Like hand and glove: climate change and inflation

Insurers will have to adapt their risk identification and mitigation techniques to not only respond to climate change related extreme weather catastrophes, but also find ways to withstand the inflationary pressures that combating climate change is likely to introduce. These were among the key points made during the recent Insurance Institute Gauteng (IIG) Insights event on climate change and the consequences of global inflation. “The climate crisis has probably been solved in terms of our understanding, but more is required across the board in terms of how the insurance industry responds to the challenge,” said Sedick Isaacs, Head: Business Support Services at Bryte Insurance, setting the scene for the debate.

Climate change is happening, now!

“Climate change is happening now,” said Lisa Morris, Regional Manager at Bryte Insurance, with reference to the April 2022 KwaZulu-Natal (KZN) floods and, more recently, the extreme temperatures affecting much of Europe. The KZN catastrophe is among the worst South Africa has experienced, claiming more than 450 lives and causing damage to assets and infrastructure exceeding ZAR17 billion in value. “There are still people that have not got water or electricity following the disaster, and it is going to take KZN years to recover from the damage caused to infrastructure,” she said. The impact of flooding on insurers is clear; but soaring temperatures present unanticipated challenges. 

Businesses and individuals in the UK and the rest of Europe are quickly realising that there are greater threats from 35C plus temperatures than discomfort and heatstroke. In the UK, rail operators had to shut operations due to their infrastructure being designed to operate at -10C to 35C. “Climate change is changing the risk landscape,” said Morris, asking what peril an insurer might be responding to in the event rail services were halted, or rail infrastructure damaged, due to extreme temperatures. In other words, global warming creates another dimension to insurers’ risk exposures. And the heatwave scenario is just another of the Black Swan type events that insurers have had to respond to in recent years. 

A staggering financial impact

Temperature-related perils are just one of among a growing list of concerns. JP Holmes, National Head: Specialist Property Division at Bryte Insure, commented that 60% of the 11000 weather-related catastrophes recorded between 1970 and 2019 were crammed into the last 15 years, and that there is widespread acceptance that this trend shift is due to climate change. “We are definitely seeing an uptick in climate change related events; the big issue is that we need to consider the impact climate change is having on the people and societies we live in,” Holmes said. “To sum it up: many people are highly vulnerable to the extreme weather events contributed to by climate change”. No wonder then that 11 of the G20 countries have included climate change among their top 10 short-term risks. 

The financial impact of extreme weather events is staggering. For example, Pakistan’s Ministry of Climate Change recently estimated that drought and flooding events linked to global warming had cost the country around 9% of GDP. Similar events are forecast to cost the South African economy 3% of GDP per annum by 2030, though the recent acceleration in natural catastrophes in our previously stable region suggest the impact could be far greater. 

“We need to change immediately; climate change has happened, and we are feeling the effect of it today,” said Holmes. To combat climate change will take a concerted effort from businesses and individuals, with a range of possible interventions. These include the relatively simple concepts such as recycling and reuse, to the adoption of alternative fuel sources, clean energy and smart technology. According to Morris, the 2020-21 COVID pandemic illustrated the potential positive effect that globally coordinated efforts could have on humanities emissions footprint. The steep reduction in air and motor travel had an immediate and positive impact on greenhouse gas emissions. 

The triple whammy: flood, pandemic and war!

Morris noted that three major events had fundamentally changed the economic environment over a short space of time… “COVID-19 was something that none of us ever imagined; the war between Russia and Ukraine; and then the apparent acceleration of global warming as exhibited by extreme weather patterns, whether it's drought, floods or wildfires,” she said. Unfortunately, rising inflation (and of course rising claims inflation) are consequences of the aforementioned events. Pandemic is singled out as mainly responsible for the auto price inflation that is affecting local insurers, while the Russia-Ukraine wall has sent energy and food prices through the roof. Locally, the July 2021 riots and April 2022 KZN floods have contributed to demand inflation for reinstatement or repair in the property asset class. 

These inflation pressures have been exacerbated by the realisation among global reinsurers that Africa is now as exposed as other regions to natural catastrophes. Following the 2017 Knysna fires and the more recent disasters mentioned in the piece, “insurers are seeing increases of in excess of 30% in terms of reinsurance premium increases,” noted Morris. “Additionally, every time we have a natural catastrophe event, we have to reinstate our reinsurance, otherwise we have no cover going forward”. This reality creates the link between climate change, evidenced by natural catastrophe events, and inflation. 

Time for climate resilient policies

The solution, said Isaacs, is to is for insurers to develop climate resilient policies. “The important thing is not to just deal with such risks from a theoretical point of view, but from an action point of view,” he said. So, insurers should consider retrofitting their buildings for energy efficiency and adopt renewable energy solutions wherever possible. Insurers will also have to take a more innovative approach when designing solutions and identifying, mitigating and transferring risks where exposure to extreme weather events is likely. “Finally, education and awareness will be critical; each of us have the responsibility to talk to our organisations, make our staff aware of the risk and go out to the broader communities to raise awareness,” concluded Isaacs. 

Writer’s thoughts:
Attend an insurance or investment conference nowadays, and you will find the programme chock-full of climate and environmental, social and governance (ESG) focused presentations. My key observation following the IIG Insights presentation was that insurers and insurance brokers need to rethink their traditional view of risk exposures. Agree or disagree? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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