A Working Group's Study Maps Solutions to Climate-Related Catastrophe Losses

A new (and lengthy) argument has been added to the hotly debated issue of climate change and its potential costs, in the form of a 164-page report from the Economics of Climate Adaptation Working Group.

The report, "Shaping Climate-Resilient Development," argues that climate-change risks could cost nations up to 19% of their gross domestic product by 2030, with developing countries taking the brunt of the hit. The report also argues that between 40% and 68% of that economic loss can be prevented if "cost-effective adaptation measures" that already exist are implemented in problem areas.

The study was put together by a "core team" of organizations led by Swiss Re and including the U.N. Development Program, European Commission, Rockefeller Foundation, Standard Chartered Bank and others. Dozens of organizations and individuals worldwide contributed.

At the core of the study, the ECA working group tested its methodology in eight countries--China, United States, Guyana, Mali, United Kingdom, Samoa, India and Tanzania--which the group said represent "a wide range of climate hazards, economic impacts and development stages."

Findings from these eight case studies point to "easily identifiable and cost-effective measures for reducing potential economic losses related to climate change. Such measures include improved drainage, sea barriers, and improved building regulations, among others. Most of these measures "could deliver economic benefits that far outweigh their costs--with adaptation measures that on average cost less than 50% of the economic loss avoided," the group said.

Role of Insurance

Measures taken by insurers and reinsurers to mitigate risks linked to climate change can be helpful, but are limited for economic reasons--most importantly, the fact that some of the most vulnerable regions to climate-related disaster have the least developed insurance markets.

The report cites reinsurers as a valuable source of data and the loss models derived from it. These models and their databases mapped the changing risk patterns of specific hazards in specific locations, providing "a powerful starting point for assessing and addressing climate risk."

But this knowledge base has some "widely acknowledged gaps," and these gaps are what the ECA working group was created to address.

The ECA based its study partly on the "natural catastrophe method" used by the insurance industry to evaluate and estimate the potential losses from catastrophes, using historical data along with models that take into account current assets at risk.

As part of the risk-mitigation solution, insurance can play a dual role, according to the report. First, and most obviously, the financial impact of a natural disaster can be lessened by access to insurance payouts. Second, insurance can act as an incentive to take steps to minimize exposure to such losses.

"Property set insurance premiums can, in principle, send appropriate signals to policy holders to undertake adaptation measures to reduce exposure to various risks, including those posed by climate change," the report said.

Insurers can be influential in less traditional risk transfer markets, such as weather-based index insurance, which can be implemented in developing economies such as India. Index insurance products have low operating costs, and "do not present the risk of adverse selection, thus ensuring a higher level of fairness by limiting cross-subsidies between policy holders," according to the report.

In sum, the ECA working group's report presents an optimistic view of the climate change problem in that solutions exist--they just need to be implemented where needed. And the insurance industry would play a leading role in that effort.