Most significant, most misunderstood risk
Each year our attention is drawn to one of the most significant, most misunderstood risks that organisations face today, which is climate change.
We are all wrestling with our understanding of what climate change (global warming) may mean and what impact it may have in the future, says Vanessa Otto-Mentz, Head of Santam Group Strategy.
It is important for us as society and business to come to terms with – and understand how this will impact each of us – and for the short term insurance sector, this is no exception.
Large-scale disasters across the world
According to Swiss Re’s 2017 Sigma Report there were a number of large-scale disasters across the world in 2016, including earthquakes in Japan, Ecuador, Tanzania, Italy and New Zealand. There were also a number of severe floods in the US and across Europe and Asia, and a record high number of weather events in the US. The strongest was Hurricane Matthew, which became the first Category 5 storm to form over the North Atlantic since 2007, and which caused the largest loss of life – more than 700 victims, mostly in Haiti – of a single event in the year. Another expansive and expensive disaster was the wildfire that spread through Alberta and Saskatchewan in Canada from May to July.
In total, in sigma criteria terms, there were 327 disaster events in 2016, of which 191 were natural catastrophes and 136 were man-made. Globally, approximately 11 000 people lost their lives or went missing in disasters. Total economic losses from disasters in 2016 were the highest since 2012 at USD 175 billion, and a significant increase from USD 94 billion in 2015.
As in the previous four years, Asia was hardest hit. The earthquake that hit Japan’s Kyushu Island inflicted the heaviest economic losses, estimated to be between USD 25 billion and USD 30 billion. Global insured losses from catastrophes were also the highest since 2012, at around USD 54 billion in 2016, up from USD 38 billion in 2015.
The implication, according to the report, is that thousands of policyholders benefitted from having insurance cover in place, however, since insurance cover is not universal there was an all-peril global catastrophe protection gap of USD 121 billion in 2016.
Disasters in Africa
Natural catastrophes and man-made disasters in Africa claimed approximately 1 800 lives and caused economic losses of close to USD 3 billion in 2016. Insured losses were USD 1.7 billion, mostly relating to claims for accidents in oil and gas facilities. A magnitude 5.9 earthquake hit near the west shore of the Lake Victoria Basin between Tanzania, Uganda and Rwanda. The area is predominantly rural and 41% of the buildings are made of mud and are hence vulnerable to quakes, and 117 721 people lost their homes.
With the recent storm that ravaged Cape Town, as well as the fires that blazed in Knysna and the surrounding areas, the claims from these disasters promise to be the biggest in South African history.
In Knysna, 846 houses were gutted and another 307 were damaged. Of the 846 houses destroyed, 150 were informal structures, and the rest formal dwellings. A council survey of fire damage revealed that more than 50% of houses destroyed were not insured. Only time will tell of the total economic loss from this disaster.
Unpacking the risk and implications of it
In terms of the current situation and trends in South Africa, as far as climate change and the risk management landscape is concerned, Otto-Mentz emphasises that climate per se is not going to change – science tells us it has changed and will be changing more.
According to Otto-Mentz, there are two broad categories of climate risk: long term changes, such as rising sea levels and desertification and short term changes, such as an increase in the frequency and severity of extreme weather events (droughts, floods, wildfires, cyclones), and as a business we need to understand how this will impact our business.
“These risks are compounded by a lack of institutional and individual adaptive capacity in many African cities with increasing populations. The protection gap on the continent, given the low levels of insurance penetration i.e. the risk covers purchased for natural catastrophes, is less than 1% of GDP outside SA. The combination of these factors are likely to expand economic losses in terms of property damage, business interruption and crop failure for example,” she explained.
“Currently, the scientific modelling of climate change is not yet at the granular and predictive shorter time interval level for the data to be integrated into short term insurance modelling. However, the knowledge on this topic is increasing and future scientific risk modelling combined with actuarial and underwriting experiential modelling will go a long way towards assessing these risks more accurately,” she said.
Society’s risk managers
Otto-Mentz says that insurers have a triple role to play, “We are society’s risk managers, risk carriers and we are investors.”
Otto-Mentz believes the insurance sector needs to support a more risk aware and more risk resilient world – one that can prepare for risk by reducing physical risk exposure through the principle of solidarity through risk transfer and risk pooling providing financial resilience in times of catastrophe. She says global problems like climate change cannot be tackled alone – and that it requires a collective response, hence Santam’s membership and active participation in SAIA, ClimateWise and UNEP FI’s Principles for Sustainable Insurance.
Otto-Mentz says it should be kept in mind that insurance is only one role player - asset owners and developers as well as city management must come together to ensure the collective decision making reduces risk exposure.
Otto-Mentz believes the insurance sector as a whole can contribute to the societal response to climate change by using resources responsibly and partnering with others to prepare communities for extreme weather by being risk aware and taking steps to reduce their risk exposure.
Editor’s Thoughts:
The Emissions Gap Report 2016 from the United Nations Environment Programme (UNEP) shows that even if countries deliver on commitments for climate change, the world will still warm by 3.0 to 3.2°C. This is worrying and as Otto-Mentz says, businesses, society and insurers will need to adapt. Please comment below, interact with us on Twitter at @fanews online or email me your thoughts.
