Climate change futures: health, ecological and economic dimensions

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THE LIMITS OF INSURABILITY Not all risks are commercially insurable. A variety of definitions of insurability are found in the literature that differ in detail but share the common theme of accepting or rejecting risks based on the nature of each risk and the adequacy of information available about it (Mills et al. 2001; Crichton 2002; Pearce 2002). The perceived insurability of natural disasters and extreme weather events may be affected by increases in the frequency or unpredictability of these events. If the availability of insurance is consequently reduced, development may be constrained in the emerging markets. In essence, private insurers set a series of conditions that must be met before they will assume a given risk or enter a given market. These conditions — sometimes referred to as “Standards of Insurability” — are intended to assure the insurers’ financial survival in case of catastrophic losses (see Table, Appendix A). This process involves technical and subjective judgments, and history shows that insurers will relax the standards when profits are high (Swiss Re 2002a). When private insurers decline to cover a risk, the cost shifts to others. As a case in point, the risk of residential flood damage in the US is deemed largely uninsurable, which has given rise to a National Flood Insurance Program, which has more than 4.2 million policies in force, representing nearly US $560 billion worth of coverage (Bowers 2001). BUSINESS SCENARIOS POTENTIAL CONSEQUENCES OF CLIMATE CHANGE FOR THE INSURANCE BUSINESS AND ITS CLIENTS The following pair of business scenarios — based on current socioeconomic trends and insurance market dynamics — represent business impacts arising from the technical outcomes described in the two CCF scenarios. 5 Both scenarios reflect a “business-as-usual” stance on the part of industry, that is, minimal and gradual interventions to alter the world’s energy diet. In the scenarios for CCF-I, triggering events arise from the consequences of gradual anthropogenic climate change, while those in CCF-II correspond to non-linear impacts. The results are neither worst- nor best-case renditions of what the future could bring. The scenarios are neither predictions nor doomsday scenarios. Rather, they offer a set of plausible developments in the insurance business environment due to climate change and corresponding developments in insured hazards, industry responses, and, ultimately, impacts on the financial performance and structure of the industry. This approach to building the scenario is similar to that employed in an exercise commissioned by the US Department of Defense to explore the implications of climate instability for conflicts over resources and international security (Schwartz and Randall 2003). The implications for specific segments of the industry are examined and the study concludes with an integrated scenario. CCF-I: ESCALATING IMPACTS In this scenario, weather-related property losses and business interruptions continue to rise at rates observed through the latter 20th century. The insured share increases from a current-day baseline of approximate 25-30%, and underwriting becomes more problematic. Corporations face more environmentally related litigation (and associated insurance payouts), both as emitters of greenhouse gases and from non-compliance with new regulations (Allen and Lord 2004). A new class of losses involving human health and mortality emerges within the life/health branch of the insurance industry. These are driven by thermal extremes, reduced water quality and availability, elevated rates of vector-borne disease, air pollution, food poisoning, and injuries/mortalities from disasters and associated mental health problems (Epstein 1999; Munich Re 2005). Other health consequences become manifest in natural systems that directly or indirectly impact humans, including coral reef bleaching, agricultural diseases or other events that hamper food production; animal and livestock diseases; and forest pests. Mobilization of dust, smoke, and CO 2 -linked aeroallergens (pollen and mold) exacerbate already high rates of asthma and other forms of respiratory disease. The combined effect of increased losses, pressure on reserves, post-disaster construction-cost inflation and rising costs of risk capital result in a gradual increase in the number of years in which the industry is not profitable. A compounding impact arises from the continued destructive industry practices of underpricing risk and routinely allowing the core business to operate at a loss, relying instead on profits from investments 97 | FINANCIAL IMPLICATIONS 5 This is an elaborated version of a scenario developed and published earlier in the course of the CCF project by Mills (2005).
