For nearly 10,000 years, humans have had a stable environment that allowed ‘unhindered’ progress. We are now in a situation, according to Christina Lu and Brawley Benson writing in Foreign Policy, whereby “countries have spent decades building critical infrastructure that is now buckling under extreme heat, wildfires, and floods, laying bare just how unprepared the world’s energy and transportation systems are to withstand the volatility of climate change”.
Like the recent pandemic – which was a preview of the unfolding climate crisis – it has begun to adversely touch every life. Rich or poor, in every part of the world. Some more adversely than others. All that we have built thus far is for a climate that no longer exists. No form of insurance can protect anyone fully and forever. There is a thin line between insurable and uninsurable. Insurance intermediaries and brokers have an important role to play in ensuring that the needle does not move towards the latter.
Results from a study by Axa in late 2021 show that 60% of risk managers fear that certain geographies or activities will become uninsurable in future due to the impact of climate change. That future has arrived too soon. Today we are seeing many vulnerable locations (particularly the US states of California, Texas, Louisiana and Florida) in the world’s largest insurance market. Due to devastating wildfires, severe floods and windstorms, the provision of homeowners’ insurance in these locations is becoming near impossible.
As global temperatures keep rising above pre-industrial times, the stability that we took for granted is in a state of flux and may head for irreversible consequences. This is due to the overexploitation of nature, resulting in climate change together with biodiversity loss and pollution. Munich Re sees climate change and La Niña as two of the drivers for a $120bn annual disaster insured loss for 2022. A figure of $100bn or more is the ‘new normal’ for the global insurance industry’s annual natural disaster loss total.
What causes a significant problem?
Firstly, carbon dioxide (at 420ppm) and methane released due to fossil fuel usage cause the greenhouse gas effect (GHG). Since the industrial revolution, the average temperature of our planet has gone up by 1.5C. Some parts, including the Arctic Circle, are warming by multiples. Together with pollution and biodiversity loss, this is causing havoc in the form of floods, droughts, forest fires, thawing permafrost, sea-level rise, ocean acidification, glaciers melting, and heatwaves. Some of the resultant changes, according to scientists, could be irreversible.
As a front line of the insurance industry, brokers ought to be mindful of these developments. Since brokers are a very diverse lot, the attempt is to keep this paper as simple as possible. Nevertheless, the gravity of the existential crisis on hand should not be underestimated. Climate is a systemic risk. It cuts across all silos. The following are a select few issues, but they are all interrelated.
Water
One of the most contentious drivers of climate crisis. Most industries are water intensive. Some 25 countries and 25% of the world’s population face extremely high water stress. Likewise, marine transits passing through, for example, the Panama Canal ought to be watched. The lack of proper rainfall and the resultant drought is causing serious delays in the crossing of ships. It has turned into a huge maritime traffic jam, with more than 200 ships stranded on both sides of the waterway.
Heat
“I believe that the Indo-Gangetic belt and the Sundarbans will be among the most affected parts of the country, since multiple climate change impacts are playing out in those regions. The Indo-Gangetic plains are hot and humid. Humid heat is much more dangerous than dry heat, and a simultaneous spike in ‘humid heatwaves’ there can significantly raise the risk of cardiovascular and neurological conditions,” warns Dr ChiragDhara, an eminent climate expert.
A study by McKinsey – Will India get too hot to work? – raises a red flag around the fact India could become one of the first places in the world to experience heatwaves that cross the survivability limit for a healthy human being resting in the shade, and this could occur as early as next decade. Moreover, rising heat and humidity levels will impact labour productivity and economic growth in an economy that relies substantially on outdoor work. Lost labour hours due to extreme heat could put approximately 2.5%-4.5% of GDP at risk by 2030, equivalent to roughly $150bn-$250bn. The study estimates the number of daylight hours during which outdoor work is unsafe will increase approximately 15% by 2030, compared with today’s levels.
This will have implications for outdoor work, agriculture, transportation, wellbeing of infrastructure and lifestyles in general.
Supply chains
McKinsey warns: “As climate change makes extreme weather more frequent and/or severe, it increases the annual probability of events that are more intense than manufacturing assets are constructed to withstand, increasing the likelihood of supply chain disruptions.”
Jacques Leslie, writing for Yale Environment 360, explains how “extreme weather, from floods to wildfires, is increasingly hammering ports, highways and factories worldwide, and experts warn these climate-induced disruptions will only get worse”.
Credit risk
Moody’s believes the credit impact of “a delayed and disorderly carbon transition” is the greatest threat to financial firms, as the increasing frequency of catastrophic weather events will lead to loan defaults and rising insurance claims.
Political risk
Africa is on the receiving end of climate change for no fault of its own. The implications of climate change on the politics in Africa ought to be watched when trading with it. “The fact that few are acknowledging is that Niger’s coup, like those in neighbouring countries, is a ‘climate coup’ – a crisis born of climate impacts largely ignored by the international community,” writes AbdoulieCeesay in Newsweek.
India
As the third-largest emitter of carbon dioxide globally, India’s fossil fuel-driven growth trajectory is bound to have adverse climate implications. It is, therefore, critical to make a rapid transition towards renewable energy. This process will risk fossil fuel assets becoming stranded. Any delays in corrective actions will see more heatwaves, droughts, erratic rainfall, flooding and sea-level rises. Rising storm activity on the west coast must be watched and factored into risk management protocols. All these are bound to impact the supply, pricing and availability of insurance.
Siloedmindset
Conventional risk silos demand an urgent revisit. Climate risks manifest as physical, transition and liability risks. Physical risk arises from physical impacts of climate-induced extreme weather events. Transition risk relates to changes in regulatory and market expectations arising from the transition to a low-carbon economy. Liability risk emanates from mismanagement of physical and transition risk. Also, a new highly complex and destabilised domain of risk is emerging. It includes the risk of collapse of key social and economic systems at local and global levels.
Greenwashing, climate litigation and management liability
“Rather than making legitimate changes to their products and processes, some businesses have relied on exaggerated, misleading or false claims about their environmental, social and governance (ESG) credentials. But how many of these can withstand scrutiny from regulators, activist groups, or opportunistic customers?” asks Reuters. Fashion, travel and finance industries are turning out to be most vulnerable.
Climate litigation started sporadically in the US in the mid-1980s. It has seen an exponential growth since 2015, when the Paris Agreement on climate change was signed. While just over 800 cases were filed in 28 years between 1986 and 2014, more than 1,200 cases commenced in the last eight years. Out of those 1,200 climate cases, roughly a quarter originated in the past two years. Increasingly, cases are being filed against a wide range of corporate actors, expanding the class of defendants beyond the usual suspects of oil and gas companies. Food and agriculture, transport as well as finance sectors have all seen an increase in strategic climate cases since 2020. Cases against private and public financial institutions indicate litigants’ increasing focus on system-wide change. The logic is simple – if financial institutions start factoring climate risk into their decisions, this will inevitably increase the cost of capital for high emitters.
“As climate change litigation evolves, it is becoming a bigger drain on company resources. Litigation is now more targeted, while the arguments used by claimants are more diverse and include themes from disclosure and greenwashing to fiduciary duty, consumer protection and human rights,” say Lisa Williams and Steve Bauer of Zurich Insurance. “Companies need to take a holistic approach to climate change liability and incorporate it into their controls and procedures, including risk and corporate governance frameworks, supply chain due diligence, health and safety, and quality control procedures.”
