Global issue, local impact

A recent global insurance survey revealed that the threat from natural catastrophes and associated climate change were rated as the second and fourth most pressing issues in the global insurance industry.

Fortunately for South Africans, the effects of global warming have, to date, been more severely evidenced in the Northern hemisphere. "South Africans are, for now, probably more insulated from the effects of global warming than people in the northern hemisphere," says Gari Dombo, Managing Director, Alexander Forbes, Personal Services. "That said, we are not immune and can expect climate-related disasters to become more severe."

Wayne Richards of Mutual & Federal concurs, "There is no doubt that changing claims patterns are being experienced globally due to losses arising out of changing weather patterns and rising sea levels. Thus far, however, the impact of global warming and climate change has resulted in relatively slow changes to insurers claims costs in South Africa."

New insurance opportunities

According to a report entitled From Risk to Opportunity: How Insurers Can Proactively and Profitably Manage Climate Change by the Ceres investor coalition, many new insurance activities are emerging in the US and globally to tackle the causes of climate change and rising weather-related losses.

"Climate change, perhaps the biggest threat in the industry's history, also creates vast opportunities for new products and services," said Mindy S. Lubber, president of Ceres. The report, written by two insurance industry experts, identifies 190 products and services available or in the pipeline from dozens of insurance providers in 16 countries. Some of the climate change solutions include energy efficiency, green building design, carbon emissions trading and sustainable driving practices.

Innovative products

One insurer offers 'green' coverage, including rate credits and other incentives, for commercial building owners who re-build damaged properties using green and LEED-certified (Leadership in Energy and Environmental Design) building practices.Marsh, the world's largest insurance broker, and AIG, the world's largest insurer, have launched carbon emissions credit guarantees and other new renewable energy-related insurance products.

Insurer-initiated hurricane loss prevention methods used at nearly 500 commercial locations incurred eight times less damage from Hurricane Katrina than properties that did not make the engineering improvements, avoiding $500 million in property damage. Insurer FM Global says the $500 million in savings came after customer investments of only $2.5 million, and helped make the company profitable in a year when few insurers were. Insurance-initiated mangrove protection programmes operated by Japanese insurers are helping to reduce cyclone-related risks in Asia.

Local situation

"One has only to look at the damage caused to private homes along the KwaZulu Natal coast in 2007," says Dombo. "While no direct link has been made with climate change these floods were caused by 'unusually high waters combined with prolonged and intensified storm activity' – all classic barometers of global warming.

"Insurers need to understand that the potential for damage resulting from natural disasters is increasing as global warming accelerates. Fortunately, it is increasingly possible to research the full potential for damage and put adequate catastrophe protection in place as the science of climate change becomes more sophisticated."

Santam says that there has been an increase in the frequency of natural perils claims and, in all likelihood, this could be attributable to global warming. Just one example is the flood damage involving various classes of business during period in August last year, which impacted on areas such as George, Mosselbay, Port Elizabeth, Durban, etc.

Underlying reasons

Andreas Spiegel, Vice President - Risk Management of Swiss Re says, "We have observed an increase in weather related claims. The main reasons for this development are rising values owing to general economic growth, increasing value concentrations in coastal regions and other particularly exposed areas, increasing insurance penetration, increasing vulnerability of the insured goods, and climate change, both anthropogenic and due to natural variability."

Spiegel adds, however, "One cannot attribute individual weather related catastrophes to climate change, as climate is the average over many weather events. However, as global warming continues, a majority of scientists expect certain types of severe weather events to increase."

Adapting risk management

Recent scientific findings suggest that the natural cycles of higher and lower hurricane activity in the North Atlantic are closely correlated to sea surface temperatures, explains Spiegel. "Since 1995, we have been in a phase of higher hurricane activity which is expected to continue for another 10 to 20 years. As a consequence, Swiss Re has adapted its underwriting and risk management framework (risk models, prices and capacity) to reflect natural climate variability, any superimposed human-induced factors, and a higher margin for increased model uncertainty."

A recent study, The effects of climate change: Storm damage in Europe on the rise, conducted by the Swiss Federal Institute of Technology (ETHZ) in cooperation with Swiss Re, revealed that storm severity and frequency will both be affected by climate change in the long term. "The results indicate that, by the end of this century average annual losses can be expected to increase from 16% to 68%, depending on the model; there will be a disproportionate increase in losses for less frequent, high-severity events, affecting the higher reinsurance layers; and the expected increase in losses will vary from country to country," says Spiegel. "Swiss Re will continuously adapt its underwriting and risk management framework to reflect these findings."

"We continually monitor our own weather related claims costs as well as weather events and trends," says Richards of Mutual & Federal. "Through this analysis the adequacy of insurance premiums is determined. While we do not offer products specifically for global warming, losses arising from perils such as storm, wind, water, hail and snow are generally covered as standard insured perils under our policies. There are very few exclusions or restrictions attached to these perils and it is not anticipated that any further restrictions to these covers will be implemented in the near future as a result of the potential impact of global warming."

Forward-thinking solutions

Swiss Re has pioneered weather risk transfer instruments in low-income markets, starting in India in 2004. A total of 280 000 policies have since been sold to smallholder farmers. Swiss Re has also provided financial protection in the case of extreme drought to three village clusters in Kenya, Mali and Ethiopia, as part of its Climate Adaptation Development Programme (CADP), dsigned to develop a financial risk transfer market for the effects of adverse weather in emerging countries.

"As the world's largest industry, with $3.4 trillion in yearly premium revenue, the insurance industry is well positioned to further society's understanding of global warming and advance forward-thinking solutions to minimise its impacts," says the Ceres report.