Ever heard of a protection gap for climate change? It is the difference between total economic losses and insured losses. Maurice Tulloch, Chairman of Global General Insurance at Aviva and Chairman of ClimateWise, says finding a way to provide insurance for the most vulnerable assets in society is crucial if the insurance sector will remain a respected industry in the future.
Climatewise is an industry coalition of 27 of the world’s largest insurers. They report that the cost of climate change is leaving the insurance sector struggling to manage the escalating risk. Total economic losses from natural disasters such as floods and storms have gone up five fold since the 1980’s to $170 billion today. The protection gap between the total losses and the value insured has quadrupled from $23 billion to $100 billion.
Big data or the utilization of predictive analytics is helping insurers pinpoint the exact level of risks faced by assets across the country. This precision in the pricing of their premiums potentially saves customers money but it also highlights the risk and cost of insuring the most vulnerable assets. “When everyone gets good at Big Data, or predictive analytics, we all then agree, arguably, that there is 15-20% (of assets) that none of us want to touch,” Tulloch told reporters. “Capitalism says we should do that to maximize our profits, but the societal parts says that’s wrong because these people can’t get insurance.”
Insurers are at the forefront of assessing a community’s economic resilience and financial stability in the face of climate change. Tom Herbstein, Program Manager of ClimateWise said, “Industry leaders now have the opportunity to step up to the challenge outlined by the Paris Climate Agreement. In particular, the industry must help shift capital flows into climate-resilient assets and resilience-enhancing investments rather than simply struggling to maintain its current underwriting exposure.”
ClimateWise members agree to disclose their specific response to the risks and opportunities of climate change to the financial markets by assessing their performance against six ClimateWise Principles. Their submissions are independently audited and each member is provided with a confidential, benchmarked ranking to compare themselves to their peers. This helps the insurance industry to disclose to governments, regulators and society more broadly how they are responding to the physical, transition and liability risks and opportunities climate change presents.
The insurance industry must adapt in order to profit from climate risk and in doing so it will help society adapt as well.
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