Working Group II: Impacts, Adaptation and Vulnerability

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3.7. Insurance and Other Financial Services

The costs of ordinary and extreme weather events have increased rapidly in recent decades. Global economic losses from catastrophic events increased 10.3-fold from 3.9 billion US$ yr-1 in the 1950s to 40 billion US$ yr-1 in the 1990s (all in 1999US$, unadjusted for purchasing power parity), with approximately one-quarter of the losses occurring in developing countries. The insured portion of these losses rose from a negligible level to 9.2 billion US$ yr-1 during the same period. Total costs are a factor of two larger when losses from smaller, non-catastrophic weather-related events are included. As a measure of increasing insurance industry vulnerability, the ratio of global property/casual insurance premiums to weather related losses fell by a factor of three between 1985 and 1999. [4.6]

The costs of weather events have risen rapidly despite significant and increasing efforts at fortifying infrastructure and enhancing disaster preparedness. Part of the observed upward trend in disaster losses over the past 50 years is linked to socioeconomic factors, such as population growth, increased wealth, and urbanization in vulnerable areas, and part is linked to climatic factors such as the observed changes in precipitation and flooding events. Precise attribution is complex and there are differences in the balance of these two causes by region and type of event. [4.6]

Climate change and anticipated changes in weather-related events perceived to be linked to climate change would increase actuarial uncertainty in risk assessment (high confidence6). Such developments would place upward pressure on insurance premiums and/or could lead to certain risks being reclassified as uninsurable with subsequent withdrawal of coverage. Such changes would trigger increased insurance costs, slow the expansion of financial services into developing countries, reduce the availability of insurance for spreading risk, and increase the demand for government-funded compensation following natural disasters. In the event of such changes, the relative roles of public and private entities in providing insurance and risk management resources can be expected to change. [4.6]

The financial services sector as a whole is expected to be able to cope with the impacts of climate change, although the historic record demonstrates that low-probability high-impact events or multiple closely spaced events severely affect parts of the sector, especially if adaptive capacity happens to be simultaneously depleted by non-climate factors (e.g., adverse financial market conditions). The property/casualty insurance and reinsurance segments and small specialized or undiversified companies have exhibited greater sensitivity, including reduced profitability and bankruptcy triggered by weather-related events. [4.6]

Adaptation to climate change presents complex challenges, but also opportunities, to the sector. Regulatory involvement in pricing, tax treatment of reserves, and the (in)ability of firms to withdraw from at-risk markets are examples of factors that influence the resilience of the sector. Public- and private-sector actors also support adaptation by promoting disaster preparedness, loss-prevention programs, building codes, and improved land-use planning. However, in some cases, public insurance and relief programs have inadvertently fostered complacency and maladaptation by inducing development in at-risk areas such as U.S. flood plains and coastal zones. [4.6]

The effects of climate change are expected to be greatest in the developing world, especially in countries reliant on primary production as a major source of income. Some countries experience impacts on their GDP as a consequence of natural disasters, with damages as high as half of GDP in one case. Equity issues and development constraints would arise if weather-related risks become uninsurable, prices increase, or availability becomes limited. Conversely, more extensive access to insurance and more widespread introduction of micro-financing schemes and development banking would increase the ability of developing countries to adapt to climate change. [4.6]

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