Climate change – an insurance perspective | Daily News

Climate change – an insurance perspective

Wasantha Warnasuriya General Manager Allianz Insurance Lanka
Wasantha Warnasuriya General Manager Allianz Insurance Lanka

As extreme weather events linked to climate change increase, so too do the impacts on human lives, society and business. Climate change is as an emerging risk for businesses and governments alike with losses of manageable financial assets estimated to be between US $7 trillion and US$13.8 trillion for the private sector and governments respectively.

The insurance industry may feel the direct and indirect impact of climate change and so it is in their interest to understand the implications, encourage green investment and advise customers on good practices to reduce their risk exposure.

The ability of the insurance industry to manage risks is being threatened by climate change; at the same time, frequent extreme weather events are driving up losses and making some assets uninstallable.

Europe’s largest insurer, Allianz, stated that climate change stands to increase insured losses from extreme events in an average year by 37% within just a decade. Losses in a bad year could top US$1 trillion.

Insurers increasingly recognize that it is the lack of action to combat climate change that is the true threat to their industry and the broader economy; engaging with the problem and mounting solutions represents not only a duty to shareholders, but also a boon for economic growth.

The analysis, by a coalition of the world’s biggest insurers, concluded that the ‘protection gap’ – the difference between the costs of natural disasters and the amount insured – has quadrupled to US$100 billion (£79 billion) a year since the 1980s.

Experts say, “Over time, the adverse effects of climate change could threaten economic resilience and financial stability and the insurance industry must also use its risk management expertise to convince policymakers in both the public and private sectors of the urgent need for climate action.

“The industry’s traditional response to rising insurance risks – raising premiums or withdrawing cover – would not help deal with the rising risks.

“The insurance industry’s role as risk manager is under threat. Insurance will struggle to reduce this protection gap if its response is limited to avoiding, rather than managing, exposure to climate risk.

“It has been reported that the frequency of weather-related catastrophes has increased six-fold. As climate-related risks occur more often and more predictably, previously insurable assets are becoming uninsurable, or those already underinsured are further compromised.”

The economic impact of these natural catastrophes is growing rapidly. This increase is partly due to an increase in extreme weather, but also due to an increase in assets as cities and towns have grown, especially in vulnerable locations.

Insurance provides a very important role in providing support for people in their time of need. Finding viable ways to help society adapt and become more resilient to the inevitable changes related to ongoing climate change is vital. It is very clear that as carbon dioxide concentrations increase, we should expect to see more patterns of severe weather disruption.

The insurance sector plays a key role in the context of climate and disaster resilient development. Insurers understand climate change because they are trying to manage the physical consequences of the severe weather experience from climate change; so insurance can be a really important industry in terms of informing policymakers about the pace at which they should act in taking preventive measures.

Other actions insurance companies can take are to work with their customers to make them more resilient to extreme weather and encourage use of insurance.

Use of disruptive technology such as location intelligence becomes relevant because insurance claims are 100% location-based. It’s all about predicting risk in the insurance industry and insurance companies better manage risk with location intelligence.

Technology like location intelligence brings to the fingertips of underwriters much quicker, real-time data to improve decision making at a quicker pace.

Risk assessment uses geographic information to predict risk. Higher risk means higher premiums. Lower premiums are for areas with less risk. Insurance companies divide areas into territories.

These territories can be assessed piece-by-piece with risk. People living in more vulnerable areas will pay higher premiums. Every natural disaster has been mapped in the past. And if the past is a good indicator of the future – then it’s a start.

Claims management involves processing claims with respect to compensation, restoration and repayment in response to loss or damage. The use of technology like geographic information systems assists understanding where risk happens and where customer locations are. This is the proactive approach to responding to customers quickly and in an organized fashion.

Insurance underwriting evaluates risk and exposure for potential clients. The underwriting process decides the amount of coverage, cost and even whether or not the client should be insured at all.

Location intelligence enables targeted sales and marketing knowing that underwriters made the right decision.

The process of assessing and disclosing climate risks contributes to insurers’ ability to evaluate the impacts of climate change on their business.

Disclosure also enables consumers to gauge whether to purchase a policy from a particular insurance company and it helps regulators to monitor the financial condition of insurance companies and the progress they are making towards addressing climate change risks.

The opportunities described here have in common the potential for improving the business position of insurers while addressing the risks posed by climate change.


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