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THE ONLY CONSTANT IS CLIMATE CHANGE

THE ONLY CONSTANT IS CLIMATE CHANGE

As the world continues to battle Covid-19 and the UK nears Brexit, climate change is still high on the agenda and Liz Booth examines the threats and opportunities for insurers

For a while, it seemed like Covid-19 might make a quantum difference to climate change, but with hurricanes impacting the Caribbean and wildfires in the western US burning more than 4.7 million across 11 states in recent weeks, the question is whether it is too little too late.

Insurers are not just worried about the here and now but also about whether risks will remain insurable into the future – a question of increasing importance as natural catastrophes continue to pummel the same areas time after time.

A new report from Swiss Re sums up the dilemma: “The Covid-19 pandemic has accelerated new emerging risks and trends, but the current crisis shouldn’t overshadow the need for the world to transition to a more sustainable economy and a low-carbon future.”

The study – Sonar 2020: A more sustainable future post-Covid-19 – suggests: “The pandemic will continue to shift politics, regulation and the market, and bring about a refocus in priorities as countries move toward planning their economic recoveries.”

However, it also introduces a note of caution: “The Covid-19 containment measures and lockdowns may have reduced air pollution momentarily but they will not stop global warming. We therefore need to embrace a low-carbon future, where sustainability is firmly embedded in economic recovery strategies.

“A transition to a low-carbon economy offers risks and opportunities for the re/insurance industry, such as carbon-removal solutions. The re/insurance industry can play a pivotal role in shaping a more sustainable world by providing specialist risk transfer knowledge and capacity to partners in other sectors of the economy.”

The Covid-19 containment measures and lockdowns may have reduced air pollution momentarily but they will not stop global warming

Energy solutions

The shift to renewable energy will need insurance solutions to facilitate innovation, infrastructure and operational needs, suggests the Sonar report. “For some engineering insurers, the surge in renewable energy capacity has already been a key source of growth,” it notes. “Product innovations such as revenue insurance coverages for no-sunshine, no-wind and drought in the case of hydro energy can complement traditional property and casualty covers for construction, operation and maintenance.

“While the opportunities are enormous, insurance market prices need to increasingly reflect this changing risk landscape. Caution is warranted with the accumulation risks from increasing complexity of systems, the number of interfaces and the exposure to extreme weather events.”

The Sonar study also states the building and manufacturing industries are energy-intensive, again offering opportunities for insurers through transformation. The report suggests: “Insurers can partner with industry to establish risk assessment standards and procedures, including judging degree of success for new technologies, and contribute risk management knowhow.

“Insurance solutions can then be provided to foster increasing deployment. In the case of solar panels, for instance, there are schemes to compensate insureds for replacements when climate-related risks inflict damage.”

Swiss Re is not a lone voice in this sphere. In its recently launched Mining Risk Report, Willis Towers Watson (WTW) states: “Climate change and environmental, social and governance (ESG) issues will transform the energy industry risk landscape.”

It highlights that the transition to a low-carbon economy requires a fundamental reappraisal of mining company climate risk. The report shows that achieving a satisfactory ESG rating will be critical in enabling mining companies to attract and maintain the support of key stakeholders in the future.

Other key highlights of the report from an insurance perspective are:

  • Capacity: Theoretical capacity levels remain broadly similar to last year, although line sizes continue to become increasingly restricted. While in previous years, WTW has reported major insurers withdrawing from coalmining risks, it seems that lobbyist pressure has now moved on to insurers’ involvement in other industries, with only one global insurer pulling out of coal this year.
  • Losses: It is still too early to provide full details of the significant impact that Covid-19 will have on the liability and directors and officers (D&O) sectors. However, following a series of disastrous losses in 2018 and 2019, the property loss record for mining seems to be improving, unlike other sectors.
  • Rating levels: For property business, rating increases are still modest in comparison to other heavy industries, but retention levels, terms and conditions, and sub-limits are all now being significantly affected by the hardening process. However, for the liability and D&O sectors, rating increases are now much more pronounced.
  • Underwriting data: The new levels of data required by insurers in terms of underwriting information are proving challenging to buyers; in particular, insurers’ scrutiny of their schedule of values and a growing tendency to impose price caps on both property and business interruption amounts.

Water risks rising

The UK is no stranger to flooding but water risks are also about drought, and both are escalating risks as climate change evolves. Now Fitch Ratings is to add water risks to its sovereign rating drivers. Fitch says: “We find that countries in the Middle East and Mediterranean basin are particularly exposed to droughts and water stress, while several south Asian and African countries are especially exposed to flood risks. Each sovereign’s vulnerability to water risks will ultimately depend on its ability to devise and implement mitigating policies.”

Fitch warns there is a “rising imbalance between steadily growing demand for water and deteriorating availability of reliable supply”, which it says “has already placed large swathes of the world population, mostly in emerging market countries, in a situation of water stress”.

Fitch adds: “This is likely to intensify in affected regions and expand to new areas, as economic and demographic growth continues to drive a rise in demand while climate change puts further pressure on supply, exacerbating the uneven global distribution of water resources.”

It points to Middle Eastern and North African countries such as Egypt, Israel, Jordan, Kuwait, Morocco, Saudi Arabia and Tunisia as particularly exposed to drought and water stress risks.


Opportunities for insurer from carbon removal

According to most climate models, decisive carbon removal together with lower greenhouse gas emissions are needed to limit global warming to less than 2°C from pre-industrial levels, says Swiss Re’s Sonar report. To reach that target, it is forecast that the carbon-removal industry will grow to the size of today’s oil and gas industry by 2050. According to most climate models, decisive carbon removal together with lower greenhouse gas emissions are needed to limit global warming to less than 2°C from pre-industrial levels, says Swiss Re’s Sonar report. To reach that target, it is forecast that the carbon-removal industry will grow to the size of today’s oil and gas industry by 2050.

However, the report warns the industry is still in its infancy and scalability has yet to be proven. “That said, growth would bring a wealth of opportunities for insurance and investments, but also many challenges. The risks attached to different removal approaches still have to be evaluated,” concludes the report.Carbon-removal solutions – also known as negative-emission technologies and practices – broadly fall into three categories:

  • Nature-based processes that use natural plants to capture carbon dioxide from the air.
  • Technological processes that use engineering tools.
  • Hybrid approaches, using both natural and technological processes.

 Innovative insurance

In general, insurers may increase their understanding of the new carbon-removal risk pools by designing pilot offerings for property and engineering covers and investing at small scale, to gradually build up the necessary risk knowledge for profitable business in the future. By 2050, billions of tons of CO2 will need to be stored – the frontrunners among insurers will profit from the experience gathered during the next decade.

Potential impacts

  • Technological and hybrid solutions will rely on the construction of plants, pipelines and facilities. These will generate demand for traditional engineering and property insurance covers, which would include new types of risks.
  • There will also be demand for insurance for related services, such as marine transport.
  • Some carbon-removal solutions come with significant trade-offs and side effects. Certain technologies are still in a prototype stage. Engaging in solutions – be it through insurance offerings, investments, or buying certificates – which turn out to have negative impacts or are flawed may lead to reputational damage and financial losses.

Source: Sonar 2020 from Swiss Re 

 

Liz Booth is contributing editor of  The Journal

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