For three days in mid-April, the typically arid city of Dubai was hit by sudden torrential rainfall, causing widespread flooding that brought one of the world’s largest business hubs to a standstill. At the same time, over in Asia, temperatures spiked to record-highs of well beyond 40°C, claiming the lives of hundreds and shutting schools and businesses temporarily.
Then, in May, severe turbulence caused the death of a passenger on a Singapore Airlines flight, the first of several incidents of extreme turbulence around the globe.
These prominent extreme weather phenomena are no doubt the continuation of severe climate patterns the world is going through due to climate change. And while the threat to people and economies worldwide is huge, the financial burden from these natural catastrophes is enormous.
Despite this, many people and businesses remain uninsured, in what is referred to as the “protection gap”. According to Swiss Re, one of the world’s largest reinsurance companies, the bigger the protection gap, the weaker the financial ability of economies to bounce back from disasters, as lack of insurance makes recovery harder for businesses and people.
In its insurance report published in 1Q2024, the Swiss firm found that less than 40% of global economic losses of US$280 billion ($377.6 billion) were insured last year.
“Relative to gross domestic product, we estimate that the insurance loss burden from catastrophes has more than doubled over the last 30 years,” reads the report. “And, extrapolating our estimated long-term trend rate of 5%-7%, we estimate that today’s burden could double over the coming decade.”
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The main drivers of rising losses are economic growth, urbanisation and the associated accumulation of assets that need insuring. According to Lasse Wallquist, Head Sustainability at Swiss Re Corporate Solutions, the protection gap is particularly prominent among developing countries in Asia, where only a fraction of natural disaster events are covered by insurance.
“This is a tragedy, because it shows that big parts of society are not protected and cannot bounce back from such events,” says Wallquist, who is an environmental scientist by training with a PhD in environmental sciences from ETH Zurich.
Wallquist: The climate insurance protection gap is particularly prominent in Asia, a region most affected by the impact of human-caused climate change. Photo: Swiss Re
People in developing nations, particularly the poor and vulnerable, are often the ones who suffer the most from the impact of human-caused climate change, which is driven by the emissions of a wealthy minority. Only recently have international governing bodies and parties begun acting on it.
Much of this disparity, known as “loss and damage”, has been discussed at length at previous iterations of the United Nations’ annual climate change conference, COP.
At last year’s COP28, wealthy countries pledged over US$700 million to the loss and damage fund, set up to help developing countries cope with the effects of climate change. And yet this figure is only equivalent to less than 0.2% of the irreversible economic and non-economic losses developing countries are facing from global heating every year. Estimates for the annual cost of the damage have varied from US$100 billion to US$580 billion.
And insurance is indeed becoming more expensive because of climate change, making it even more difficult for non-wealthy parties to own or continue to pay for higher premiums and more expensive coverage.
Traditional insurance or just insurance in some instances will not be sufficient alone, says Wallquist. He adds that it may become an uneconomical risk management strategy in some areas of the world in the future of climate change.
Climate adaptation and mitigation
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He uses an exposed beachfront property as an example. Under future scenarios with a sea-level rise resulting in a storm surge, the expected loss on a dislocation for this particular beachfront property becomes “uneconomical”.
“If you expect the full damage of the property to be paid out every three years, it’s not worth it right? You can’t pay the insurance premiums that would need to be paid to cover for that,” he elaborates. “So, it becomes more economical to either build a physical protection or just to relocate.”
Already, the insurer has a team of almost 200 risk engineers worldwide, specialising in various industries, who work on-site to assess the vulnerability of assets and projects. According to Wallquist, Swiss Re’s risk data services platform gives clients insights into analysis conducted by its team of experts, and recommendations for mitigation and adaptation.
The insurer works to ensure that the solution is mutually beneficial to both parties, as frequent insurance payouts is an expensive option.
“We can recognise certain measures to adapt that a corporation is taking may have a positive impact on the insurance premium that they have to pay, because we recognise that the expected loss will go down due to protection measures or adaptation measures that have been taken,” Wallquist adds.
Insurance companies have been caught in the crosshairs of the impact over climate change of late. Several major companies in the US have found themselves facing pressure from all parties — while they are raising premiums and cutting back coverage because of more damaging storms and wildfires, which are made worse by climate change; they also insure the fossil fuel producers whose products are blamed for causing climate change. In addition, as investors, they also hold these same companies in their portfolio.
Yet, Wallquist is firm that the insurance industry today is a big player in mobilising climate finance. For one, insurance is often legally required by governments for businesses that want to build projects. The purpose is to give investors and stakeholders the confidence that this project is bankable, he explains.
The environmentalist cites the team’s renewable energy project financing of a hydroelectric power station in Nepal. The Upper Trishuli-1 Hydropower Project located 70km northeast of Kathmandu is one of the largest foreign direct investments in Nepal, but the 2015 Nepal earthquake severely hindered the progress of the project and made traditional insurers reluctant to provide coverage for earthquakes in the remote location of the dam.
A lack of insurance coverage would have negatively affected the project’s investment potential, and so a parametric insurance coverage deal was struck between lead lender IFC, insurance adviser Aon and Swiss Re, which ultimately enabled the power station project to progress.
“So the whole construction period of that hydropower plant was covered for over a five-year period, and that provided the stakeholders the necessary peace that ultimately enabled the project,” says Wallquist.
As for the links between insurance companies and some of the biggest environmental polluters in the world, Wallquist says that the industry is aware that they have to “get out of some of the legacy high-emitting technologies”.
Swiss Re first made known its stance on thermal coal back in 2018, giving investors an early notice that the firm has a “limited risk appetite” beyond 2030 and 2040, a timeframe that it adopted from the International Energy Agency, among others.
Regardless, Wallquist believes insurers and reinsurers will continue to be key enablers to mobilise finance to tackle climate change through adaptation and mitigation, even more so in the future.
“We will remain key to advancing the transition to net-zero. When you look at the massive investments that need to be made, they will need insurance protection,” he says. “So, in combination with the continued increase of natural catastrophe losses, both on adaptation and mitigation side, the role of insurance will continue to grow.”
