Weather Risk, Weather Warning
Reinsurance Magazine, 1 September 2004 – As Europe faces extreme weather conditions, the implications of weather change become more pressing as a risk management issue. A report from European Environment Agency examines the potential impact.
The UK has been stunned by severe flash flooding in recent weeks and the rest of Europe has also seen extreme weather conditions throughout the summer, as well as snow as far south as Turkey last winter.
Furthermore, regardless of the effectiveness of initiatives, such as the Kyoto protocol, to reduce emissions of greenhouse gases, the climate is still projected to change over the coming centuries and the only question should be about how to adapt to these changes, according to the European Environment Agency (EEA) report, ‘Impacts of Europe’s changing climate’.
For the (re)insurance sector, this means coming to terms with the new potential for economic loss – in Europe, 64% of all catastrophic events since 1980 are attributable to weather and climate extremes such as floods, storms and drought/heatwave.
Economic losses from catastrophic events are 79% weather-related. There is also an increase in the losses over the past 20 years – from an average loss of $5bn to $11bn. The report finds this is partly due to more events and also due to wealth increase.
A particularly disastrous event was the flooding in central Europe in August 2002, which caused economic loss of $17.3bn and insured losses of $4.1bn.
Human health is another area where the climate has an increasing impact.
The heatwaves in 2003 casued more than 20,000 excess deaths, particularly among the ageing population, in western and southern Europe. The EEA finds that these recent events are likely to provide a picture for the future as the climate models project that the frequency and intensity of heatwaves will increase and even modest changes in average temperatures can increase the frequency of heatwaves.
The World Health Organisation (WHO) predicts that the annual excess summertime mortality attributable to climate change will increase several-fold by 2050. The potential for excess deaths due to increased cold spells is greater, but no data can support this trend, according to the WHO.
Research from Munich Re shows that the heatwaves in Europe in 2003 (see chart) left clear marks on the economy:
– cancellations in the inland cargo transportation sector (due to low water);
– reduced output from power plants (due to insufficient cooling water);
– losses in agriculture and forestry.
The company also considers that more frequent heat waves will cause new substantial loss potentials and increase the demand for corresponding insurance protection (eg for crop losses or loss of earnings due to low water). It says: “The insurance industry must prepare itself for a deterioration in the risk situation.
Climate researchers believe that given an average increase in temperature of 2 degC, as is to be expected in central Europe by the middle of the century, extreme heat and heavy rain will occur much more frequently than has been the case up to now.”
Flooding is also likely to become more intense as climate change alters rain patterns. The EEA points out that as well as loss of life, there are also indirect health issues caused by a lack of medical aid due to infrastructure damage.
Increases in diseases because of reduced sanitation or the overcrowding of displaced people is also a possibility. The human health impact of future flooding will be strongly determined by the improvement of warning and rescue measures, the report finds.
Adapt and survive
Successful risk management of changing climate conditions will depend on the ability to get the participation of “all the shareholders who are involved in any kind of policy, service or business that is affected by climate change,” the report says.
In part, this will mean dealing with the misconception that adaptation strategies will be expensive to implement and that non-action is a cheaper alternative. Some of the examples of successful adaptation strategies include altering building design to cope with higher temperatures or dams and flood-protection constructions to deal with the run-off from more intense storms.
Reinsurers are already working on these issues. Swiss Re is participating in a research project to access the accuracy of medium- to long-term statistical weather forecasts with the Swiss National Competence Center in Research on Climate (NCCR Climate) with the aim of adapting its business to climate change and ensuring that it is able to offer reinsurance for natural catastrophes in the future.
Munich Re has recently focused on renewable energies. However, they cite the difficulties of assessing risk on new and untested technology associated with renewable technology. “The risk assessment insurers always carry out before granting cover is often associated with many uncertain factors on both the technical and economic side.
Important bases for this risk assessment are previous claims experience and analyses of the exposure to natural hazards, for example. In so far as reliable claims experience is still lacking, other known technologies have to service as “sponsors” for the risk assessment. The untried techniques for alleviating the impact of climate change look set to remain high risk and, thus, expensive to cover.
The EEA report emphasises that any assessment of climate change is still subject to a range of uncertainties and information gaps. There is a large amount of data about the changes on the climate system over the past 100 years but less is known about the frequency and intensity of extreme events.
(Re)insurance companies themselves supply much of the data on the trends in the number of catastrophic events as well as on human casualties and economic losses. They also provide an overview of trends in damage but further efforts and more detailed datasets are necessary to evaluate the impacts of climate change on economic processes.
For the foreseeable future, risk management and risk-adequate insurance rates and conditions may serve as an incentive to encourage loss prevention.
The question of (re)insurance coverage for areas at risk of natural catastrophe is set to be on the agenda across Europe. However, the EEA makes clear that measures must also be taken now to protect our climate in the long term.
Copyright 2004 Timothy Benn Publishing Limited
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