Just as the 2015 U.N. climate change talks (popularly known as COP21) are about to start, rating agency Standard & Poor's has published a report with the notable title "The Heat Is On". And, as 2015 is set to become the hottest year on record, the heat truly is on.
As a rating agency, S&P issues credit ratings to companies as well as countries, based on the capacity to meet financial commitments.
With this specific report S&P demonstrates that also climate change can have an impact on that capacity. Triggered by more severe tropical cyclone or flood events, climate change can exacerbate the negative sovereign rating impact of major natural disasters, particularly in the Caribbean and the Asia-Pacific region, which are most at risk.
The report finds that on average climate change increases the negative rating impact of these natural catastrophes by about 20% compared to a scenario not including climate change. Climate change would increase government debt in the affected countries between slightly more than 4% of GDP in Vietnam and 42% of GDP in the Bahamas, compared to a no-climate-change scenario.
Mind you that the report only examines the impact of single extreme events (that are expected to occur on average once in 250 years) and does not quantify the accumulated impact from all natural disasters countries will experience under a changed climate regime. The report also disregards important perils such as drought, so in all likelihood the impact is underestimated.
Typically, by quantifying the economic impacts of weather and climate, insurance puts a price tag on risk and incentivises investment in prevention measures. With that in mind Swiss Re compiled the direct damage data which S&P used for this powerful report, as we believe that quantifying the impact of climate change be helpful when working on finding a solution for the protection gap.
If global warming is contained, insurance can play an important part in strengthening a country's climate resilience.
Considering that the impact of climate change is far more important for emerging and developing sovereigns than the advanced economies, we as an industry need to work together with the exposed governments to come up with solutions that can help narrow that protection gap.
In the context of COP21 and other important initiatives, we want to continue the support we provide to governments in their efforts to improve climate resilience in terms of risk management and innovative risk financing solution.
This is a link to the report "The Heat Is On".
Category: Climate/natural disasters: Climate change, Disaster risk, Floods/storms, Resilience