Insurance companies aren't covering climate risk — is Big Data to blame?

ShutterstockAlena Kazlouskaya
Extreme weather means value of uninsured losses due to climate change have quadrupled since the 1980s.

The insurance sector is struggling to manage escalating risk for society as the cost of climate change begins to bear down in the form of more frequent and severe weather events.

Total economic losses from natural disasters such as floods and storms have increased fivefold since the 1980s to around $170 billion today. More worryingly, over the same period the gap between those total losses and the value insured has quadrupled from $23 billion to $100 billion.

The new data was outlined in two new reports published this week by ClimateWise, an industry coalition of 27 of the world's largest insurers, in collaboration with the University of Cambridge Institute for Sustainability Leadership (CISL).

Addressing this "protection gap" and finding an equitable way to provide insurance for the most vulnerable assets in society is crucial if the insurance sector is to remain a respected industry in the future, warned Maurice Tulloch, chairman of global general insurance at Aviva and chairman of ClimateWise.

"Put simply, the protection gap is the economic divide between total economic losses and insured losses," he said at the reports' launch. "These figures starkly illustrate the growing threat of climate change. And while Paris potentially promises to slow the impacts of climate change by limiting global warming to 2 degrees by 2050, the near-term impact of continued severe weather is significant, and will have a profound impact on the investments, growth and general socio-economic outlook."

Bank of England Governor Mark Carney agrees. In September he warned insurers are heavily exposed to climate risks and that time is running out to deal with global warming. In one of this week's reports, "Closing the Protection Gap," he reiterated the warning. "Over time, the adverse effects of climate change could threaten economic resilience and financial stability," he said. "Insurers are currently at the forefront."

The insurance industry urgently needs to develop new strategies to deal with the climate risks presented by a rapidly warming planet, Tulloch explained. "The prevailing theme of 2016 has unquestioningly been the protection gap," he said. "With this in mind, it's important to focus on how we as an industry can collectively respond to the risks and opportunities that presents."

Technological progress is likely to further widen the protection gap in the future, he warned. Big Data — also known as predictive analytics — is helping insurers become increasingly accurate in their ability to pinpoint the exact level of risks faced by assets across the country. The technology allows insurers to be more precise in the charges they levy, potentially saving customers money, it also makes them more aware of the risk faced by the most vulnerable assets.

"When everyone gets good at Big Data, or predictive analytics, we all then agree, arguably, that there is 15-20 percent [of assets] that none of us want to touch," Tulloch told reporters on the sideline of the event. "Capitalism says we should do that to maximize our profits, but the societal part says that's wrong because these people can't get insurance.

"If we don't figure out collectively how to solve the remaining 15-25 percent [of most vulnerable assets], then as an industry, as a collective, we end up arguably as the lowest respected sector in the world."

The reports set out a number of strategies for closing the "protection gap" and extending insurance access to those businesses and households most vulnerable to climate risks. In particular, it details how the insurance sector could use its expertise in risk analysis to enhance the climate resilience of the wider economy and financial sector. For example, it suggests insurers collaborate on a widely applicable rating system to help local governments, banks and businesses assess the resilience of current and future assets.

"If our response to climate change is limited to avoiding exposure rather than manage risk, then collectively we all fail and the protection gap I alluded to actually grows," Tulloch stressed in his speech.

Speaking on the sidelines of the meeting, Tulloch called for the insurance industry to regain the spirit of mutuality he said defined the industry's roots. He praised the U.K.'s Flood Reinsurance scheme, a levy and pool insurance system launched in April and designed to help provide affordable insurance coverage to the homes that are most at risk of flooding. Such "insurance pools" will become more commonplace in the future as insurers seek new ways to ensure as much of the world's assets are able to access insurance as possible, Tulloch predicted.

Last year's floods in Cumbria caused a staggering $7.55 billion worth of economic damage in the U.K. But Tulloch warned the impact could have been much, much worse.

"As an industry, what we have seen in natural catastrophes... we've been kind of lucky in the last 18 months because they have hit in less populated areas," he reflected. "I wonder if 14 inches [of rain] had hit London and we had a full moon and a high tide, would the Thames Barrier have worked? We don't know. But, boy, if it had failed we wouldn't be talking a couple of billions — we would be talking tens of billions. Never mind the fact that the financial hub of the world would have been put out of business."

If ever a profession were less willing to rely on luck, it is the insurers. So the pressure is on for the industry to not only find ways to manage the risks posed by climate change, but also to spread the warning to the rest of the financial community. 

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