climate-related Financial disclosures - which he chaired.”
“Currently, the scientific modelling of climate change is not yet at the granular and predictive, shorter time interval level for the data to be integrated into short term insurance modelling. However, there are pockets of GIS data that can be used for particular underwriting purpose, for example flood risk mapping in certain areas around the Vaal and in the Garden Route, but on the whole large areas of South Africa do not yet have updated GIS data to provide holistic climate risk exposure insights. The knowledge on this topic is increasing and future scientific risk modelling combined with actuarial and underwriting experiential modelling will go a long way towards assessing these risks more accurately,” she said.
According to Otto-Mentz, there are two broad categories of climate risk: long term changes, such as rising sea levels and desertification and short-term changes, such as an increase in the frequency and severity of extreme weather events (droughts, floods, wildfires and cyclones), which pose immediate risks to lives and asset owners as well as impacts the short term insurance sector.
“In many African cities with rising populations, these risks are compounded by a lack of institutional and individual adaptive capacity. The protection gap on the continent, given the low levels of insurance penetration i.e. the risk covers purchased for natural catastrophes outside of SA, is less than 1% of GDP outside SA. This leaves people and assets exposed. These factors combined are likely to expand economic losses in terms of property damage, business interruption and crop failure for example,” she explained.
Unpacking the risk and implications of it
“South Africa has indeed experienced some extreme weather events over the last few years, most recently being the extreme weather in the Western Cape and the tragic forest fires that stretched along the East Coast of our country,” said Soul Abraham, Head: Commercial Lines, Commercial, Personal & Distribution at Old Mutual Insure.
Otto-Mentz adds,“This, combined with the size of human populations living in vulnerable areas (e.g. Cape Town's exposure to winter storm and drought) presents challenges for cities and towns to address. Furthermore, extreme weather events tend to exasperate existing vulnerabilities such as low economic growth, hunger, and water availability.”
The key, according to Otto-Mentz, is for asset owners and risk managers to better understand the risks they are exposed to; and focus on the actions that can reduce the potential for loss through increased preparedness.
Relevant data will be needed at each point of the risk management continuum from risk identification through management to risk transfer through to the purchase of an insurance cover. “If societal understanding and data availability does not keep pace with the risk development, or if the loss exposure results in a premium that the market cannot bear, you will find the insurance offers of risk covers retreating from the market. This is evident in areas of the USA where flood or hurricane covers are not available in the market in certain high exposure, high frequency areas - a situation that is not ideal.
“In order to stay competitive the short term insurance industry needs to stay abreast with the current state of climate change. This will require an understanding of how to measure risks and may also shed light on opportunities to mitigate some of them,” emphasised Abraham.
Abraham says to take into account the risks posed by climate change requires not only an understanding of the historical experience and how it has changed but more importantly an understanding of how these changes could affect experience in the future.
“Key to addressing these challenges is being open and accepting of the value that new technology can offer the insurance industry,” he said.
Society’s risk managers
“As an industry we need to continue to work with our clients to help them manage their exposure to the risks posed by climate change. This can happen in many forms from appropriate product design and packaging, advising on appropriate insurance cover to take out, sending out electronic warnings to our clients if there is a strong risk of hail, to on-site visits by our surveyors and brokers to discuss risks and the possible mitigation opportunities with our clients,” emphasised Abraham.
“As insurers it is very important to ensure that the risks posed by climate change are managed internally. Key to this process is ensuring that we understand the risks faced by each of our clients and using this knowledge to set up appropriate reinsurance agreements so that when extreme climate events do occur we can respond confidently and protect our clients,” continued Abraham.
“The short term insurance industry should also ensure that the products sold and advice given meet client’s reasonable expectations and provide them with the information they need to make an appropriate decision on the appropriate level of insurance cover to choose,” said Abraham.
A collective to carry risk
Otto-Mentz emphasises that Santam believes in a good and proper response to climate change, one that includes working with others to address the systemic risks climate change presents as well as adapting their own risk solutions and offers to the market. To this end Santam is a member of ClimateWise, the global body of insurers who are working to address climate risk, and recently submitted their 7th return of progress against the ClimateWise principles during July.
Like Otto-Mentz, Abraham believes there is definitely a strong incentive for collaboration. “Its key value is that it can allow access to specialist skills in important areas where specialist skills would otherwise not be available. This allows us to focus on the areas of insurance where we excel while still being able to leverage off of specialists in any other key area where we cannot specialise.”
This aside, Otto-Mentz believes the insurance sector as a whole can contribute to the societal response to climate change by using resources responsibly and partnering with others to prepare communities for extreme weather by being risk aware and taking steps to reduce exposures to flood, fire and storm risk on the ground. This includes putting measures in place to respond to disasters, for example, flood defences, better building plans, GIS flood risk mapping and ensuring financial protection is adequate.
Santam is making a contribution in this regard through the Santam Partners for Risk and Resilience in partnership with the Department of Cooperative Governance where ten district municipalities and 53 local municipalities will benefit from the programme over the next five years.
Abraham believes by innovating and streamlining the internal processes, insurers should be able to offer solutions to their clients at competitive prices, and as such, maintain a good value proposition.
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