Climate change will drive unprecedented economic and social change

Climate change will drive unprecedented economic and social change

The increase in frequency and severity of climate change-related extreme weather events will drive unprecedented economic and social change over the coming decades, requiring both businesses and individuals to reassess their interaction with the environment. This was among the key messages delivered during a climate-focused panel discussion at the 2022 African Insurance Exchange (AIE 2022).

“Climate change is going to bring some of the fastest economic and social change we will ever experience; the clients and businesses that the insurance industry supports will have to undergo significant changes to transition to low-carbon operating models,” said Shivan Hutton, managing director of Marsh Specialty Africa. All three of the panellists agreed that climate change was a reality, that it climate change “was happening today” and that insurers and reinsurers were among the best positioned firms to influence the change needed to combat it.

“Insurers will play a central role in the transition to a green economy [as] they can help shape policy, influence consumer behaviour and create products that are climate-aligned,” said Martine Botha, sustainable finance executive at KPMG Impact. She outlined two main ways in which climate change related risks impacted on insurers, starting with the costs associated with the increase in frequency and severity of climate-related extreme weather events.

“We have seen a big increase in the amount that is being spent on these catastrophic disasters,” said Ms Botha, referring attendees to the April 2022 KwaZulu-Natal (KZN) floods. It is estimated that the insured losses following widespread flooding and landslide will top ZAR15bn, making it among the costliest natural catastrophe loss events in South Africa’s history. Just days after the conference, the Swiss Re Institute its estimate for industry-wide insured natural catastrophe losses at US$35bn for H1 2022. This included US$3.5bn in insured losses stemming from the costliest flooding event in Australia’s history.

The second climate-related impact that insurers and reinsurers will have to contend with is the risk to their operating activities associated with combatting climate change. Risks associated with the ongoing transition to net zero carbon emissions will arise in both the regulatory and social spheres.

For example, imagine the challenges that would be introduced to local insurers were the Prudential Authority (PA) to accelerate the net zero transition by introducing limits on the underwriting of brown or polluting assets. Certain international regulators are already demanding that asset managers, banks and insurers run climate risk stress tests. “The PA are also busy doing preliminary surveys in this area,” said Ms. Botha, and will soon approach insurers to ask them to run various climate scenarios through their books.

All businesses face vulnerabilities unique to their day-to-day operations; and climate change is accelerating these. Mr Hutton said that businesses, insurers and reinsurers included, would have to become more transparent about their decarbonisation strategies over the next decade or so. He noted that the post-pandemic resurgence in global greenhouse gas emissions suggested that some tough decision would have to be made, soon. “There is a narrowing window of opportunity for us to act [and thus] a strong possibility that firmer steps will have to be taken by governments, regulators and society to force businesses to commit to and reach net zero targets by 2050,” he said.

Butch Bacani, programme leader for the United Nations Environment Programme (UNEP) Principles for Sustainable Insurance Initiative (PSI), said that the UN’s 2021 Climate Chance Conference (COP26) had set a clear goal to limit the global average annual temperature rise to less than 1.5°C by 2100.

“The science is showing that every half degree of warming makes a world of a difference,” he said. For example, a 2°C versus 1.5°C world would see shockingly worse impacts in terms of declining crop yields, extreme heat and sea level rises. Mr Bacani also warned the audience that they should not hold any illusions that a 1.5°C increase in global annual temperatures was a safe harbour: rather, they should view this level of temperature change as a least-worst outcome.

Stakeholders throughout the African insurance industry must incorporate adaptation and mitigation in their climate action plans. “Adaptation is coping with the impacts of climate change, which is very close to the resilience agenda that insurers have been championing around the world,” said Mr Bacani. The mitigation agenda, meanwhile, focuses on the reduction of the root causes of climate change, being greenhouse gas emissions. He noted that all stakeholders in the insurance industry have a role to play in building financial resilience in the context of the transition to net zero.

“We are already building the climate risk impact of our clients’ operations into our risk engineering practises; we are gathering information relating to decarbonisation to enable those clients, and the insurance industry, to better understand the transition risks and to help clients mitigate those,” commented Mr Hutton. He added that adjusting to a lower-carbon economy would introduce new risks to insurers, and result in shifts in client behaviour, investor sentiment and regulatory policy, to name a few. “From a reputational standpoint, organisations need to be able to identify, prioritise and act on clear sustainability and climate initiatives; the potential impact of not doing so can be even more costly than the physical damage of climate change related events,” he said.

Ms Botha said that insurers could play a leading role by influencing consumer behaviours through innovative product design. But the industry’s real influence lies in rethinking how it applies capital.

“Insurers and reinsurers need to channel capital towards longer term time horizons; we need to look at between 20 and 30 years so that we can direct capital to create real impacts, and not just [concern ourselves with] financial returns,” she said. The consensus among the panellists was that economic and social returns had to come first to ensure a resilient and sustainable insurance industry.

“The insurance industry will play a really key role in solving the climate crisis and helping the world to achieve net zero by 2050,” concluded Ms Botha. “The result will be a sector that is more resilient, better aligned to public needs and recognised for having solved some of humankind’s most pressing issues”.

A similar sentiment was expressed by Mr Bacani, who concluded that African insurers would contribute to climate change adaptation and mitigation through their insuring and investing activities, and risk management.

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