Insurance and Climate Change column

Report: Climate Change Requires a ‘Rethink’ of How Catastrophic Events are Funded

By | March 19, 2020

Severe weather events and demographic challenges will continue to strain government finances, a trend that will require “a rethink of how catastrophic events are funded” and push the need for greater use of public-private partnerships to manage risk, a new report shows.

The report from Guy Carpenter & Company LLC, Protecting our Planet and the Public Purse, highlights how the risk landscape for public sector entities is changing at an “unparalleled rate,” with extreme weather, mass migration and unfunded social liabilities dominating government agendas into the future.

“Climate change dynamics are only going to accentuate the challenges associated with shifting demographics and strained government finances,” states the report from the global risk and reinsurance specialist, which is a business of Marsh & McLennan Cos. “Natural catastrophes are becoming more frequent, and the intensity for certain perils is also likely to increase. Put simply, weather extremes will become more extreme.”

According to the report, natural catastrophes are becoming more frequent, and the intensity for certain perils is also likely to increase, while statistics show that carbon dioxide emissions have increased and the planet as a whole has warmed considerably.

The report said some of the most pessimistic scenarios associated with climate change point to “major economic and societal upheaval,” while sea level rise brings “wide-ranging consequences” to coastal properties and a warming climate will inevitably result in more frequent and severe wildfires.

The cost burden of natural catastrophes is increasingly being assumed by governments, as insurance penetration for climate-related risks falls behind rising loss trends and the protection gap grows, the report notes.

“Governments therefore need to rethink how to fund catastrophic events that go largely unbudgeted and create a strain on public resources when they occur,” the report states. “A culture of reliance on government assistance surrounding disaster relief has emerged, which puts pressure on governments to provide assistance after catastrophes occur and prompts a perception of moral obligation. These macroeconomic costs are projected to increase significantly.”

The report examines risks confronting public sector entities and outlines six case studies that demonstrate how governments are turning to the reinsurance market for risk mitigation solutions.

“The arguments are clear: countries need to move more quickly if they are to address the reality of climate change and its attendant financial challenges,” the report states. “To enhance the financial resilience of our communities, effective risk management practices must be brought to bear.”

NOAA Fact Sheet

The National Oceanic and Atmospheric Administration’s Office for Coastal Management recently put out a fact sheet highlighting “Weather Disasters and Costs,” which shows there were 28 weather and climate disasters in the U.S. in both 2018 and 2019 with losses exceeding $1 billion – 2018 and 2019 each saw $14 billion weather disasters.

In 2019, historic flooding in the Midwest caused $10.8 billion worth of damages throughout millions of acres of land, making for one of the costliest inland U.S. flooding events on record. In 2018, Hurricanes Michael and Florence, and the western wildfires, accounted for about $73 billion of the $91 billion total for the year.

Two wildfires impacted California in early November 2018. The Camp Fire burned more than 153,000 acres, caused at least 88 fatalities and destroyed more than 18,000 structures in Northern California. It was the most destructive wildfire on record in the state, and the deadliest wildfire in the U.S. since 1918. In Southern California, the Woolsey Fire destroyed more than 1,500 structures and killed at least three people in and around Malibu, the fact sheet notes.

The NOAA fact sheet also notes that 2019 marked the ninth consecutive year with eight or more billion-dollar disasters, and it was the fifth consecutive year in which 10 or more billion-dollar weather and climate disaster events affected the U.S.

A related Climate Change Predictions fact sheet put out by NOAA shows that if emissions stay as they are that by 2050, up to $106 billion worth of coastal property could be below sea level and that some Midwestern and Southern counties could see a decline in crop yields of more than 10% over the next five to 25 years, with a one-in-20 chance of losses of crops by more than 20%.

“Factoring in potential changes in hurricane activity, the likely increase in average annual losses is expected to grow by $7.3 billion, bringing the annual price tag for hurricanes and other coastal storms to $35 billion,” the fact sheet states.

Australia

Following the Australian floods, insurers appear to have become more picky.

Allianz has become more selective about writing new policies in Townsville, while others including Suncorp and QBE stopped covering large apartment units after the Queensland floods.

The insurers agree that the floods were previously a one-in-500-year event, but say climate change has made such events more frequent.

That divergence is echoed across regions in developed countries which have been hit by floods, forest fires or other extreme weather-related events linked to climate change and is worrying regulators and industry executives, according to a Reuters article appearing this week in Insurance Journal.

The article looks at the state of things for Australia, where only a year after losing their homes to floods in parts of Australia’s north eastern coast of Queensland, people are moving into new houses built on or near the same plots.

While banks have been willing to offer them long-term loans at rates in line with the national average, insurance companies, which suffered massive losses as a result of the Townsville floods, are more cautious.

In February PERILS, the independent Zurich-based organization that provides industry-wide catastrophe insurance data, disclosed its final property loss estimate for the flood event that hit northern Queensland between Jan. 26 and Feb. 10, 2019.

The final estimate of the property insurance market loss is A$1.243 billion (US$831.3 million), which is up from the third loss estimate of A$1.217 billion (US$813.9 million), which was issued by PERILS on Aug. 10, 2019, six months after the event.

In line with PERILS’ event definition, the PERILS loss number covers the property line of business only.

A tradesman who has bought a new home in Townsville after walking away from his water-damaged dwelling 9.32 miles away, told Reuters the insurance premium had risen 350%, a price he said he was not willing to pay to protect against another flood.

“Locals call this place ‘Brownsville’, that’s how dry this place was,” said the tradesman, who would only be identified by his surname Cullen. “So it is unfair for insurers to react in such an extreme manner after just one event. This was a once-in-a-500-year flood, it won’t come again in my lifetime.”

Ventura County

Voters will not get a say on a proposal to raise the sales tax rate in Ventura County, Calif., to combat climate change and address fire protection.

Ventura Country was where the aforementioned Woolsey Fire occurred. The fire ignited on Nov. 8, 2018, burning 96,949 acres, destroying 1,643 structures and killing three. The fire prompted the evacuation of more than 295,000 people.

A climate change and wildfire proposal that would have gone on the November ballot died on Tuesday when county supervisors decided that voters were unlikely to pass it, despite that most people in the county actually appear to favor it – just not enough of them.

The Ventura County Board of Supervisors decided against proceeding with the November ballot measure after polling showed 63% of likely voters supported a quarter-percent increase in the sales tax to fund the programs, the Ventura County Star reported.

The 63% approval number was less than the two-thirds vote to needed to pass the measure in the election. Sales tax varies in counties around the state. The sales tax totals 7.25% in most areas of the county. The tax would have raised an estimated $35.8 million per year.

The actual ballot measure was never crafted, but supervisors were looking at using the proceeds to manage vegetation and acquire land for parks, conservation and agriculture.

According to the article, the acquisitions were intended to accomplish goals for climate change, fire protection and economic vitality.

Had the board supported going ahead with the measure, the plan was to return an ordinance to add the measure to the ballot, and supervisors also would have had to agree to spend $400,000 for election costs, according to the article.

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