Climate change represents one of the greatest long-term risks in the insurance industry.
According to the World Economic Forum’s 2020 Global Risks Report 1 – climate action failure is the highest global risk in terms of impact. Two of the three top risks in terms of likelihood are extreme weather and natural disasters.
A fundamental question is facing our society. How can we avoid disastrous consequences with respect to climate change risk? The early warnings are here right now for climate change – recent catastrophes such as severe flooding events and the devastating California wildfires are just two examples. The COVID-19 pandemic has illustrated that the best course of action is on an ex-ante basis rather than an ex-post one. Our society needs to act immediately to mitigate and adapt to the effects of climate change and strengthen our resilience.
Munich Re Group (“Munich Re”) first began tackling the emerging issue of climate change risk in the 1970s. Since then we have been analyzing long-term data on meteorology and losses in order to better understand the risks of change in a warmer climate. As a leader in the climate risk space, Munich Re has been carbon neutral since 2015 and employs subject matter experts from a variety of fields including meteorology, climatology, seismology, hydrology, geoinformatics, data analytics, and engineering. These scientists combine our deep institutional knowledge with cutting-edge expertise to help clients identify the most important and relevant climate change risks that could adversely impact them.
There is strong evidence that climate change has already had a significant influence on the frequency and severity of some types of natural disasters and extreme weather events in regions across the world. Incidents such as hurricanes, wildfires, and floods might widen the protection gap that already exists between economic and insured losses if successful counter measures are not taken to reduce the vulnerability of property and business interruption risks to these perils. Education is another vital aspect in climate change mitigation, and Munich Re is enhancing general risk awareness by initiating a wide range of prevention and adaption measures to help protect people and make vulnerable communities more resilient.
Understanding the size and ramifications of the protection gap and the scope of potential losses due to climate change is critical for many in our society – insurers, brokers, regulators, members of the public sector, and financial institutions. The insurance industry has a tremendous opportunity to help close this protection gap. Effective methods include the offering of innovative risk transfer solutions for weather perils and the development of risk transfer products and services that incentivize resilience and risk mitigation. Another way is through supporting people and communities as they manage the impact of climate change.
Traditionally, Munich Re has focused coverage on peak risks associated with increased frequency and severity of natural disasters. The company is increasingly working on initiatives to address both loss mitigation and prevention, as well as developing innovative solutions to measure and transfer climate risk. This approach will facilitate adaption to climate change, foster climate-friendly technologies, and help communities become more resilient.