Global warming of 2˚C will put insurance markets under stress

 

29 June 2010

International efforts to limit global warming to no more than 2˚C above pre-industrial levels will not be enough to prevent changes in extreme weather events that will put the risk management procedures of the insurance industry under stress and could threaten the insurability of people and their property in some areas, according to a new report| published today (29 June 2010) by the Centre for Climate Change Economics and Policy at London School of Economics and Political Science and the University of Leeds.

The report, written by Nicola Ranger and Bob Ward for the Centre's Munich Re Programme, warns that while the Copenhagen Accord calls for reductions in global emissions of greenhouse gases to limit warming to no more than 2˚C, such an increase in the average temperature "would not be 'safe".

It states: "In a world that is 2˚C warmer, we are very likely to experience changes to the types and characteristics of extreme weather in many regions, as well as a global trend towards more intense weather-related events, including droughts, floods, storms and heat waves".

It adds: "It is still not possible to predict exactly how hazards will change, particularly at a regional or local level; in fact, due to their localised and rare nature, changes in extreme weather are amongst the most difficult impacts of climate change to predict."

But the report points out: "It is clear that changes in extreme events will put additional stress on risk management procedures, particularly where exposures and vulnerabilities to extreme weather are high. 

"From an industry perspective, long-term solvency could depend on the ability of insurers and reinsurers to anticipate and respond rapidly to changing levels of hazard and risk in relation to hurricanes and other extreme weather events. Risk managers could see benefits from incorporating flexibility into long-term strategies to allow for the rising ambiguity in hazard and risk on decadal timescales." 

The report also highlights the threat to insurability that could result if there is inadequate adaptation to the impacts of climate change that would be associated with a rise in global average temperature of 2˚C. It states: "The impact of such changes in hazard on the global risk of extreme weather events will depend on the effectiveness of adaptation, in particular, the extent to which reductions in exposure and vulnerability limit risks associated with weather-related hazards. If such reductions do not occur or are inadequate, risks will increase, and the number of people and properties that are considered uninsurable could grow." 

"In addition, with continued migration of populations to coastal regions, insurers and reinsurers could be exposed to potentially growing accumulations of risk. Without adaptation by limiting exposure and vulnerability of insureds, such increases in expected losses, uncertainty and capital demands could have profound consequences for future affordability and availability of insurance cover." 

The report acknowledges that "the traditional response to changing levels of risk by the insurance industry has been adjustments to insurance premiums, policy conditions and coverage", but draws attention to "recent evidence from the United States where major and rapid changes in policies offered by private insurers to cover homeowners' properties can create negative public and political reactions that may affect other lines of business". 

It adds: "An alternative response by insurers and reinsurers may be to guide and contribute to public policies that reduce exposure and vulnerability in order to promote insurability." 

The report concludes: "The insurance industry can play a leading role in promoting and supporting adaptation to climate change, with benefits from protecting and extending the market for property and casualty insurance." 

"Promoting and supporting societal adaptation could increasingly become a strategic imperative for the insurance industry." 

The report also notes that the reductions in greenhouse gas emissions by 2020 listed by countries in the Copenhagen Accord collectively fall short of the level required to create a 50 per cent chance of avoiding a rise in global temperature of more than 2˚C. The report states: "Any delay in global emissions reductions is likely to mean greater costs of action to achieve the same goal, or a greater chance of higher levels of warming."  

Notes for Editors

1. The Centre for Climate Change Economics and Policy (CCCEP) was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council and Munich Re.
2. The Munich Re Programme at CCCEP is evaluating the economics of climate risks and opportunities in the insurance sector. It is a comprehensive research programme that focuses on the assessment of the risks from climate change and on the appropriate responses, to inform decision making in the private and public sectors. This programme is funded by Munich Re and benefits from research collaborations across the industry and public sectors.