98 | FINANCIAL IMPLICATIONS Table 3.1 Climate Change Threats and Opportunities for the Insurance Industry • New and existing markets become unviable as climate change increases regional exposure • New markets/products related to mitigation projects/processes • Macroeconomic downturn due to actual impacts • New markets/products related to adaptation projects/processes • Compounding of climate change risk across entire portfolio of converging activities (asset management, • Public/private partnerships for commercially unviable markets insurance, reinsurance) • Unforeseen changes in government policy • Technology insurance and/or contingent capital solutions to guard against non-performance of clean energy technologies due to engineering failure • Physical damage to insured property from extreme/more frequent weather events, compounded by unmanaged development, resulting in volatile results and liquidity and credit rating problems • Increased risk in other lines of business (e.g., construction, agriculture, transport) • Increases in population and infrastructure densities multiply the size of maximum potential losses from extreme weather events • Increases in demand for risk transfer and other services as weather risks increase • Insurance of mitigation projects • Innovative risk transfer solutions for high-risk sectors • Increased risk to human health (thermal stress, vectorborne disease, natural disasters) • Increase in demand for products as human health risk rises • Business interruption risks becoming unpredictable and • Collaboration with others in pooling capital more financially relevant • Disruptions to construction/transportation sectors • Microinsurance • Increased losses in agro-insurance • Weather derivatives, CAT bonds, etc. • Political/regulatory risks surrounding mitigation • Hidden GHG liabilities impair market values of securities • Investment in climate leaders and best-in-sector • Real estate impaired by weather events and increased securities energy costs • Innovative climate-related theme funds • Potential absence of property insurance • Consulting/advisory services Source: Adapted from UNEP and Innovest (2002), Mills 2004 • Hedge funds investing in GHG credits
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Climate Change Futures Health, Ecol
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Published by: The Center for Health
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PREAMBLE Hurricane Katrina 4 | PREA
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6 | EXECUTIVE SUMMARY With this in
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8 | EXECUTIVE SUMMARY Other non-lin
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THE CASE STUDIES IN BRIEF Floods in
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12 | EXECUTIVE SUMMARY THE CCF PROJ
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PART I: The Climate Context Today
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(see McCarthy et al. 2001). As glac
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Table 1.1 Extreme Weather Events an
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DISCONTINUITIES CLIVAR, Climate Var
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Figure 1.6 The Frequency of Weather
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Figure 1.7 Trends in Events, Losses
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• Thawing of permafrost (permanen
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CCF-II: GRADUAL WARMING WITH INCREA
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PART II: Case Studies
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CLIMATE CHANGE AND EMERGING INFECTI
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HEALTH IMPACTS Malaria is character
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Figure 2.5 Brazil N Brazil COLOMBIA
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estimates (over and above current a
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SPECIFIC RECOMMENDATIONS Preventing
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262 deaths in 2003; 7,470 cases and
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98% of the two-year life cycle take
Page 48 and 49: The rise in minimum temperature res
Page 50 and 51: While the role of allergen exposure
Page 52 and 53: AIR QUALITY AND CLIMATE CHANGE ISSU
Page 54 and 55: EXTREME WEATHER EVENTS 1984 and 199
Page 56 and 57: HEALTH AND ECOLOGICAL IMPACTS Heat
Page 58 and 59: Figure 2.20 Projected Excess Deaths
Page 60 and 61: THE ROLE OF CLIMATE Australia exper
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Page 64 and 65: Table 2.1 Economic Losses in Europe
Page 66 and 67: NATURAL AND MANAGED SYSTEMS adelgid
Page 68 and 69: created unstable conditions conduci
Page 70 and 71: Climate research has already identi
Page 72 and 73: LOSSES ASSOCIATED WITH 1993 HEAVY P
Page 74 and 75: Figure 2.28 Soybean Rust Introducti
Page 76 and 77: Table 2.3 Extreme Weather Events Ca
Page 78 and 79: General measures to reduce the impa
Page 80 and 81: Physiological stresses on reef orga
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Page 88 and 89: In 2001 the IPCC fully recognized t
Page 90 and 91: While seawater desalinization is cu
Page 92 and 93: PART III: Financial Implications, S
Page 94 and 95: Figure 3.1 Reinsurance Prices Are H
Page 96 and 97: RISK SPREADING IN DEVELOPED AND DEV
Page 100 and 101: (also known as “cash-flow underwr
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Page 104 and 105: Engagement of the insurance industr
Page 106 and 107: Industry observers point out that p
Page 108 and 109: CONCLUSIONS AND RECOMMENDATIONS Jus
Page 110 and 111: FINANCIAL INSTRUMENTS Regulators an
Page 112 and 113: of carbon-risk hedging products, su
Page 114 and 115: Summary Table of Extreme Weather Ev
Page 116 and 117: Table B.1 Summer Percentage Frequen
Page 118 and 119: Climate sensitivity for small-scale
Page 120 and 121: diffuse and do not manifest in sing
Page 122 and 123: APPENDIX D. LIST OF PARTICIPANTS AT
Page 124: Carmenza Robledo Gruppe Oekologie E
Page 127 and 128: 126 | BIBLIOGRAPHY Bibliography AAA
Page 129 and 130: 128 | BIBLIOGRAPHY Chordas, L. Epid
Page 131 and 132: Ford, S.E. & Tripp, M.R. Diseases a
Page 133 and 134: 132 | BIBLIOGRAPHY Kalkstein, L. S.
Page 135 and 136: 134 | BIBLIOGRAPHY Mills, E. The in
Page 137 and 138: 136 | BIBLIOGRAPHY Rose, J. B., Eps
Page 139 and 140: 138 | BIBLIOGRAPHY Vandyk, J. K., B
Page 142: Infectious and Respiratory Diseases
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