The UN’s Intergovernmental Panel on Climate Change (IPCC) has recently published its Synthesis Report, a comprehensive summary of the IPCC’s three previous reports, which outlined the causes, the impacts, and the potential solutions to climate change.
The report comes at a critical time for international action on climate change, following the UN Climate Summit in New York in September, and preceding the anticipated Conference of the Parties in Paris, when a new global climate deal will be agreed in December 2015.
Findings: Severe Impacts Can Still be Mitigated
Some of the key findings from the report include:
- Climate change will inflict severe, widespread, and irreversible impacts on people and the natural world unless carbon emissions are cut sharply and rapidly.
- Climate change has already increased the risk of severe heat waves and other extreme weather.
- Climate change mitigation instruments are both available and affordable.
These findings will resonate with many things we have heard in the past. However, what has evolved is technology, which is giving us the highest mathematical and scientific confidence around climate change yet. Paralleling developments in the insurance sector, the modelling world is more accurate, and its refinement will benefit both the insurance industry and society.
So, should our sector be concerned about all of this? The short answer is yes: Climate change is leading to an increase in the frequency and severity of catastrophic events. These trends are already affecting insurers through increased claims, with implications for many aspects and lines of the insurance industry in the years to come.
A changing climate and extreme weather represent significant risks to supply chains, operations and business continuity, demanding organisations to devise new ways to anticipate and respond to risk, while increasing resilience.
In a recent report by PwC, supply chain risks were identified as an area clients rely on their broker(s) as a primary information source for when placing risk. The report quoted Willis’ Steve Hearn discussing what this means to brokers and their clients:
…there needs to be a shift in mindset from ‘we have a policy’ to ‘we understand the dynamics of your business and market and can help you to develop the solutions.
This shift will be particularly important for those clients whose businesses are highly diverse, with global supply chains that rely on services and products from small and medium enterprises (SMEs) based in countries with high exposure to natural disasters and expected to bear the frontline impacts of a changing climate.
Threat to Real Estate and Construction
Trillions of dollars remain earmarked for investments in hazardous zones, including flood plains and coastal areas, with potentially large losses in the pipeline if climate and disaster risks are not adequately accounted for.
Miami, the city referred to as “ground zero” for the problems posed by climate change, continues to attract strong investment for major multi-billion development projects, despite warnings of the accelerating trajectory in the frequency of nuisance flooding.
According to a recent study by the National Oceanic and Atmospheric Organization, nuisance flooding causes frequent road closures, overwhelmed drainage systems, and damage to infrastructure, and has increased between 300 and 925% across the three US coasts since the 1960s.
It is imperative for the insurance sector to engage in construction projects at early stages, to ensure that planning and design address these risks, including low impact high probability risks.
Geological Changes Threaten Energy
Global demand for energy is expected to rise in the next 20 years, and technological innovation around energy exploration, particularly in new unfamiliar environments, will need to be developed in order to meet that demand.
The “sinkholes” that have appeared in the last year in the Yamal Peninsula in northern Siberia reveal a phenomenon brought on by the rapid increase in greenhouse gas emissions, with implications for the wider energy sector. These sinkholes, which occur as a result of the build-up of “dormant” stored methane gas “woken up” by the warming of the earth, lead to small blowouts that eject soil and sediment around the rims, and release a vast amount of methane in the air.
The insurance sector needs to address such changes in the geological landscape caused by climate change, which could impact energy and other extractive industries. Developing sophisticated risk assessments at the portfolio level to account for the rising tail risk at the extremes is essential.
What Businesses Need to Do
Daunting as these risks are, businesses need to perceive and frame climate change as an opportunity, not merely a risk. Overcoming paralysis around an issue as overwhelming as climate changes requires “a shift in our mindsets”.
The business case for addressing climate risk is simple: future-proofing our economy, our industry, and our clients against climate and disaster risk builds resilience and can give rise to
- New waves of invention and innovation
- New business models
- New forms of collaboration
- New risk transfer mechanisms
This will require added resources; organisation learning and development; orienting the corporate culture; and profiting products, services, and partnerships. Above all, it requires companies to understand how they will be affected by climate change, and to put this in the context of their risk management strategies to better meet their needs and provide innovative solutions.
What We’re Doing
If you’ll forgive a little shameless promotion, let me conclude with some of the ways Willis is playing a leading role to address climate and disaster risk:
- At the UN Climate Summit in September, Willis announced the 1-in-100 Initiative, a drive by an alliance of public and private sector organisations to integrate natural disaster and climate risk into financial regulation globally.
- Willis is a founding corporate partner of the R!SE Initiative, a global response focused on public-private partnerships looking at disaster risk reduction and resilience.
- Willis chairs the Private Sector Advisory Group of the UNISDR, responsible for advising the Special Representative of the Secretary General for Disaster Risk Reduction, Margareta Wahlstrom, on the role of the private sector in disaster risk reduction for the renewal of the Hyogo Framework for Action.
- Willis North America sits on the North American Task Force of the United Nations Environment Programme Finance Initiative (UNEP FI), focused on both the risk and opportunities emerging from environmental issues, including climate change, presented to the financial sector.
- Willis has been a member of ClimateWise, the insurance industry’s climate change initiative, since 2012.
- Willis has an industry leading catastrophe modelling team focused on the needs of corporate clients.
What more can we do to help our clients better manage the risks posed by climate and disaster risk?