The short-term insurance industry gets serious about climate change

It was hoped that the 17th meeting of the "Conference of Parties” to the United Nations Framework Convention on Climate Change (COP17) would lead to lasting agreements to curb greenhouse gas emissions. This proved difficult at government level… But in the many side events industry representative bodies made steady progress.

FA NEWS: Why is it important for SAIA to get involved in events like COP17?

Debbie: The short-term insurance industry is directly impacted by changes in global weather patterns. We pay claims for damages that stem from many weather-related events including floods, storm damage, drought, fire etc.

In order to reduce risk we need to address the causes and the consequences of climate change. The prevention, mitigation and adaptation to climate change demands coordination and commitment from all affected stakeholders including government, NGOs, business and consumers. SAIA and its members had the opportunity to create platforms for initiating this form of collaboration through the COP 17 side events hosted by the National Business Initiative and various government departments. These forums are an important "first step” in the process.

Risk management is a core function of the short-term insurance industry. We contribute by way of physical risk mitigation practices (and the related change in behaviour these create) together with providing alternative risk financing mechanisms for natural disasters in different market segments.

Collective changes in behaviour can make a real difference to South Africa’s ability to manage climate-linked risks. In agriculture, for example, the presence of alien plants on a farm can increase the incidence and severity of fires. The eco system would then need to become an integral part of the underwriting process.

FA NEWS: Do you believe our industry has done ‘enough’ to reduce the risks associated with climate change?

Debbie: It is difficult to quantify efforts around climate change and climate risk. Our industry has been contributing to international forums as well as various initiatives coordinated through the United Nations Environmental Program: Financial Initiative, Climate Wise, The World Bank and the SAIA. These initiatives promote frameworks for insurers as to the insurance expertise and insights required to contribute to and actively participate in the mitigation of climate risk and adaptation of insurance practices to address it. South African insurers were the first (as a country) to adopted the UNEP FI Principles of Sustainability, for example.

At a practical level studies initiated by insurers locally can highlight the impact of manmade practices in relation to insurance perils. We know that by removing natural wetlands for building projects we potentially increase the risk of floods. The water runs off the surface instead of being absorbed into the ground. We are working on alternative risk finance frameworks for crop insurance as food security and employment is critically linked to the agricultural sector – which is in turn affected by climate change. And we are investigating the possibility of creating an industry-wide framework for renewable energy replacements in the event of geyser claims.

This is just the beginning. As an industry our challenge will be to establish and contribute to local and global frameworks and investigations on how the short-term industry can promote climate friendly adaptations across our value chain.

FA NEWS: How can South Africa fulfil its obligation to reduce greenhouse gas emissions? And is there anything the insurance sector can do to help?

Debbie: Neither South Africa nor the insurance sector can afford to adopt a "business as usual” approach. We are faced with a changing landscape. At present the green paper on Climate Change, released by the South African government, will drive our unified approach to the problem. SAIA is making progress on an industry-wide approach through the current development of a Sustainability Strategy Document.

This document will be drawn up in relationship to the SAIA focus on the Top 10 Environmental, Social and Governance (ESG) risks. Mitigation and adaptation practices related to weather change will develop as a result of our focus on the "environmental” sub-set of these risks. As an industry it is important to establish collaborative frameworks with other stakeholders to implement actions required to address the challenges we face.

On average only 6% of natural catastrophe losses were insured over the last 30 years.

1. Government is "the insurer of last resort”

1.1. The monetary impact of a natural catastrophe could be devastating to an individual country

2. All stakeholders in our economy need to find ways to do things differently, it is no longer "business as usual”

3. Public private partnerships are critical to creating solutions for South Africa

4. Building resilient cities is a priority. The trend to urbanisation is a global, African and South African issue.

4.1. Building regulations and town planning must be revisited to create the ability to mitigate and adapt to continued climate change as well as decrease carbon emissions. This includes addressing both new and existing buildings.

4.2. Some characteristics of this redesign are increased renewable energy usage, increased effective waste management programs, ensuring balanced land usage, planning city infrastructure to maximise the preservation of and / or re-introduction of natural ecological systems, decreasing individual motor vehicle usage in favour of public transport and accommodating alternatively powered vehicles.

* Source Munich RE

FA NEWS: Key scientific institutions say that climate change is already well underway. For this reason COP17 focused more on the acceptance of future climate change and the management of its impacts… We’ve moved from prevention of risk to risk management if you like... Any comment on that?

Debbie: The insurance industry has evidence of climate change thanks to its long-term weather claims trends. We have been adjusting our risk management practices to mitigate, avoid and manage these risks over time. However, given the magnitude of the likely changes to our environment we will witness a movement towards adaptation practices. One of the challenges will be to include scientific data in our risk models.. We will need to incorporate this knowledge into the underwriting, actuarial modelling and claims settlement practices. .

FA NEWS: How is COP17 relevant to brokers? Is there anything they can do to make a difference?

Debbie: Brokers play an important role in driving product innovation, providing advice and acting in the best interest of their clients in preparing them on changing insurance practices. Because brokers have a holistic understanding of their clients’ businesses they can provide invaluable feedback on how clients can minimise their environmental impact as well as insure against associated climate change risk. The Financial Intermediaries Association (FIA) is actively engaged with SAIA to find solutions to the Top 10 risks facing the industry.

FA NEWS: Much of the climate change discussion took place at a very high level. What are the next steps for SAIA and its insurer and reinsurer members in responding to the various COP17 challenges?

Debbie: The sign off of the Sustainability Strategy that is being developed will provide the framework and activities that our members can l support and drive.

FA NEWS: What are your feelings from a non-insurance perspective?

Debbie: There is a lot more work to be done to ensure buy-in from ordinary citizens. As individuals we need to understand the widespread implications of climate change and take an active interest in how we can take to make a real difference.