By David Bresch, Head Sustainability, Swiss Re.
When we talk of climate change, we tend to think of the frightening scenarios of melting ice-caps, rising sea-levels, growing carbon emissions and the like. However, the last decades of climate research have been a great source of innovation for insurers, the renewable energy industry, NGOs and governments. For example, the renewable energy industry is proving a rich breeding ground for innovative climate change mitigation technologies and the means of implementing them. Expertise in risk modeling and scenario-building is identifying cost-effective climate adaptation measures globally, and surprisingly simple grassroots measures are already putting innovative protection measures in place.
The current state of affairs in climate change is sobering. According to findings from the Intergovernmental Panel on Climate Change, the increase in the average global temperature over the next century will be anywhere between 2°C and 6°C.
Over half of the world's population is currently threatened by natural hazards. In economic terms, insured losses from weather-related disasters jumped from USD 5.1 billion per year in the period between 1970 and 1989 to USD 27 billion over the last two decades. Future developments will only increase the losses from climate related events. In Europe alone, losses from surge events along the North Sea coast are expected to more than quadruple from an average of USD 600 million to USD 2.6 billion towards the end of the century. Specific regional risks could cost emerging economies up to 19% of their GDP by 2030.
Yet, even if all carbon emissions were stopped at once, the Earth's climate is still going to change. This means local populations will still be exposed to the increasing costs of climate related risks. In order to keep these costs manageable and insurable, a two-pronged approach is needed: mitigation efforts to reduce greenhouse gases, and adaptation measures to help societies become more resilient to the changes which are on the way.
The renewable energy industry is currently in the vanguard of technological innovation to combat climate change. Advances in solar, wind and hydro-electric technologies are being widely publicized and implemented. However, to match the vibrancy of this industry and ensure a financial basis for its success, risk managers need better understand the risks involved.
To this end, Swiss Re and the Economist Intelligence Unit recently surveyed nearly 300 senior-level energy executives in the renewable energy sector on the risks they face. Some results are predictable. Financial risks, such access to capital, and operating risks topped the perceived high risk areas. However, there were surprises. Political risks and regulatory changes ranked as highly as strategic business risks.
Further, whereas respondents appeared to have plans and insurance in place for operational and financial risks, 30% of respondents had no solution, or no idea of how to deal with regulatory risk – highlighting the role governments need to play in creating stability in this area. Insurers also have a large role to play. The study showed that insurance solutions currently constitute the main risk transfer mechanisms, with room for other risk transfer techniques, such as financial derivatives and bonds.
The second part of dealing with climate change is climate adaptation. Here, risk management expertise is playing a key role in helping decision-makers to prioritize cost effective measures to make their communities resilient to climate risks. The role of these measures in keeping future risks insurable cannot be underestimated.
There are currently several examples to illustrate how risk expertise can locate cost-effective adaptation measures and the role of insurance. For example, the Economics of Climate Adaptation, a study co-authored by Swiss Re, identified Southern Florida a prime example. Under a high climate change scenario, annual economic losses from hurricanes in Florida are estimated to rise to a staggering USD 33 billion by 2030, or 10% of the region's total GDP. Whereas around 40% of this loss can be averted cost-effectively though measures such as local levees, beach nourishment programs or building improvements, the remaining 60% is unlikely to be averted cost-effectively through adaptation measures. Traditional insurance solutions and capital market risk transfers will need to cap losses; smooth out costs for stakeholders and protect local economies from the economic impact.
Perhaps the most exciting and innovative work in climate adaptation and insurance protection is taking place in the developing world. Together with Oxfam and the World Food Programme Swiss Re's R4 - Rural Resilience Initiative is helping farmers from Senegal, Ethiopia and Haiti to secure their livelihoods in the face of climate risks, drought and disease. These programs are pushing the boundaries of what is insurable by exploiting the potential of innovative index-based solutions.
For example, with the Ethiopia projects, labour based payment mechanisms have been introduced to provide crop protection in the face of drought. In an earlier project in Malawi, protection for Maize crops is linked to a rainfall index.
Browsing through the United Nations' Database on Local Coping Strategies, one sees that adaptation measures can be as simple as beach and mangrove regeneration in Florida, or adapting imported sprinkler systems in Kenya, or as complex as large infrastructure improvements - re/insurance solutions often present a pragmatic approach to complement these. The important thing is that governments, industry and NGOs are active in both mitigating and adapting to climate change. Through innovation and partnerships we can ensure that the effects of climate change will be manageable and insurable in the future.