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Climate Resilience: Opportunities for the Insurance Industry

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The potential impact of the effects of climate change is requiring multiple stakeholders to re-think their approach to climate resilience. In recent years we have witnessed heightened weather volatility, and according to the majority of scientific opinion, this trend is expected to continue, according to Ruth Lux, Head of Public Sector EMEA, Placement Solutions Group.

In parallel to this emerging threat, the insurance gap continues to grow. For example, in 2018, according to Munich Re, the total insured losses in Europe totaled EUR 5 billion, however the economic losses totaled EUR 13.5 billion, resulting in uninsured losses of EUR 8.5 billion. This equates to 63 percent of underinsurance. Governments typically pick up these unbudgeted costs either through welfare payments, emergency disaster relief expenditure or by rebuilding infrastructure and repairing damages. This places a significant burden on public balance sheets at a time when it is least welcome.

The (re)insurance industry has a critical role to play in assisting businesses and communities to recover quickly and sustainably in the post-loss environment. (Re)insurance helps to minimize the negative effects of natural catastrophes on economic stability and it can help society build a broad culture of resilience. As well as providing immediate financial relief following a disaster, the industry can play an important collective role in incentivizing sustained societal resilience through considered loss mitigation and risk management measures. In the context of the worsening impacts of climate change this is invaluable.

Transferring risk from public to private balance sheets is an area in which Guy Carpenter has significant expertise. We have a proven commitment and track record in helping to close the protection gap by identifying and building bespoke public-private partnerships that reduce the burden of catastrophic risk for public entities and make communities more resilient. Guy Carpenter currently represents 31 natural catastrophe pools globally, and in August 2019, was appointed as the sole reinsurance intermediary for the newly formed California Wildfire Fund, which is currently being administered by the California Earthquake Authority (CEA). Together, the CEA and Guy Carpenter are working to increase the longevity of the California Wildfire Fund and to enhance its claims-paying capacity. Having previously focused on flood, storm and earthquake risk, Guy Carpenter is now turning its attention to the emerging peril of wildfire risk.

Insured losses due to wildfires have soared in recent years – from a little more than EUR 1 billion a year between 2010 and 2016, to over EUR 13 billion in both 2017 and 2018 (excluding environmental damage and firefighting costs, among other expenses). The greater frequency of hot and dry conditions in which wildfires thrive, which many attribute to climate change, signify that the potential for loss from this peril is increasing, and the potential protection gap for this hazard is widening.

It is anticipated that wildfire activity in southern Europe, southern Canada and the western United States will increase and countries that are unaccustomed to wildfire, such as those in northern Europe, will become more and more exposed. As a result, we have invested significantly in building state-of the art catastrophe models for the peril of wildfire to help public entities such as the CEA identify and quantify their potential exposure to this growing threat.

Guy Carpenter views the efforts to close the insurance gap, and thereby improve societal resilience to the effects of climate change, as a huge opportunity for the (re)insurance industry. It has the collective tools and expertise to identify, assess and price risk, to then allow the (re)insurance market to assume that risk for a price. The burden on taxpayers and public finances can be reduced via the establishment of private sector pre-financing options and the (re)insurance industry’s reputation for speedy claims payments post-loss is well founded, thereby enabling the swift delivery of financial relief to those in greatest need.

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