Reinsurance is the insurance that is purchased by another insurance company to partially insulate itself from the risk of major claims events. Reinsurance companies provide insurance against loss for other insurance companies, particularly losses related to catastrophic risks such as hurricanes, tsunamis, and the global financial crisis of 2008 – 2009. The repercussions of climate change directly impact the insurance industry. Extreme weather events have resulted in crop losses and considerable damage to buildings and infrastructure.
Climate change, predominantly the result of human activity, is real and has a major influence on weather-related natural disasters. It can dramatically alter a region’s risk situation in terms of severe storms, thunderstorms, floods or droughts. A thorough understanding of climate change is essential for an insurer’s risk management[1].
Reinsurers primarily deal with the most complex risks that normal insurance companies are not capable of internalizing for numerous reasons. Climate change is increasingly creating “high exposure risk” to reinsurers. While some may argue that it is difficult to attribute individual loss, storm, events directly to climate change it is evident that the long-term trend based on meteorological data, along with underwriting and socio-economic data, is a key indicator of the risk from dangerous storms arising from climate change.
The construction of homes on costal areas, beside dams, in flood plains, on barrier islands and other high-risk locations raises the risk level and exposure of the insurance companies to costs of repair, replacement, and recovery of property and public infrastructure.
2017 represented the costliest year on record for natural catastrophic events, representing a $344 billion economic loss, 97% of which were due to weather related events with insured losses estimated from natural catastrophes estimated at $140 billion.
The 2018 report from the Intergovernmental Panel on Climate Change estimated that global economic damages associated with climate change would reach $54 trillion with a 1.5 degree Celsius warming, $69 trillion with a 2 degrees Celsius warming, and a staggering $551 trillion with a 3.7 degrees Celsius warming.
“If climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products – mortgages, home insurance, pensions – cannot shift risk away from their portfolios,” stated Rostin Beham to the NY Times. Mr. Beham sits on the U.S. federal government’s five-member Commodity Futures Trading Commission.
Also, in the Spring of 2019 the Bank of Canada identified climate change as one of the key vulnerabilities for the financial system stating that it posed “physical risks from disruptive weather events and transition risks from adapting to a lower-carbon global economy.” Raising the issue of climate change when asked about economic change and emerging risks, Bank of Canada governor Stephen Poloz stated “it’s about the transition risk, right, as everyone’s portfolio and all their lending practices kind of converge on a different climate trend line, and that could have significant consequences for financial systems.”
The Bank of England’s former coordinator on climate change, and fellow at the Cambridge Institute of Sustainability Leadership when questioned about the impacts of climate change stated “In general, one can’t provide that a single event is the result of climate change but it is likely to cause more such events of greater severity.”
In August 2019 the Bank of Montreal decided to wind down the majority of its reinsurance business, with climate change being partially to blame for BMO’s departure from the market.
According to the Banana Skins report by PwC, in September 2019, climate change joined technology and cyber risk as one of the three most pressing concerns for the reinsurance industry in 2019.
Global risk advisory Willis Towers Watson and the Society of Actuaries both identified climate change as the biggest risk to the insurance industry. Reinsure Munich Re indicated that 2017 – 2018 was the worst two-year period for natural disasters on record, with insured losses amounting to $225 billion.
There have been numerous court cases relating to the liability of fossil fuel companies for the effects of global warming including the Children’s Climate Lawsuits that Siskinds has previously blogged about. Numerous cities have also been exploring litigation as a means to make fossil fuel companies pay for the costs of climate change.
Impacts of recent extreme weather events highlight the vulnerability of communities and critical infrastructure to adapt to the effects of climate change. The costs resulting from extreme weather events in Canada over the past 15 years have been greater than for all previous years combined. Hundreds of millions and even billions of dollars in property damage and disruptions in the production and flow of goods and services have been associated with flooding, wind, hail and ice storms, hurricanes, tornadoes and wild fires. Increases in the frequency and intensity of extreme weather, as is projected to occur with continued climate change, will affect the cost and availability of insurance and impact governments where they serve as the insurers of last resort.
Eight cities and counties in California, New York City and municipalities in Colorado and Washington State along with Rhode Island have filed civil claims against numerous oil and gas companies. The civil claims are based in a public nuisance and in some instances allege negligence. The basis of the claims is that oil and gas companies have been aware for decades that the burning of fossil fuels is one of the largest contributors to global warming and the companies have downplayed the risks of using fossil fuels.
In April 2019 Toronto City Council’s Infrastructure and Environment committee passed a motion to direct the city to consider suing greenhouse gas emitters for billions of dollars in adaption and repair costs incurred by the City as a result of increasing extreme weather events such as the floods that occurred in Toronto in 2013. Between 2000 and 2012, Toronto experienced three 100-year rainstorms. In 2013, the city spent $940 million, utilizing approximately $65 million out of its capital budget and operating costs, to cover damages caused by floods. The floods in 2017 and 2018 resulted in almost $90 million in damages. The question is whether industry, government and society can mitigate the risk – climate change is not a problem that can be solved by actuaries, insurers, or reinsurers – they have appropriately identified the risk. At this time, there is no universal answer on the authority of the courts to address climate change issues and order reductions on greenhouse gas emissions[2]. What is clear is that the reduction of greenhouse gas emissions and costs associated with climate change will continue to be pursued through the courts. The unmitigated effects of climate change will have significant devastating impacts on the global economy. This blog has not dealt with the food crisis, socio-economic impacts and migration also arising as a result of the effects of climate change.
[1] Munich Re is an international company that covers the entire value chain of reinsurance, primary insurance and insurance-related risk solutions. Münchener Rückversicherungs AG engages in the provision of insurance and reinsurance services. It operates through the following segments: Life Reinsurance, Property-Casualty Reinsurance, Life Primary Insurance, Health Primary Insurance, Property-Casualty Primary Insurance, Munich Health, and Asset Management. The company was founded by Carl von Thieme on April 3, 1880 and is headquartered in Munich, Germany.
[2] See Siskinds blog on the Urgenda and Juliana cases.