Over the course of the past decade a cluster of environment-related risks, notably extreme weather events, failure of climate change mitigation and adaption as well as water crises, has emerged as a consistently central feature of the Global Risks Perception Survey risk landscape. That’s along with strong connections to other risks such as conflict, migration, weapons of mass destruction, unemployment and underemployment, say international trackers of risk and risk management.

In fact, according to the WEF’s 2017 Global Risks Report released earlier this year, the environment dominates the 2017 global risk landscape in terms of impact and likelihood. Extreme weather events, large natural disasters and failure to curb greenhouse gas emissions and build resilience to climate change are the most prominent global risks identified in the report. Meanwhile, climate change ranks as one of the top three trends to shape global developments over the next 10 years.

Since the 1950s, the frequency of weather-related catastrophes such as windstorms and floods has increased sixfold. As climate-related risks occur more frequently, previously insurable assets are becoming uninsurable, and those already underinsured are further compromised. Also, the gap between total economic losses and insured losses, known as risk protection gap, is widening.

Risk protection gap refers to an increasing divide between economic and insured losses as a result of climate change, and many health and other types of insurers have started offering tailormade products such as medical aid gap cover to close the divide. Globally, the economic impact of these natural catastrophes is growing quickly, with total losses increasing fivefold since the 1980s to around $170 billion today.

Over the same period, the average annual protection gap has widened quickly from $23 billion to $100 billion today, according to ClimateWise, a global network of 29 insurance industry organisations in collaboration with the Cambridge Institute for Sustainability Leadership (CISL), a unit of the University of Cambridge.

The network shares a commitment to reduce the impact of climate change on society and the insurance industry and, as stated in two of its reports, Investing for Resilience and ClimateWise Principles Independent Review 2016, insurers should align their asset management, underwriting and risk management to support green bonds, resilience impact bonds and invest in resilience-enhancing infrastructure. Recent analysis by ClimateWise member, Swiss Re, found that on average, around just 30% of catastrophe losses were covered by insurance in the 10 years prior to 2014, leaving about 70% ($1.3 trillion) carried by individuals, firms and governments.

Nico Esterhuizen, general manager: insurance risks of the South African Insurance Association (SAIA), says it’s important that investors and companies make ‘resilience investments’ to mitigate the impact of climate change.

‘Resilience investments challenge traditional approaches to cost-benefit analyses because communities have very high-value assets like hospitals, power plants, water and sewerage plants, transportation and communication networks. This necessitates qualitative and quantitative inputs into a decision-making framework for disaster resilience.’

Esterhuizen says climate change poses risks to all businesses in economic sectors, mainly due to altered weather patterns that have developed across the world as a result thereof. ‘For instance, South Africa is experiencing more flash floods, and longer and more intense droughts than in the 1950s when climatic events first started being monitored and measured. Traditional rainy seasons are shorter with stronger downpours that presently result in more frequent flash floods of two to three days. And our droughts last longer and are more severe and intense.’

Citing the commercial farming sector to illustrate the impact of climate change on business, he says it’s not only the farmer but each business in the agricultural value chain – including banks that lend money in the form of production loans and other types of credit, right down to the consumer, who feel the impact.

‘Economic sectors like the financial, manufacturing, retail, chemical and even animal and plant health services are exposed to agriculture to a lesser or greater degree.

‘So climate change and changed weather patterns increase the risk to everyone in the value chain as well as the individual consumer, who at the end of the day faces higher food prices along with erratic food security.’

In SA, food inflation reached 12% by the end of 2016 and peaked at 10% by February this year amid one of the most severe droughts the country and sub-Saharan Africa have experienced in the past 60 years. Esterhuizen says it has become imperative that businesses, in co-operation with their insurers, cushion themselves more effectively against the risk of suffering climate change-related losses. Resilience investments differ from country to country and region to region, depending on the prevailing risks. ‘For instance, take the question of South Africa’s critical shortage of clean drinking water. If national and local government were to better resolve this issue and reduce the associated risks of disease and the high cost of transporting clean drinking water to communities by road and truck, one can simply increase the amount of reeds that typically grow in and around wetlands. The reeds act as a natural water purification system and release clean water into the system.’

Esterhuizen adds that the same goes for building artificial sea walls at coastal areas to contain the force of the waves that can damage property and injure people.

‘These types of investments are not always easy to quantify in terms of cost versus benefits, but it does illustrate how essential new thinking and approaches have become to effectively deal with climate change-related risk and how possible it is to prevent the damage simply by adopting new ways of problem-solving.’

Elsewhere on the continent, Santam (SA’s biggest short-term insurer) and ICLEI Africa (the African secretariat of the world’s leading network of more than 1 000 cities, towns and metropolises committed to building a sustainable future) initiated the so-called CIP AIRR pilot project in Dar es Salaam, which typifies a ‘resilience investment’.

They work closely with the UN Environmental Programme Finance Initiative, Principles for Sustainable Insurance and ClimateWise – the global insurance industry’s leadership group that drives action on climate change risk. They’ve been joined by global insurance brokers Marsh. Other partners are in the process of joining, some of which were involved in the successful 2014 Cape Town pilot, out of which the Dar es Salaam pilot evolved.

The pilot, known as the City Innovation Platform for African Infrastructure Risk and Resilience (CIP AIRR), aims to support emerging economy cities to better manage the climate risk protection gap and to find ways to improve the quality of decision-making around urban infrastructure projects in Africa. The CIP AIRR pilot, which culminated in a gathering of private sector industry players and city officials in Dar es Salaam in 2016, was sparked by concerns that the traditional development model for public infrastructural projects is vulnerable to high levels of risk, often as a consequence of a lack of city level information or expertise to address key infrastructural development decisions.

The aim was to identify how the insurance sector can more proactively and collaboratively manage the risks associated with public infrastructural development, thereby increasing their resilience.

Vanessa Otto-Mentz, group strategy unit head at Santam, says: ‘With this collaborative model between local and international insurers and the Dar es Salaam city leadership, we’re hoping to more effectively manage the risks and opportunities associated with key public infrastructural projects.

‘This deviates from the past whereby insurers entered the process only once many of the development decisions had already been made. This way it enables the insurance industry to support more informed decision-making from the start of public infrastructure development projects.

‘CIP AIRR provided a space where private and public sector representatives were able to discuss challenges and solutions openly and constructively, giving officials an opportunity to learn more about the contribution insurers can make to managing risk. The private sector was similarly exposed to the city’s perspective on the challenges faced in balancing key development decisions with social, economic and environmental needs,’ says Otto-Mentz.

She adds that on the business risk side, clients and businesses will have to start taking precautions on two fronts: firstly to mitigate against risk and secondly to adapt to new risks.

‘To mitigate requires us to go green earlier rather than later in order to limit and put the brakes on further climate change in the future. We can do that through, for instance, constructing more environmentally-friendly buildings powered by renewable energy and fitted with clean technologies.

‘Business needs to understand that the environment and associated risks have already undergone change – like altered weather patterns, for instance – which makes it imperative that we find new ways of managing risk. This applies to medical aid, life and personal insurance.’

She refers to a 2014 poll of US citizens that found that only one in four Americans were able to name a single way in which climate change was harming their health, adding that new risk-management approaches must be adopted by all insurers.

By Louise Brougham-Cook
Image: Gallo/GettyImages