Currently showing: Food security > Farming


07 Dec 15 20:33

A reinsurer underwrites a risk that is initially borne by a different party, thereby transferring part of that risk to the reinsurer. I would say it is a safe assumption that the (re)insurer would like to limit the risk of the (re)insured assets and that this risk is reflected in the premium paid by the owner of the risk. Correct risk assessment is crucial for a fair valuation of the premium.

Climate change is becoming a wild card in the assessment of risk, and this wild card will become more prominent in the coming decades. Global warming is already increasing the risk of regular floods, flash-floods, droughts and soil erosion (and the impacts that come along with this like reduced food security). In the end, these risks might become too high for a (re)insurer to accept, thereby reducing the amount of acceptable contracts for (re)insurance companies and reducing the amount assets in high-risk areas that can be insured, negatively impacting the societies that live there.

Currently there seem to be two ways in which (re)insurers try to mitigate for this:

"Insurers are responding to the global-warming threat in two ways: By developing and selling novel kinds of insurance for clients who want to hedge their climate exposure; and by pressing policymakers in the United States and around the world to enact carbon-emission limits that are aggressive, detailed, and long-term."
(https://newrepublic.com/article/123212/who-will-pay-climate-change?hootPostID=d70deb6b3e2b5eb5db7d359f2351bf6d referenced by Swiss Re here: https://twitter.com/swissre/status/662042410504036352)

I would argue that Swiss Re and other (re)insurance companies can also use a third way to respond to the threat of global warming, climate change and global biodiversity loss. I am talking about the standard inclusion of Natural Capital accounting in the assessment of risk and by pushing clients harder to use Nature Based Solutions to mitigate risk. These two elements could and perhaps should be included in every contract where they could be applicable.

The first steps towards this are already being taken and the actions of Swiss Re together with the IUCN are a clear proof of that (see: http://www.swissre.com/rethinking/climate_and_natural_disaster_risk/Low-tech_ways_to_cope_with_climate_risks_in_the_Caribbean.html). However, merely suggesting and facilitating the use of Nature Based Solutions to mitigate specific risk is not enough. Requesting a full account of the Natural Capital impact of a client (for example a city or region) will give a comprehensive view of the negative and beneficial effects that a client exerts on its surroundings. This would improve the risk assessment associated with a contract and would show multiple ways of mitigating the risk as well through Nature Based Solutions. The (re)insurer could then adjust the premium paid on the risk, thereby making it financially beneficial for clients to improve their impact on the Natural Capital that they affect.

In effect the actions taken by the client, and potentially financed by the reduced premium, will in return help mitigate climate change (for example through carbon capture in peatland) and biodiversity loss (by providing areas that support species and ecosystems). It would also be attractive to the bottom line of (re)insurers as the risk of large scale (and uninsurable) natural disasters like floods and droughts occurring would be lower. Everyone is a winner.


Category: Food security: Farming, Climate/natural disasters: Climate change, Disaster risk, Drought, Floods/storms, Pollution

Location: Worldwide


4 Comments

irinaborissova - 12 Jan 2016, 5:15 p.m.

It is very interesting and right on time how this climate change tools work. Everywhere now we feel the effect of the global warming, something not even thought of some time ago. What are these tools exactly? Any success stories to share?

Honza Kerver - 13 Jan 2016, 12:46 p.m.

A very current case could be grabbed from the UK where recent flooding hat created massive issues with large costs to individuals, companies and government.

If resources would have been used to create areas where flood water could be "stored" like marshes and wetlands this would be cheaper than building man made flood protection - while it would offer all the benefits towards recreation (and benefits associated with that like physical and mental health) and biodiversity.

On Natural Capital accounting, the only example I know of a company that is using it on a massive scale to take action is Kering. Kering has made a full Environmental Profit & Loss calculation where their impact on nature is assessed - and they use this to reduce that impact. However, I do not know how this affects their insurance premiums.

Ivelin M. Zvezdov - 24 Feb 2016, 4:35 a.m.

For the (re)insurance industry providing coverage for loss and destruction of ecological and biodiversity assets due to human commercial and industrial activity, or due to climate change is quite a serious proposition. Actually the (re)insurance side of the equation is the relatively less complex one. If corporations, public and government agencies or any market player(s) in principle are willing to carry liability of deteriorating ecological and biodiversity resources the (re)insurance industry will build up capacity to provide coverage. This will of course require developing a coherent framework for measuring and quantifying risk, which is accepted by all market players, but this can evolve over time as for example have evolved the basic principles of property and casualty premium pricing. Relevant civil legislation could potentially serve as both catalyst and motivator for such a process to begin in earnest. Legislative requirements also formalize, legalize and rationalize without ambiguity the market mechanics of buying and placing (re)insurance coverage. Kind regards, Ivelin Zvezdov

Honza Kerver - 5 Mar 2016, 2:43 p.m.

Hi Ivelin,

I would not want to argue for the fact that the (re)insurance industry has to cover the direct loss and destruction of ecological and biodiversity assets due to human commercial and industrial activity, or due to climate change.

However, these developments already happen and do affect risks like flooding, droughts, mental health, erosion (mountains and coasts alike) that (re)insurance companies are already liable for through (re)insurance contracts. I would argue that, knowing these risks and ways to mitigate them, (re)insurance companies could push for risk mitigation during contract negotiations. The actions related to risk mitigation would have to be undertaken by the contracting party, but could partly be financed by a reduced premium.

For example, if party A wants to reinsure flood risk to the amount of X then the reinsurance company will say that the cost will be K. However, the risk could be reduced if actions are undertaken so that the risk is X-Y, and the premium will be K-L. The amount L that party A will not have to pay in premium can then be used to finance the risk mitigation.

As for local legislation, I am afraid that this process would be too slow, and do see an opportunity for business (like (re)insurance but also consultancy, players in agriculture / resource extraction etc) to play a leading role.

Cheers,

Honza


If you would like to leave a comment, please, log in.