An expert from Climate Change Risk Management has chastised insurance companies, claiming that they do not consult climate scientists often enough and so can’t comprehend the risk that extreme weather poses.
Stephen Harrison is the Director of Consultancy at Climate Risk Management, and he argues that policymakers only speak to specialists in the event of a major incident, whereas if they were to speak to them on a regular basis they would have a ‘greater understanding of the issue’ and thus be able to ‘price risk much further ahead of time’.
“We’ve done a lot of work with this market, but insurers tend to consult us on an ad-hoc basis without really having a handle on climate change and the risks it poses to infrastructure. The problem is that insurers only price risk for the next year, or next couple of years, and climate change is a long-term issue, so they’re not really pricing risk for 2050 or 2080, they’re pricing risk for 2021 or 2022,” Harrison told Compelo.
Harrison’s words come after Munich Re announced that climate change could make insurance unaffordable for people living near areas at high risk of wildfires – a pertinent observation following the 2018 Californian wildfires. Ernst Rauch, Chief Climatologist at Munich Re, warned: “If the risk from wildfires, flooding, storms or hail is increasing, then the only sustainable option we have is to adjust our risk prices accordingly. Affordability is so critical because some people on low and average incomes in some regions will no longer be able to buy insurance.”
Harrison also noted that climate change means that the threat of flooding is on the rise: “There’s been an increase in flood magnitude and flood frequency in recent years and there’s lots of questions about whether we can really attribute large floods to climate change,” he said. “But what climate change can mean is that for a flood which might have occurred once every 100 years, something on the magnitude of that scale could take place every 50 years or every 20 years instead.”
India is possibly one of the countries at the highest risk of flooding, highlights Harrison, and this is due to a hydroelectric power plant that India has been working with the World Bank to build – which will be powered by water coming down from the Himalayan mountains.
“In the Himalayas, we know that climate change is producing the melting of glaciers, and those glaciers are leaving behind large lakes which are dammed by ridges of sediment,” Harrison explained. “These will fail eventually, and the lakes will drain catastrophically down very narrow valleys and produce huge damages to people within them. The damages will also be to these hydroelectric power schemes, which involve hundreds of millions of pounds worth of investment per site.”
With the heavy burden of climate change affecting the future of people the world over, the onus of creating effective policies with adequate coverage and affordable pricing is on the insurer. Maintaining affordability for those living in greater areas of risk is crucial, and by working with climate specialists, insurers can ensure that they are pricing risk appropriately and accessibly in the long term, whilst protecting the future of the insurance industry.