Insurance and Climate Change column

Climate Change Tops List of World’s ‘Extreme Risks’

By | September 12, 2019

Global temperature change, global trade collapse and cyber warfare are the top three “extreme risks” identified in a study from Willis Towers Watson.

The new paper out this month is part of the firm’s extreme risk series of papers, which kicked off in 2009, when the top three extreme risks were economic depression, hyperinflation and excess leverage.

Economic depression, hyperinflation and sovereign default by a major developed economy were the top three risks in a 2011 study. Global temperature change first made the list in 2013 and has since worked its way up.

The most recent paper, which examines an array of risks that cover financial, economic, political, social and environmental concerns, uses an assessment framework for risks based on likelihood, impact and uncertainty.

Global temperature change, which is defined as Earth’s climate tipping into a less-habitable state, was the No. 1 concern.

The paper notes that over the last six years, despite calls to action from all major governments, the world has continued to emit increasing amounts of greenhouse gasses, exacerbating the risk of rising global temperature.

“The passage of time, with no meaningful actions taken, means we are six years closer to the point of no-return,” the paper states. “For that reason, we decided to lift the likelihood rating for this particular risk, boosting its ranking to the top as a result. In fact we seriously pondered whether rising global temperature remains an extreme risk. To us, it is looking increasingly likely, suggesting it might need to be considered as a mainstream risk.”

Climate Change And 9/11

Signs point to worsening climate change risks scaring off new money for the insurance industry, according to an opinion article in the Financial Times this week.

The article, Why climate change is the new 9/11 for insurance companies, is written by Patrick Jenkins, who explains that he was a cub reporter during the Sept. 11, 2001 terrorist attacks then compares then and now for the insurance industry.

Climate change seems to be making hurricanes more severe and sparking more wildfires, states Jenkins, who wrote the article as Hurricane Dorian was bearing down on the Bahamas. The Category 5 storm was so powerful that it drowned people who had been seeking refuge in their attics, swept others out to sea, and crushed steel-reinforced concrete structures, according to Health Minister Duane Sands.

He notes that Munich Re has said that 2017-18 was the worst two-year period for natural catastrophes on record, with insured losses of $225 billion.

“The insurance industry looks like it has ample capacity to cope,” Jenkins writes. “Over the past 10 years, insurance and reinsurance companies have been joined by new forms of capital, as pension funds and other investors have sought out sources of higher returns than are available in traditional bond markets in the ongoing environment of ultra-low interest rates. Many funds now have a 3 percent asset allocation to the sector.”

However, there is a logistical hurdle.

When a catastrophe bond experiences a loss event, the capital in the investment is suspended until the full cost of a disaster is pinned down. A phenomenon of “loss creep,” where initial estimates of a loss balloon months or even years after the event, has also spooked some investors. The cost of last year’s Typhoon Jebi in Japan, for example, rose from initial expectations of $6 billion to $15 billion, Jenkins notes.

More on “loss creep” emerged in a report this week from reinsurance broker Guy Carpenter that shows that extended development from North American hurricane losses and losses from non-peak perils like California wildfires have finally jolted reinsurers out of a soft reinsurance market.

“Harking back to the pre-9/11 underwriters’ mentality, the combination of bigger catastrophes and a supply of underwriting capital that might not keep pace with the mounting risks is prompting some analysts to prophesy a boom in pricing and profits,” Jenkins writes.

Regulators are starting to worry about climate change.

Jenkins points out that the Bank of England’s Prudential Regulation Authority is leading the way on stress-testing insurers against the risk that the world misses its carbon reduction targets.

“In such a scenario, insurers, especially in the U.S. where price increases are restricted by regulators, may find it increasingly unattractive to offer coverage,” he writes. “Greater lay-off of risk to reinsurers is one option. But more restrictive policies or wholesale withdrawal of cover are also possible. At some juncture underwriters will need to remove their blinkers and acknowledge that a world awash with worsening climate change risks is not necessarily just bad for the planet. It could be bad for the insurance industry too. A bit like 9/11.”

Time

Time Magazine is throwing down the climate gauntlet, if you will, in its Sept. 22 issue.

The issue, which opens with a letter from the editor, “Why TIME Devoted an Entire Issue to Climate Change,” contains numerous in-depth articles on climate change.

“This issue, if civilization can get its act together, might just mark a midpoint in TIME’s coverage of the biggest crisis facing our planet,” the letter from Edward Felsenthal, editor-in-chief and CEO of Time, states.

The issue, 2050: The Fight for Earth, has articles from journalists as well as activists like Al Gore, Ban Ki-Moon and Jane Goodall.

About 30 years ago the editors at Time convened a group of scientists and political leaders from around the world in Boulder, Colo., to discuss the climate change threat.

“The result was one of the best-known issues TIME has ever produced, sounding one of the louder alarms to date,” Felsenthal wrote.

In that issue, on Jan. 2, 1989, editors named “Endangered Earth” the most important story of the year, replacing the annual “Person of the Year” with a planet. The cover portrayed a 16-in. globe wrapped in plastic and rag rope.

Felsenthal notes that 30 years from now, we will be on the cusp of 2050.

That’s the year called out by the U.N.’s Intergovernmental Panel on Climate Change as the requirement to have reduced carbon emissions enough to have a chance to keep average global warming to 1.5°C above 19th century levels.

“Human nature, like journalism, is deadline-oriented,” Felsenthal writes. “Our intent with this issue—only the fifth time in our history that we have turned over every page of a regular issue, front to back, to a single topic—is to send a clear message: we need to act fast, and we can.”

Banking

Banks aren’t out of the reach of the impact climate change can have, according to a recent S&P Global Ratings report, Climate Change: Can Banks Weather The Effects?.

“Although climate change poses risks that may materialize well beyond banks’ typical business planning period, it’s clear that they need to act now,” the report issued on Monday warns.

The report notes that “strategic decisions” require lots of time to implement, and that the consequences of climate change could become more difficult to manage the longer banks wait.

“S&P Global Ratings sees an accelerated rise in global temperatures, a frequent occurrence of extreme weather events; the direct and indirect effects on businesses; and the likely direct human consequences, such as migration and water scarcity, as factors that financial systems will need to adjust to,” the report states.

According to the report, studies show that the value of global financial assets could drop and losses could “rise exponentially” with an average increase in temperature between the years 2015 and 2100.

“Understanding the main climate change risks for the banking industry is therefore of paramount importance for banks to minimize future climate-related costs and the impact on their creditworthiness,” the paper states.

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