Climate change cuts through the insurance value chain
Brokers play an integral role in helping insureds navigate evolving climate change related risks by giving practical guidance on risk mitigation and transfer and offering support when extreme weather events disrupt businesses and households. Your close relationships with clients enable you to translate insurance best practice into action, thus contributing to risk resilient communities.
Climate enters the mainstream
These insights emerged during a webinar titled ‘Insuring Tomorrow, A Climate-Ready South Africa’ which was sponsored by Momentum Insure. FAnews editor Rianet Whitehead steered a panel of industry experts through a complex four-part discussion beginning with (1) the reality of climate risk and touching on (2) the cost to society due to climate change, (3) how to get insureds and the broader public to care, and (4) building climate resilience. In this newsletter, your writer explores key observations under each theme.
Whitehead kicked off the discussion by asking the panel what businesses and households could expect under the broad climate change challenge. Jayne Mammatt, an Expert in Climate Change Resilience at Deloitte warned against pigeon-holing the issue as ‘environment only’ due to its broader socioeconomic impact. “The focus is definitely moving towards climate adaptation or resilience, with all companies across all sectors seeing its impact across their entire value chain,” she said.
Hayley Schell, Regional Manager at Swiss Re said the industry was at a crossroads, arguing that changing climate patterns were testing traditional pricing methodologies. “Reinsurers’ modelling or pricing methodologies used to be very comfortable with looking to the past ... we [now] have to be more future-looking,” she said. Insurers and reinsurers will have to work together to offer affordable, sustainable solutions and ensure there is adequate capital (and controls) to accommodate the anticipated frequency and severity of future extreme weather loss events.
Short-term weather versus long-term climate
“Current weather often gets confused with the long-term impact of climate change,” interjected Rudolf Britz, Chief Actuary at Momentum Insure. He cautioned against overreacting and recommended separating short-term weather fluctuations from 100- to 150-year climate change trends. Local insurance stakeholders were urged to deal with structural issues that magnify the losses caused by extreme weather events. “We have infrastructure pressure caused by decay and urbanisation contributing to more systemic problems,” he said.
The panel moderator introduced the second part of the discussion focused on the loss exposures arising from underwriting climate change related perils. “Climate affects every single sector in South Africa, and we are also impacted by what happens overseas,” Mammatt said. To illustrate, the panellist mentioned frequent disruptions to global silicon chip supply following earthquakes or floods in Taiwan. And domestically, the April 2022 KwaZulu-Natal (KZN) floods caused significant business interruption (BI) losses at Toyota SA’s Durban plant.
The panel noted that Africa carries a disproportionate burden from climate change. Schell commented on the intensity of tropical cyclones affecting Mozambique and some of its neighbours, and the rising severity of drought events in Zimbabwe as examples. She added that no part of the globe was spared, recounting a recent trip to a glacier near Zurich, Switzerland. The glacier she visited was covered in a glacier blanket in an attempt to prevent melting, and the temperate that day was hovering around 35C.
Insurers and reinsurers may underwrite selectively
Funeka Ngewu, Executive Head: Claims and Procurement at Momentum Insure, encouraged all stakeholders, from brokers to underwriters, to have the important conversations around changing weather patterns.
“Everybody sitting on this panel has a responsibility to ensure that clients, consumers and the greater public are aware of what weather means in our context today,” she said. One of the emerging trends if for insurers and reinsurers to become more deliberate about the risks they underwrite. “The insurance industry is becoming very selective as to where it will insure homes along the KZN coast,” Schell said, by way of example.
Whitehead asked the psychologist on the panel what it would take to get individuals to act on the climate change threat. Dr Khosi Jiyane suggested that society had a shared responsibility to tackle the problem. “Nobody has the luxury of apathy as far as the impact of climate is concerned; it is everybody’s problem,” she said. A good starting point would be to get communities involved in environmental projects through education programmes at schools or corporate social responsibility (CSR) initiatives.
Jiyane reminded the panel that information alone is not enough to drive change, and that shifting behaviour requires engagement at the most basic level: in homes, schools and communities. This means that brokers, insurers and even municipalities all have a role to play in reinforcing small but consistent actions that collectively build resilience. For underwriters, the focus will shift to product innovation.
Could government’s special risks insurer play a part?
“Parametric insurance is a beautiful public-private partnership that allows the under-serviced segment of society to benefit from insurance, despite not necessarily being able to pay the premium or afford the cover,” Schell said. She used the example of a USD275 million pay-out to thousands of individuals within 30-days of an earthquake in Morocco. The trigger event for that parametric insurance pay-out was an earthquake exceeding a certain level on the Richter scale.
“There has been conversation about changing Sasria’s model [to allow them to] step into the climate space around floods,” Whitehead hinted. One panellists said the state-owned insurer would be “a great nesting ground for climate change vehicles and products to be rolled out across the country”, but Britz countered that the functions performed by insurance pools like Flood Re in the United Kingdom, and FAIR in California, US, were substantively different from the civil unrest risk currently underwritten by Sasria.
All that remained was for the panellists to weigh in on the building climate resilience theme. “Education is key to ensure climate resilience,” said Ngewu. “We have to keep our brokers and clients informed around what is happening and how they can potentially mitigate risks.” The insurer conceded that brokers were well-positioned to educate insureds about the evolving risk landscape and to push clients for the interventions needed to avoid or limit catastrophe losses.
The litter versus storm water drainage dilemma
Jiyane suggested a more hands-on approach at the community level, pushing for a prevention rather than cure approach. For example, programmes aimed at reducing litter could overlap with educating communities about storm water drainage systems. “It is about education and explaining systems,” opined Schell. “If the storm water drain is full of litter, the surrounding homes will be flooded; if population migration is interpreted as ‘you may build your house wherever you like’ you will increase the risk of flooding.”
Whitehead singled out consistency and innovation as key metrics in the broader insurer resilience debate, before calling on her panellists to share some parting thoughts. “Everyone has a responsibility to drive the message [around climate resilience],” concluded Britz. “Insurers have influence via broker communities or direct to client, and we can only hope that the climate message filters through [from there] into the rest of society.”
Writer’s thoughts:
Climate change is reshaping the insurance landscape across the distribution, underwriting and claims areas. Should brokers be adding client education re climate resilience to their existing risk identification, mitigation and transfer function? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
