Global warming and the role of insuranceCan insurance protect the world from financial losses due to destructive climate change? What is possible and what isn’t.
Walter Stahel is the head of risk management research at the Geneva Association, an insurance think tank.
Allianz Knowledge: The Geneva Association represents leading insurance companies. Why are you concerned about climate change?
Walter Stahel: Climate change has been on our agenda for 20 years, but we called it resource efficiency and sustainable development. If we want to achieve the objective of a low-carbon society, we first need to shift to a low-resource society.
The industrialized countries still consume far too many resources of all kinds, and these are the countries with a high insurance coverage. If we really want to reduce CO emissions, we have to radically change our way of life. And that will have radical repercussions for the insurance sector as well.
How will Climate change affect insurance?
There are three effects of climate change that are virtually undisputed. We have a problem of rising CO2 levels in the atmosphere, of rising air, water and land temperatures, and of rising average sea levels.
The rising CO2 emissions and temperatures will probably have a major impact on health and agriculture. How this will impact insurance is not really clear, but it will have an impact on insured losses.
The sea level rise is the most drastic impact. Aside from all ports and harbours, a large majority of oil refineries and nuclear power stations are within one meter of present sea levels.
These installations have a lifespan of at least 30 or 40 years. Moving these installations is going to cost a lot of money, closing them down means stranded investments. This might affect the investment side of insurance.
Fighting climate change will cost a lot of money. Is it worth the effort?
There are costs, but I can also see big opportunities, for example in the energy efficiency of buildings. The major of New York City, Michael Bloomberg, has recently announced plans to make all new buildings autonomous with regard to energy.
His argument wasn’t necessarily about climate change, but public safety. Every time there is a blackout in New York City, the emergency systems are overwhelmed. People are trapped in elevators. Security systems no longer work. In an energy-autonomous building you would have none of these problems.
There are many advantages that go beyond the CO2 question. More intelligent use of energy in buildings will positively impact society and insurance. Things just become safer.
We have to start talking about these second and third degree impacts. If we can show that fighting climate change has additional societal benefits it would be much easier to find the political and public support to implement mitigation and adaptation measures.
Has climate change already had negative impacts on insurance companies?
The most problematic events are always floods and storms. But here you have problems of negligence and moral hazard as much as a problem of climate change.
Losses from floods and storms are often caused by a lack of maintenance of existing installations, such as sewers and pumps, dams and dykes, rather than by radical changes in climatic conditions.
And people increasingly want to live in beautiful but hazardous areas like Florida. During the last 100 years there has been a constant trend in the USA of moving from the central, rural areas of North America to the coastal areas. And that immediately makes insured values more vulnerable to extreme weather events.
Urban areas don’t just grow vertically, but also underground. New underground roads and railways, parking garages, and bank vaults are all vulnerable to flooding and flash floods.
And there is a steady influx of relatively poor people that want to live in their own house, or at least under their own roof. They have to move to cheap areas, and those are very often floodplains or otherwise hazardous areas.
All these factors have increased the risk for insurance claims in recent years. But insurance can only contribute to loss prevention if Governments are willing and able to cooperate. This can be done by banning people from moving back into hazardous areas after a natural catastrophe, or by imposing the application of existing building standards with regard to windstorms and floods—without neglecting ‘old’ hazards such as earthquakes.
What other big global changes do you see for the insurance industry?
One challenge is how we can help in the development of emerging economies through insurance and microinsurance.
Water scarcity is a really difficult problem, because you cannot just invent water. A lack of clean drinking water is possibly the biggest health hazard world-wide. You can get water from desalination, but that is very costly and very energy intensive.
The third challenge is that some regions will be losers, but others will profit from climate change: Siberia, the Inuit regions, the whole North of Canada, Greenland.
The North-East Passage along the Siberian coast will open up new ways for Siberia to exploit and export its resources. All this is completely virgin territory with regards to insurance underwriting and investments.
And finally floodplains, such as Bangladesh, are among the world’s most fertile and populous regions, and will be among the losers. I don’t know what adaptation is possible if any. Building sea walls is possible, but extremely expensive—see the Dutch experience.
Can microinsurance help poor people adapt to climate change?
Microinsurance works like any other form of insurance. You have a pool of similar risks where each covers others losses, which means the insurance cannot work if everyone loses.
Therefore, microinsurance schemes in the Bangladesh delta or similar regions will not work, if the capital donors and the insured are based in the same region. Similarly, if there is a catastrophic cyclone hitting an island, everyone loses and the insured may not get their losses covered if they rely on purely local mechanisms.
So the biggest challenge may be to develop new and specifically adapted reinsurance schemes. But in the case of sea level rise, reinsurance may not solve the problem. Sea levels will rise everywhere on Earth and so even the reinsurance scheme cannot work, because everybody will be hit. Maybe insurance diversification in time and alternative risk transfer mechanism can help to cover such risks in the future.