Climate Risk: Learning From Insurers

    Stockholm (NordSIP) – ClimateWise, a global insurance network, published a new report discussing how investors and lenders can incorporate the impact of climate change into their portfolio risk assessments. The study uses an open-source tool based on ETH Zurich’s CLIMADA model and The Future Flood Explorer developed by Sayers and Partners.

    ClimateWise’s mission is to assist the insurance industry in engaging with the risks and opportunities associated with climate protection gap – the growing divide between economic and insured losses. The organisation is associated with the Cambridge Institute for Sustainable Leadership (CISL).

    “The key observation of this report is that we need to focus on both the mitigation of climate change, as well as adaptation to its effects, and that if we do both, we can maintain affordable insurance. This is an important message and one that Lloyds Banking Group very much supports. This open-source tool will provide investors with the means of accessing the information they need to take action to mitigate climate risks and protect their assets,” according to David Rochester of Lloyds Banking Group.

    The report follows recent recommendations that climate projections should be integrated into natural catastrophe models to provide better forecasts of the effects of climate change. The analysis uses these insights to consider how climate change might affect portfolios of real estate and infrastructure assets.

    “The project highlights how the measures necessary to mitigate and adapt to climate change should be factored in as potential transition risks, which could increase significantly by 2030,” commented Dr Bronwyn Claire, Senior Programme Manager at CISL.

    ClimateWise uses a sample of 12 real estate portfolios with assets across the UK, Europe, North America, South America and Asia, to illustrate how investors can internalise climate risks. The analysis compares the present-day impact of extreme weather events on portfolio losses with those expected in the 2050s, based on two climate change scenarios. The first scenario explores the effects of a 4°C warming by the end of the century, while the second scenario considers the more optimistic case of a 2°C temperature increase.

    Under the worst case scenario, the flood risk to residential properties increases by 40% in the UK. The estimated average asset losses (AAL) to UK investment portfolios caused by floods in this scenario would increase by 130%. In the USA and the Pacific Rim, the AAL would increase by 80%. The equivalent increase in losses from winter wind storms in Europe is much smaller.

    The report highlights that the impact of climate change will vary widely due to significant differences in exposure between as well as within portfolios. In the most severe cases, the increase in risk could make insurance premiums unaffordable.

    The analysis assumes that little efforts will be made to mitigate the effects of flooding. However, investors could become more selective about the location of their investments. Property management could also play a role in loss prevention. “Around two-thirds of the additional losses might be offset if half of at-risk households install flood protection measures. This includes measures to prevent flood ingress and measures to reduce damage if flood water does ingress, such as resilient flooring,” according to the report.

    “The analysis of tropical cyclone risk suggests that, in a 2°C temperature scenario, roof upgrades to properties at risk of tropical cyclones might offset around half of the increase in AAL,” adds the report. However, these efforts would yield substantially weaker results in the worst case scenario. According to the report, they are complementary to reductions in CO2 emissions rather than as substitutes for such efforts.

    Picture from Pixabay

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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