Spotlight: Innovative insurance solutions help ease climate change impacts

Mark Way, Swiss Re Head Sustainability Americas Hub, understands that the insurance industry must predict change and plan for it. On the Swiss Re team since 1994, Way  is leading his sustainability team in developing new adaptation services and extending insurance coverage to the most vulnerable in emerging markets. He attended the Global Adaptation Institute’s Annual Meeting & Scientific Convening May 9-10 in Washington, D.C., to participate in the adaptation conversation and spoke on the Private Sector Service Providers Panel. 

The impacts of climate change and severe weather around the world are there for everyone to see and are becoming more apparent. Low lying coastal areas are at risk from flooding due to rising sea levels, already arid regions are experiencing prolonged droughts and a shift in the frequency and severity of weather events is having a significant socio-economic impact.

The insurance industry has witnessed the risk landscape altering first hand and is taking a two-pronged approach to managing this risk with important research revealing the scale of climate change impacts while innovative risk transfer solutions are helping societies become more resilient.

The current state of affairs in climate change is sobering. According to findings from the 2007 Intergovernmental Panel on Climate Change Fourth Assessment Report, the increase in the average global temperature over this century will be anywhere between 2°C and 6°C.  This trajectory must change and a large part of that will involve negotiating Dry East Texas Ponds-24a new international climate change agreement. Yet, even if all carbon emissions were stopped immediately, the planet will continue to face global warming challenges for a considerable time due to the already high level of greenhouse gasses which have accumulated in the earth’s atmosphere.

This is a clear signal that we have to deal with climate change as it exists today. Over half of the world’s population is presently at risk from natural hazards. In economic terms, insured losses from weather-related disasters jumped from $5.1 billion USD per year in the period between 1970 and 1989 to $27 billion USD over the last two decades. In fact, of the 40 largest insured losses recorded by Swiss Re since 1970, 32 are related to weather events. We should expect losses for the insurance industry and society in general to increase further in the future unless we take action to reverse this trend.

In the US, we have recently seen that even a highly developed nation is all too vulnerable to weather impacts. Just last year we saw the unprecedented flooding, tornado and drought events that occurred in states such as Alabama, Missouri, New York, Texas and Vermont. Economic losses from weather events cost the country approximately $55 billion, a huge sum particularly when one considers that no major hurricane made landfall in the U.S. in 2011.

Swiss Re’s research in various locations around the globe, including locations in the U.S., suggests that the average annual cost of weather related events is the equivalent of between one to 12 percent of local GDP. These numbers represent an enormous economic impact and underline the need for society to reduce its vulnerability to climate risks. To do this we need a two-pronged approach: mitigation efforts to reduce greenhouse gases, and adaptation measures to help societies become more resilient to the impacts which are evident today and which will increase in the future. 

The insurance industry can play a key role in helping to manage climate risk, most notably in the area of climate adaptation. Here, risk management expertise is invaluable in helping decision-makers prioritize cost effective measures to make their communities more resilient to climate risks. There are currently several examples that illustrate how risk expertise can identify cost-effective adaptation action and the role insurance can play as an adaptation measure. The Economics of Climate Adaptation (ECA), a study co-authored by Swiss Re, identified three counties in South Florida as a prime example. Under a high climate change scenario, annual economic losses from hurricanes in those counties are projected to rise to a staggering $33 billion USD by 2030, or 10 percent of the counties’ total GDP. Yet approximately 40 percent of this loss can be averted cost-effectively though measures such as constructing and maintaining local levees, beach nourishment programs or building improvements.

Insurance solutions are themselves effective climate adaptation measures, offering protection against the most severe weather impacts that few other measures can achieve. Such risk transfer solutions can cap losses, smooth out costs to budgets and protect local economies from the economic impact of climate change.

But perhaps the most exciting and innovative work in climate adaptation and insurance protection is taking place in the developing world. Together with Oxfam, the World Food Programme and USAID, Swiss Re is a partner in the “R4 - Rural Resilience Initiative”. R4 is helping farmers from Senegal and Ethiopia secure their livelihoods in the face of climate risks, namely drought. These programs are pushing the boundaries of what is insurable by exploiting the potential of innovative index-based solutions in the form of microinsurance contracts. 

Swiss Re and its partners have implemented simple, transparent, index-based parametric insurance products for vulnerable populations who traditionally have not had access to insurance protection against natural catastrophes.  These policies make post-disaster claim payouts in a manner that is fast and transparent to policy holders, since the settlements are based on regularly available and updated third-party data, such as hurricane intensity data from the National Hurricane Center, earthquake magnitude from the United States Geological Survey and satellite-derived rainfall from NASA.

Swiss Re is also the lead reinsurer for the Caribbean Catastrophe Risk Insurance Facility (CCRIF).  The CCRIF is a joint venture of 16 Caribbean governments which aims to reduce the impact of natural catastrophes on the economies of the area; since its inception in 2007, numerous countries have benefited from a payout in the immediate wake of a disaster.  

Building on the CCRIF, and in the wake of the 2010 Haiti earthquake, Swiss Re and other stakeholders came together to offer Haiti’s working poor a solution to help them get back on their feet after natural catastrophes. This led to the formation of the Microinsurance Haiti earthquake damageCatastrophe Risk Organization (MiCRO). Under this approach these low-income entrepreneurs receive protection for their hard earned gains, something that was previously not an option. Haiti’s largest microfinance institution, Fonkoze, which provides microloans to women entrepreneurs, made coverage available to clients starting in January 2011 through the MiCRO platform.  By December 2011, the product covered almost 60,000 Fonkoze clients against hurricanes, excessive rainfall and earthquakes.  Nearly 6,700 clients suffered losses which were covered by the insurance protection during 2011. Fonkoze used the proceeds to provide loan relief (their loans were reimbursed to Fonkoze) and emergency cash payments to clients, totalling more than $1.8 million USD. The clients also received a new loan from Fonkoze to recapitalize their business as soon as they were ready to resume their business activities. As MiCRO continues to grow its insurance solutions in Haiti, it is working to expand its replicable, scalable model to other products and markets worldwide.

Swiss Re continues to look for new ways to contribute in building resiliency around the world to the impacts of extreme weather. This is an opportunity to develop our understanding through research on climate adaptation but also to expand innovative product offerings to enhance financial security in the face of climate change. We have allocated important resources for this purpose and now have dedicated teams in place in Asia, the Americas and Europe. 

Climate adaptation solutions come in all shapes and sizes from the very simple, easily implemented to the more complex, and the insurance industry remains a driving force behind both understanding climate risks and developing climate risk management solutions. Through innovation, collaboration and partnerships with governments, industry and NGOs, we can play our role in tackling the greatest environmental challenge of the 21st century.

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