Many experts agree that extreme climate events such as flooding, tornados, hurricanes, and heat waves are occurring with increasing frequency and severity. These destructive events are happening in tandem with broader climate change, which while imperceptible on a daily basis may result in a more long-term systemic impact including rising sea levels, melting permafrost, food ecosystem disruption and persistent drought.
Apart from the human consequences of population movement, disrupted job and home life and the societal cost of climate change, there is a clear material cost as well, with a significant impact on the insurance and reinsurance industries. Whether or not individuals or communities accept the full scope of climate change, insurers need to prepare for difficult-to-predict climate events and to mitigate ever-increasing claims costs.
The insurance unknown of climate change
Most insurers have been preparing, as much as they reasonably can, for the impact of climate change. Insurers spread risk through risk diversification, management, and mitigation practices, so while there have been extreme weather events, related losses are generally still within reasonable boundaries, though that is expected to change as climate events become more catastrophic.
For example, though climate litigation is increasing, on the legal front there is still little decisional law relating to climate change liability (such as against fossil fuel companies). Another example is the future potential for credit rating downgrades for coastal regions related to rising sea levels, and the consequent increase in flood insurance premiums.
Putting a price tag on future events is one of the principal challenges in the age of climate change, and the insurance industry is at the vanguard of pricing the costs of future climate change. Risk areas such as life insurance and auto insurance are thoroughly studied by this point, but how do you insure for left-field events like wildfires in the Arctic that are as yet barely understood? Predictions and modeling for climate change are extremely complicated and forecast a wide range of future scenarios.
Additionally, the effects of climate change indirectly impact other types of risk. For example, AIG considers climate change a cause for reputational risk for organizations, in that changes in societal or consumer behavior related to climate change are likely to induce changes in customer preferences for products and services.
Of the 26 risk topics that the reinsurance giant Swiss Refocuses on in its Risk Knowledge center, nearly half are related to risks arising from climate change. Typical are risks such as flooding and hurricanes, but now included are threats previously not as worrisome, such as increased seismic activity: as melting glaciers reduce the massive weight on an area of the earth’s surface, fault lines and tectonic activity are impacted, leading to increased earthquake and volcanic activity, for example.
Climate change is already having an outsize impact on reinsurers. The 2017 United States hurricane season for example, which saw just three category 4+ hurricanes, shared an almost equal burden of cost between insurers and reinsurers, and completely absorbed global reinsurer’s net income for that year. MunichRe even has a position of chief climatologist, underscoring the seriousness with which reinsurers take the issue.
DRC and Climate Change
DRC has long been a part of the climate change conversation for both professional and personal reasons. As a company headquartered in Hawaii, DRC is aware of its island ecosystem, and as an insurance technology leader, DRC understands risk. Our risk modeling tools help both insurers and reinsurers assess climate change impact and cost, providing the technology necessary to help the insurance industry fully automate existing Excel® raters and other manual or legacy pricing tools. RS X rating technology offers the fastest, most accurate and cost-effective path to transform insurance products from concept to production.
DRC will participate at “Les Rendez-Vous de Septembre,” the international gathering of the insurance and reinsurance industries, from the 7-12th of September at the Fairmont Monte-Carlo. Climate change and its impact on the insurance industry will be important topics and we look forward to discussing these issues with our peers.