Global warming will lead to growing intensity and frequency of severe weather events, rising losses, as well as greater uncertainty in the assessment of these events by the insurance industry, which could make some weather risks uninsurable, according to a report published by Swiss Re.
“Failure to take immediate, tangible action to confront warming temperatures could lead to climate systems reaching irreversible tipping points,” said the sigma report titled “Natural catastrophes in times of economic accumulation and climate change.”
Swiss Re predicts that economic and insured losses resulting from such events will rise in the coming decades, which poses a major threat to global resilience. In other words, the report emphasized, the insurability of weather risks could be jeopardized, particularly in high-exposure accumulation areas.
The full extent of the impact of climate change is difficult to predict, and it could take decades to gather the proof points needed to confirm the changes that are already underway, report indicated.
The short-term lack of proof of climate change does not prove there has been no change, the report said. Indeed, the signals of the effects of warming temperatures are already apparent: warmer average temperatures, rising sea levels, more frequent and longer heatwaves, greater weather extremes and erratic rainfall patterns.
Incomplete and Outdated Models
“We believe weather-related risks remain insurable. However, to improve risk assessment and ensure insurability in the face of many uncertainties, insurers need to continually adapt their models to changing parameters,” said Swiss Re in the report.
While re/insurers face risks of climate change on both the asset and liability sides of their balance sheets, the report focused “on the liability side where physical climate change risks can impact underwriting results.”
“The foremost underwriting risk in the context of climate change and other macro-risk trends is potential underestimation of insurance premiums by relying on historical loss data or incomplete/outdated models to assess the current risk,” the sigma report affirmed.
“Insurers need to adapt to a dynamic risk landscape by closely monitoring and incorporating socio-economic developments, the latest scientific research on climate change effects, and the status of local risk mitigation measures in their modeling,” it added.
“Many of today’s catastrophe models are benchmarked against historical loss data, which does not reflect the current level of urbanization, and hence do not fully account for today’s quickly rising exposures, changing socio-economic environment and climate,” according to the report.
Distortions from Historical Loss Records
“To uphold the insurance risk transfer model as a powerful tool to foster resilience, insurers need to adapt before, not post events,” Martin Bertogg, head of Catastrophe Perils at Swiss Re said in a statement accompanying the report.
“To this end, insurers should be wary of historical loss records in understanding today’s state of the socio-economic environment and climate. Averaging out over a past spanning multiple decades can lead to distorted risk assessment,” he warned.
Swiss Re suggested that the modeling and underwriting communities “need to develop better methods to de-bias historical records, be it for exposure, hazard and vulnerability.” The key is to understand how factors such as GDP growth and urbanization, which are not fully captured in risk models, can affect rising risks and losses, the report added.
The report further noted that more sophisticated modeling approaches are needed to account for the growing loss impacts of secondary perils, which have been inadequately modeled in the past. (Secondary perils are the smaller to mid-sized events, or secondary effects, that follow a primary peril, such as a storm surge or flooding after a hurricane.)
A good example of the cost of secondary perils occurred last year when Japan was hit by back-to-back typhoon events: Faxai in September and Hagibis in October, which resulted in the largest insured loss totals (US$7 billion and US$8 billion, respectively) of all natural disasters around the world. “Damage was due to the very strong winds and heavy rains of the typhoons, leading to exceptional inland flooding,” said sigma.
Given Japan’s long history of typhoons, these events were not a surprise, but the extent of Hagibis’ flood losses provided “a wake-up call” for the industry. Flood risk in Japan was thought to be largely or even completely mitigated because the country made a “huge investment in coastal and inland flood defense following the devastating typhoon events in the 1950s and 1960s,” explained sigma.
But, the report said, Typhoon Hagibis challenged this assumption because most of the US$8 billion in insured losses from Typhoon Hagibis came from flooding, exacerbated by urban development since the mid-20th century, “Tokyo was unprepared for the degree of physical damage it suffered.”
While the flood defenses helped mitigate the impact of the storm, the risk was not eliminated.
As a result, Swiss Re suggested a recalibration of models with respect to the higher levels of risk, particularly in terms of intensity, that water inundation in Japan now poses.
“Economic development and ever-increasing population concentration in urban centers, alongside changes in climate, will continue to increase losses due to weather events in the future,” said Edouard Schmid, chairman of the Swiss Re Institute and group chief underwriting officer at Swiss Re.
“Our industry can play a key role by partnering with clients and governments to develop scalable solutions that support the transition to a low-carbon world by managing risks associated with renewable energy projects and making these more attractive to investors with re/insurance risk-transfer backing,” he went on to say.
Photograph: Driftwood is piled around a bridge after Typhoon Hagibis hits the town in Marumori, Miyagi prefecture, northern Japan, on Wednesday, Oct. 16, 2019. The typhoon hit Japan’s main island on Saturday with strong winds and historic rainfall that caused more than 200 rivers to overflow, leaving thousands of homes flooded, damaged or without power. Photo credit: Kyodo News via AP.
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