You always take the weather with you

Climate change is a material underlying driver of risk today. As average temperatures continue to rise, the increasing incidence of extreme weather events cannot be ignored.

Earlier in May, The Economist reported that scientists are more and more confident in attributing increasing heat waves and droughts to climate change, meaning they are driven by human activity.

Manage your risk

Weather risk and residual vulnerabilities materially impact insurance risk profiles and claims patterns, and the general insurance sector is adapting underwriting and risk management strategies.

Existing tools for assessing and managing future risks are under review and the sector is adopting new ways of thinking and more systemic and collaborative approaches. For example, Santam was one of the founding signatories to the United Nations Environmental Programme Finance Initiative (UNEP FI) Principles of Sustainable Insurance (PSI) in 2012, which aims to embed environmental, social and governance (ESG) risk factors in industry decision-making.

The group also participates in the activities of the over 40 members of ClimateWise, a global industry initiative which leverages the insurance industry’s expertise to better understand, communicate and drive action on climate risks.

At a regional level, Santam worked with UNEP FI during the recent global inquiry into governance for sustainable development, of which results will be globally shared in June. The Strategic Risk Forum, a partnership between the South African Insurance Association and the Financial Intermediaries Association (FIA) of South Africa, was initiated in 2011 to enable the industry to engage on longer term issues, for example the planned industry and government green geyser replacement initiative.

Insurance industry leaders are working to promote climate risk mitigation and adaptation, either through the management of their own emissions, but more directly in promoting risk resilience in an effort to reduce losses and promote risk adaptation.

Taking a scientific approach

Collaborative efforts to address the challenges posed by climate change was a key focus in the Eden District study by the Council for Scientific and Industrial Research (CSIR), the University of Cape Town, the World Wide Fund for Nature South Africa (WWF) and Santam, the results of which were released in 2011.

This study revealed that human actions in the form of land use management – such as foredune management at the coast - have upside potential to neutralise sea storm risk in a given area proving that ecological infrastructure should be taken seriously for risk reduction.

Work still to be done

Santam improved its internal risk assessment capabilities and created external partnerships such as the Business-Adopt-a-Municipality (BAAM) programme aimed at capacitating local municipalities in the areas of fire, storm and flood risk management since Eden. However, much work remains to be done to improve broad-based resilience and risk preparedness on the ground.

This is also reflected in the work of the Business Roundtable in Australia, led by Insurance Australia Group, which focused on flood resilience. It was found that for $1 in preventative disaster risk reduction, $10 were spent in recovery, and that if this spend ratio could be reversed, economic and human losses from flood risk would be significantly reduced.

These lessons and global insurance data are captured in PSI’s flagship Global Resilience Project, from which a global risk map and pilot local resilience projects will be launched in the second half of 2015.

Collective management

The challenge to manage environmental, social and governance risks is a collective one; it requires innovative systemic risk solutions and calls for decisive and collaborative action at multiple levels of society.

The insurance industry can make a positive contribution to climate risk resilience through its risk frameworks, solutions and tools. This has motivated the PSI and its members to sign the March 2015 Sendai statement to the UN Office for Disaster Risk Reduction (UNISDR), calling for insurance knowledge to be considered as part of all disaster risk reduction activities.