Working Group II: Impacts, Adaptation and Vulnerability

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8.1. Introduction

Our definition of the financial services sector includes private and public institutions that offer insurance, disaster preparedness/ recovery, banking, and asset management services. Analysis of the financial services sector provides a unique opportunity to quantify the potential socioeconomic impacts of climate change and offers a barometer of effects on other sectors (including the government sector). The Intergovernmental Panel on Climate Change (IPCC) Third Assessment Report (TAR) highlights insurance and other components of the financial services sector because they represent a risk-spreading mechanism through which the costs of weather-related events are distributed among other sectors and throughout society. The sector also is among the world's largest and is captured less effectively in other parts of the TAR. The financial services sector also stands to play a central part in adaptation and mitigation activities and is a major source of global and regional data on the costs of weather-related events (Mills, 1996; Changnon et al., 2000; Kunreuther, 2000).

This chapter is about the impact of climate change on the financial services sector, as well as the way this sector can adapt and help society to adapt to climate change. Still, little can be said about the total financial cost of adapting to climate change. Short-term effects are likely to be felt most through changing frequencies and intensities of ordinary and catastrophic weather events.

The Second Assessment Report (SAR) chapter on financial services concluded that "within financial services the property insurance industry is most likely to be directly affected by climate change, since it is already vulnerable to variability in extreme weather events" (Dlugolecki et al., 1996). Experience and analyses over the past 5 years has confirmed the trend of growing weather-related damage costs since the 1950s (see Section 8.2).

The vulnerability of and challenges for the insurance sector, private and public, are addressed in Section 8.3. Section 8.4 discusses the implications for other financial services, such as corporate, retail, and investment banking. There is evidence that the banking and insurance industries have become more aware of opportunities and threats with regard to climate change since the SAR. However, little information is available on climate change impact and adaptation implications for the banking sector.

Climate change impacts are expected to be greatest in the developing world. There is only limited penetration of or access to insurance in these regions. This situation makes these regions more vulnerable and will impair their ability to adapt. Over the past few years, several multilateral organizations and banks have taken initiatives to develop new financial schemes for coping with natural disasters in developing countries (see Section 8.5).

Issues regarding funding for adaptation are addressed in Section 8.6. Although knowledge about the financial services sector, private and public, generally has increased since the SAR, major questions remain. Research could help explore the potential roles of the sector in helping society respond to the challenge of climate change (see Section 8.7).

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