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Brace yourselves for the impact of climate change

29 June 2007 Gareth Stokes

Risk is a major factor driving insurance premiums. The success of a company doing business in the insurance environment depends on accurate assessments of the likely frequency and severity of specific insurable events. (Click on the heading to read mor

Nowhere is this more important than in the field of reinsurance, where underwriters provide billions of dollars of cover for major catastrophes. A quick look at the major global natural catastrophe and man-made disasters in 2005 and 2006 reveals that, of the two categories, natural disasters were the main culprit in terms of insured losses. Events which cost the industry the most include hurricanes, tropical storms, earthquakes and floods.
FAnews Online was interested to know more about the systems that big insurance companies put in place to assess the insurance risks posed by such massive natural disasters. To this end, we spoke to Andreas Spiegel who works as a climate change advisor in the Sustainability and Emerging Risks unit of global reinsurer, Swiss Re. Swiss Re is the largest reinsurance company in the world, conducting almost 50% of its business in the Americas.
From climate trend to insurance premiums

Part of the role of Swiss Res Sustainability and Emerging Risks department is to scan the environment to identify risks to the group's underwriting operations. "We are the team that actually helps the company to identify upcoming and emerging risks like climate change, nanotechnology, obesity and other risks which could potentially have an impact on our industry," said Spiegel.
Spiegel's department is responsible for coordinating the topic of climate change across Swiss Re globally. They focus on the most significant risks which include tropical cyclones in the US and winter storms in Europe. "We help identify [risks] and shape the processes so that we can manage these risks or initiate actions or communications to address them."
Spiegel was quick to point out that Swiss Re does not attempt to forecast events. Instead, the firm works with various experts at international universities to develop models which allow it to better understand the impact of climate change on the business as a whole. "When we do the research we try to quantify the risks and as soon as we [better understand] certain weather patterns, for instance with tropical cyclones, then we include this in our risk management tools and also our pricing calculations." Results from these investigations are a contributing factor to the overall final premium calculation.
Swiss Re has already completed this type of analysis for tropical cyclones and winter storms in Europe.
How does climate change impact business at Swiss Re?
Environmentalists have been warning governments about the impact of carbon emissions for many years now. Spiegel confirmed that insurance companies have been paying attention to these warnings. "We identified climate change a long time ago already some 20 years ago as an emerging risk. Since then we have built up our knowledge on this topic and incorporated it into our long-term risk management."
Spiegel mentioned that the group's focus on climate change has already created new business opportunities. Swiss Re uses the information gained from a better understanding of the risk from climate change and weather events to adapt its business strategies.
In recent years, Swiss Re has become involved in catastrophe bonds (more commonly known as cat bonds), placing such bonds in the market to protect its own balance sheet, along with structuring and placing transactions for clients. Swiss Re is also active in the over the counter market for weather derivatives, in which Spiegel estimates that Swiss Re has a 30% market share. The group has also invested "roughly 150 million Swiss Francs into renewable energy companies."
The scientists believe it is time to worry

"The scientific debate around whether the climate is changing is now over," said Spiegel. "There is overwhelming evidence nowadays that climate change is happening and that we will see more variable weather in the future."
Global warming will have a significant impact on the world in the next hundred years, and Africa will be one of the areas hardest hit. Scientists estimate that the average temperatures in African cities will increase by more than 1.5 times the world average. The result would be temperature increases of between three and four degrees centigrade. Some estimates are for crop production in arid African regions to fall by as much as 50%. In short, said Spiegel, "The predictability of weather will become more difficult."
A more significant impact of global warming comes from the threat it poses to the ice packs in the northern hemispheres. As the northern ice cap gradually recedes, and glaciers in Greenland continue to melt, the sea level could rise by as much as one metre in the next hundred years.
This massive increase in sea level could result in as many as 60 million people in coastal areas of developing countries being displaced. And as much as 17% of a country like Bangladesh could end up below water.
Editor's thoughts:

Climate change will play a major role in every aspect of life in the coming years. As South Africans, we are aware of the devastating economic impact of erratic weather patterns. If Africa becomes warmer in coming decades we will probably see an escalation in drought and crop failure. Can South Africa afford to ignore the impact of global warming? Send your comments to



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