Climate Change Risk for Insurers

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Insurers are struggling to assess the risks from climate change, industry officials say, with the floods in Australia and Brazil highlighting the potential losses from greater extremes of weather.

Scientists say a warmer world will cause more intense drought, floods, cyclones as well as rising sea levels and the insurance industry says the number of weather-related disasters has already soared over the past several decades.

Adding to the risks is a growing human population, more people moving into cities, particularly in Asia, and more property in the path of increasingly volatile weather.

This makes it harder to tease out a direct climate change link in ever rising losses, experts say. Lack of long-term weather data in some parts of the world is also clouding the picture.

Another problem is the narrow time horizon insurers typically focus on. Reinsurers, for instance, renew their contracts annually based on past losses, meaning they aren’t so concerned about trends decades in the future.

“There is still a fair amount of uncertainly as to climate change and the attribution of climate change to natural events or man-made and therefore it has not translated yet into the pricing,” Yves Guerard, secretary-general of the Ottawa-based International Actuarial Association, told Reuters.

Some insurers are seeing a climate change link and rising risks.

“Ignoring global warming will risk an increasing exposure and therefore insured losses will escalate,” said Scott Ryrie, CEO of Allianz SE Reinsurance Asia-Pacific in Singapore.

“I believe climate change will add something to the losses we see already but I don’t believe losses will be dramatically changing. It’s just going to make the losses worse,” he told a climate change and insurance conference in Singapore.

Rapidly growing megacities were a major concern for the market, he said, pointing to UN data showing 231 million people living in cities in Asia in 1950. By 2050, that figure is forecast to grow to nearly 3.5 billion.

“Increased exposures with megacities coming up, low insurance penetration and key exposures being in emerging markets where most of the insurance growth has been happening. That’s a time bomb,” said Jan Mumenthaler, head of the International Finance Corporation’s insurance services group.


In Australia, rising coastal urbanization and a rapidly expanding mining sector means a growing risk of weather-related insurance losses. The government has said the floods since last month are expected to be the nation’s costliest natural disaster, with damage and reconstruction estimates between $5 billion and $20 billion.

“In some regions of the world, we have already seen changes in the patterns in terms of frequency and intensity of these events,” said Ernst Rauch of global reinsurer Munich Re.

He pointed to changes in rainfall patterns and more intense thunderstorms, hailstorms and tornados. “The U.S. is a prime example but also parts of Europe,” he told Reuters in Singapore.

“But you cannot generalize and say that the weather patterns have changed already in all parts of the world in the same way. There is no evidence for this,” said Rauch, head of the firm’s Corporate Climate Center.

Munich Re says the number of weather-related natural catastrophes has more than doubled since 1980.

Overall losses from weather-related natural catastrophes rose by a factor of 3 in the period 1980-2009, taking inflation into account, while insured losses from such events increased by a factor of about 4 during the same period. Total insured losses from natural disasters in 2010 was $37 billion, it says.

While taking into account rising wealth, population and urbanization, “there is evidence indicating that the growing number of weather-related catastrophes most probably cannot be fully explained without climate change,” the company says.

Rauch said the industry was struggling to get an accurate picture of the extent of climate change risks.

“It is not easy. And quite frankly, it would help if more companies in our industry would have more expertise and experts analyzing these risks,” he said.

Insurers use complex models to calculate catastrophe risks, but here, too, there were challenges.

“There’s a huge amount of variability in the models and understanding that variability is hugely key,” said David Simmons, managing director, analytics, of the Willis Group, a global insurance broker.

“And climate change adds another layer on to that. And so it’s very hard. There’s a fundamental lack of data,” he said, pointing to lack of long-term global weather data.

“So trying to dis-engage natural climate variability — there are cyclical changes like El Nino and La Nina — and then any underlying thing, is tough. But we are getting better at it,” he told Reuters at the conference.

(Editing by Ed Lane)

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