Climate change: The tipping point looms

Adrian Ladbury travelled to Munich to meet Ernst Rauch, chief climate scientist, and Caoimhe Adams, head of climate advisory and natcat data, at Munich Re to discuss the implications of climate change for corporations, the insurance sector and wider society. Munich Re’s latest analysis of total economic global natural catastrophe losses in 2022 shows a reduction compared with previous years. But the underlying trend is still sharply up, as the frequency and severity of events continue to escalate. Natural phenomena such as La Niña and socio-economic factors, including increasing wealth and concentrations of people in hazardous regions, are playing a role in driving overall and insured losses. No-one can argue, however, that climate change is not a big factor. Munich Re estimates overall natural catastrophe losses of around $270bn in 2022 compared with $320bn in the previous year. Its insured loss figure of roughly $120bn was the same as in 2021 and joins the recent run of years with high insurance losses of more than $100bn. Overall losses were close to the average for the last five years, while insured losses were significantly above average. Average insured losses from 2017 to 2021 stands at $97bn. “Two factors should be kept in mind when considering the 2022 natural disaster figures. Firstly, we are experiencing La Niña conditions for the third year in a row. This increases the likelihood of hurricanes in North America, floods in Australia, drought and heatwaves in China, and heavier monsoon rains in parts of South Asia. At the same time, climate change is tending to increase weather extremes with the result that the effects sometimes complement each other,” explained Ernst Rauch, chief climate scientist at Munich Re. Munich Re was built on its ability to offer insurers, and therefore their customers, solid and reliable risk transfer capacity to enable risk-taking in all corners of the economy and globe. Quality insurers and reinsurers have always encouraged and incentivised good risk management practices, but this has become more important than ever in an increasingly volatile environment, said Rauch. “The focus needs to be on loss prevention and risk management. We are seeing a significant jump in the level of losses, such as with the Australian wildfires up a factor of two to three times and German flooding up a factor of four. These are not just small increases, they are 200% to 400% higher. So, it is about how we manage these risks and not just transfer them,” he told Commercial Risk Europe. “It is not just about climate change, of course. It is more complex than that, including socio-economic factors such as more people living in coastal areas and higher concentrations of wealth. There are also existing natural climate factors such as La Niña. But, such socio-economic factors do not explain it all. Human-induced climate change is for real, as pointed out by the International Panel on Climate Change (IPCC), which shows clearly that events are increasing in both frequency and severity,” added Rauch. The Munich Re experts were asked to be more specific about the existing and future potential impacts of climate change, separate from the naturally occurring and socio-economic trends. Caoimhe Adams, head of climate advisory and natcat data climate change solutions, said you will see more heat and more water depending on where you are based in the world. “It is a fact that we are seeing different impacts in different regions of the world. Basically, some regions are becoming hotter and drier with risk of drought and wildfires, and other regions are becoming wetter. The atmosphere can retain more water at a rate of 6% more for each degree of warming, which is one reason why we are seeing an increased likelihood of extreme rainfalls and flooding in Europe,” she said. Investing in the future The next big question is clear: where do leading reinsurers and insurers such as Munich Re need to focus their future investment to remain relevant for customers and help tackle the wider challenge? Adams said that as a group Munich Re is firmly committed to making its contribution. “There are a couple of significant things we are doing already. We have a very strong commitment to net zero by 2050 through our investments, liabilities and our own operations, which will be net zero by 2030. We are also always encouraging new technology to meet these targets. We have insured more than 850 renewable energy projects. We are also part of the Net Zero Insurance Alliance like other (re)insurance companies,” she said. Munich Re is also a pioneer in offering new solutions for renewable energies. Rauch further explained that the way ahead is really a dual path based on two intrinsically interlinked areas: practical techniques for loss prevention and mitigation, and the longer-term goal of reducing C02 emissions. Sadly, Russia’s invasion of Ukraine has not made the energy transition any easier. As we discussed the challenge in Munich, protesters and police were gearing up for what turned out to be a high-profile conflict over the re-opening of the opencast coal mine Garzweiler 2 in a bid to tackle Germany’s short-term energy supply problems. For Rauch, the energy crisis in Europe is certainly an element in the equation because of the sudden spike in demand for natural gas and coal. This underlines the need for a more intense transition to renewable energy, he added. “Europe has responded rather well to this challenge and so have other leading economies such as China and India. But the bottom line is that if demand for energy increases at a higher rate than the renewable sector can deliver, then we reach a crisis point,” he said. Risk management is key Again, Rauch said that risk management is the key factor for Munich Re’s own business and the wider economy. “To successfully invest in the renewable sector we have to use our data to understand the risks and loss trends. To grow in this space and support its development by taking risks from investors’ balance sheets, we need to manage and model these risks properly. We need to keep a close eye on developments, separating the wheat from the chaff to invest in those that manage these risks in a technically sound manner,” he said. The same principles apply when underwriting such new technologies. If the risks cannot be underwritten, then solutions will not grow and deliver what the world needs. “Those who provide capacity can only do so if they can obtain an adequate risk premium. Those who perceive a below technical risk premium will find it more challenging. To manage the risk and capital properly, the correct premium is needed. This is key,” said Rauch. Companies like Munich Re can also provide corporations with risk analysis and software solutions to help them properly analyse their exposures. “We offer risk management support and digital solutions using Munich Re data collected over decades. We offer software as a service, for example, for companies thinking about setting up a manufacturing plant in a territory. We can provide local hazard information and can run IPCC scenarios based on different pathways looking into the future. This provides added vital information for companies and banks investing in projects,” explained Rauch. Parametric potential Another interesting developing area is parametric insurance, in which Munich Re is a leading player. Rauch said this market offers interesting solutions, particularly in developing regions of the world, and is definitely part of the mix. Adams said that the real positive from parametric solutions is the predetermined payout and the fact that payments can be made within a matter of days, delivering real contract certainty to customers. Rauch believe the potential of the parametric market is “huge”. “We are really at the beginning of this. There are a lot of benefits. There is a faster payout with a pre-determined amount using what can be a very simple trigger. I think we will see more of this on the retail market and it’s also a key way of transferring risk in developing countries as shown by the success of African Risk Capacity, backed by the African Union, and the Caribbean Catastrophe Risk Insurance Facility, backed by the states of the Caribbean. This market is still at a relatively low level but the potential is huge and we see more and more great ideas,” he said.

Climate change: The tipping point looms

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