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Dr. Thomas Loster, a geographer who advises the Munich Re Foundation, told those attending the current United Nations Environment Program (UNEP) Conference in Nairobi that, “Most insurance and re-insurance companies have no doubt that the rising tide of losses from weather-related disasters is linked with climate change. The possibility of a one trillion dollar loss year is one scenario out of many, but whatever the precise figures the losses are already large and set to increase.”
The statement came as part of the UN’s Climate Change Working Group in a report called “Adaptation and Vulnerability to Climate Change.” It focuses on “The Role of the Finance Sector” in dealing with environmental problems and is featured in this, the closing week, of the talks in Nairobi.
UNEP’s bulletin explained that the “one trillion dollar loss year has been modeled by Andlug Consulting on behalf of the UNEP FI Climate Change Working Group report. The scenario says “long term trends indicate that losses, as a result of windstorms, storm surges, droughts, floods and other extreme natural disaster events, are doubling every 12 years.” The new scenario modeled by Andlug Consulting “also takes into account other factors including the point that so called great disasters appear in clusters one in three years. Making allowance for such clusters, and for the inclusion of all costs, it seems likely that there will be a ‘peak year’ that will record losses of over one trillion USD before 2040. In fact, since so much development is taking place in coastal zones, the figure may arrive considerably before 2040”
In perspective the conference bulletin describes the current situation as follows: “Widespread insurance cover has been generally confined to developed countries where consumers, businesses and industry have in the past been able to pay for premiums. However, the time has come to forge public private partnerships to bring new kinds of creative financial instruments to developing countries where the impacts of climate change are likely to hit hardest, insurers and banks argue. Otherwise the costs of coping with a rising tide of full scale, climate-linked, natural disasters could outstrip current levels of humanitarian aid putting increasing strain on international aid budgets.”
The report noted, however, that “some promising initiatives are already underway.” Earlier this year France’s AXA Group teamed up with the United Nations World Food Program to insure that funds would be available in Ethiopia to make up for potential crop failures (See IJ Website March 9). AXA Re underwrote an innovative weather derivative transaction, which would provide up to $7.1 million to Ethiopian farmers, if rainfall levels fall below certain parameters, indicating that a drought and famine are likely to occur.
“Other projects are being examined to assist pastoralists, with payments triggered when the condition and availability of forage for livestock deteriorate below a pre-determined point.” the bulletin continued. “The new report also highlights how microfinance institutions in India, working with the re-insurer Swiss Re, are assisting farmers in Andhra Pradesh use ‘weather hedges’ against lower than expected monsoon rains. Community-wide cover of around 150,000 dollars is in place for an annual premium of just 1,600 dollars.”
Achim Steiner, UN Under-Secretary General and Executive Director of the UNEP, commented: “Adaptation to climate change is a wide ranging issue which is already touching on every facet of economic and development life. The finance, insurance and re-insurance industry is skilled in the management of risk. In the past, this creativity has been largely confined to covering people and populations in developed countries”.
The report, “Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector,” is produced by UNEP’s Finance Initiative. www.unepfi.org. The working group consists of Aviva, AXA, Bank of America, Calvert Group, Development Bank of Japan, Allianz-Dresdner Bank, Garant, Grupo Santander, HSBC, Insurance Australia Group (IAG), Japan Bank for International Cooperation, NATCAT SERVICE, Sustainable Asset Management, Swiss Re and UBS.
The full report and additional information o n the conference is available at: http://www.unep.org. Further information on Munich Re’s efforts to examine the consequences of global warming and climate change, as well as the reinurser’s latest report may be obtained on the Group’s Website at: www.munichre.com.