Are insurers prepared for the effects of climate change on the industry?
One of the biggest debates of the 21st centuries has been the issue of global warming and the effects it has had on climate change. While this has affected other sectors of society, its effects are starting to be felt in the financial services sector wher
While there are still many people who do not believe in global warming, it is hard to turn a blind eye to climate change. This was highlighted by film maker Davis Guggenheim in the now famous documentary ‘An Inconvenient Truth’, which starred former US Diplomat Al Gore and highlighted his campaign to educate the world on global warming. The documentary became an overnight success and made society sit up and take notice of the change which is happening around them. The prevailing message of the documentary was that mankind needs, to adapt in order to survive in this changing world.
Climate Change and Its Impact on Insurers
The South African Insurance Association (SAIA) reports that the effects of climate change on the financial services sector is starting to become significant.
SAIA reports that climate change poses a material financial challenge to insurers and threatens both insurability and affordability. If insurers fail to adequately address climate risk it will impact on the sustainability of the sector.
“Changing the way insurers understand, communicate and act on climate risks can incentivise clients and policy makers to reduce their exposure to these risks and so contribute to mitigation and the promotion of resilient economies. This was the reason behind the establishment of ClimateWise, a global insurance led group, six years ago,” says Debbie Donaldson, SAIA GM Strategy and Planning.
She adds that ClimateWise exists to drive insurer action on climate change risk. Now with forty members across Asia, Europe, North America and Southern Africa, ClimateWise is facilitated by the University of Cambridge Programme for Sustainability Leadership.
The ClimateWise Principles are a readymade and tested framework for insurers developing a holistic response to climate change in their business operations:
- Lead in risk analysis
- Inform Public Policy Making
- Support climate awareness amongst customers
- Incorporate climate change into our investment decisions
- Reduce the environmental impact of our business
- Report and be accountable
“All members commit to action, individually and collectively against the six principles, and are independently reviewed against these annually. Where co-operation is required, ClimateWise creates a platform for members to collaborate. Stakeholders from within the insurance value chain, policy makers and clients, convene to tackle specific climate-related challenges through a time-bound process of enquiry and change,” says Donaldson who adds that some of the topics covered include product development that can facilitate the take-up of low carbon technologies and risk reduction in both rural and urban contexts, increased incorporation of climate change in investment decisions, and more efficient use of energy and resources signalled through the supply chain.
The need for the mind set change is simple
The need for the mind set change is simple. The recently released KPMG Insurance Survey shows that catastrophe pay outs significantly affected the short-term industry, and it is clear that the South African market can ill afford the effects felt by climatic events in the USA.
One of the worst international climatic events which affected the international community was Hurricane Katrina in 2006. In the past, these severe events rarely occurred in close proximity to each other, but scientists have pointed out that global warming has changed this.
The total estimated cost of damage wreaked by Hurricane Sandy, which hit the US in 2012, is nothing short of staggering. An article released by the Associated Press on November 2 2012, estimates the total damage caused by Hurricane Sandy to be up to $50 billion (but this could have ranged between $30billion and $50 billion.) The damage is comprised of property damage, loss of business, and increases in living expenses.
Other reports show that although the total amount of damage estimated was $50 billion, the costs that insurance companies incurred were considerably less. The report indicated that insurance companies can expect to pay between $10billion and $20 billion. Hurricane Sandy is already more expensive than many severe hurricanes from the past, including 2008's Hurricane Ike, 2004's Hurricane Ivan and even the much overhyped Hurricane Irene from 2011.
Why the lower price tag for insurance companies?
There are plenty of reasons why the insurance companies got a lower price tag. For one, many homeowners' insurance policies have exclusions and do not cover the cost incurred from flooding.
In order for flood claims to be paid, a consumer must have already purchased a flood policy prior to the arrival of Hurricane Sandy. In addition, the damage estimates include costs that are not covered by insurance policies such as loss of wages, power outages and increased costs of living expenses.
Insurance companies in South Africa, particularly direct insurers, follow the same model in South Africa. Many motorists were left red faced after they found out that vehicles which were damaged in the severe Gauteng hailstorms of 2012 were not covered by their original insurance package.
Editor’s Thoughts:
While South Africa hasn’t been significantly affected by climate change, it is clear that it is not impossible that this might occur. Looking to the future, natural disasters are becoming more frequent and, together with man-made disasters, are expected to increase dramatically within the next 40 years. When catastrophe strikes, the underwriter need to take decisive action in order to reduce the inconvenience to the customer.
Is the South African insurance industry prepared if disaster strikes? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].
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