In 2021, on one side of the world in the US and Mexico, an extreme and historic cold snap wiped out billions of dollars in livelihoods and was later followed by an unprecedented North American heatwave in June. In Europe in the same year, unprecedented flooding caused the greatest climate-related loss to the European economy in modern history, and in the continent of Africa severe drought in East Africa continues to affect some of the poorest communities in the region.
We are already seeing the effects of climate change on a daily basis through weather and climate patterns that feed into the frequency and severity of events that were previously thought unlikely to occur until the end of the century but are happening today. With those extreme weather events come escalating damage and costs to the economy, to livelihoods and to lives – and the poorest are still the most at risk and the least protected or able to rebuild. However, there is still time to act according to the Intergovernmental Panel on Climate Change (IPCC), and the way forward has to be to mobilise insurance to tackle these issues – particularly the “protection gap” experienced by the poorest communities.
Our work has shown that between 65 to 80 per cent of losses due to climate change-related weather events are uninsured. Even in mature and leading markets, such as the US, there are years where over 50 per cent of losses are uninsured. But there is clear global inequality. In Asia, Africa and Latin America, that uninsured percentage is much higher, and the frequency of large-scale, repeated and complex disasters greater. This is where we see quick shifts from extreme drought to extreme flood back to extreme drought, which can result in food insecurity challenges that can initiate geopolitical risk. These communities need to rely on national and local governments to provide funding through partnerships to respond and rebuild.
This is where new insurance schemes, working with the public sector and with aid agencies, can have real and positive impacts on communities affected by climate change, which includes helping the underserved to build and meet resilience needs. Parametric coverage, for example, will pay out based on whether a threshold, such as the amount of rain, earthquake magnitude or windspeed, is breached rather than based on a specifically assessed and recorded damage.
There are also moves around accessing more diverse forms of capital such as catastrophe bonds, where countries are working with the private insurance market and also with the World Bank and other large institutions, to create a pool of capital where a trigger method – similar to parametric insurance – allows for money to get into the hands of the people that need it most after an event has happened.
We also need to take action on adaptation. If you spend (invest!) money up front, you’re very likely to save even more money in the future, in addition to saving a lot of lives. We need to be appropriately investing in the modernisation of our infrastructure, we need to be investing in the communication of risk, and we need to be investing in making sure that the poorest areas of the world are being taught modern agricultural practices to limit the potential food insecurity.
One way that we are seeking new solutions around the emerging hazard risks of climate change is through collaborating with academic partners, who are looking into the climate change effects for various perils all around the world. As we discover new information, we are able to directly implement this research into various types of modelling, or other types of quantitative or qualitative analysis, to more clearly identify the highest-risk areas. This then allows us to work with private and public sector groups to develop new solutions. Such solutions could include a new type of tool, a type of new insurance product, or a visual-based mapping product to help identify places where we see emerging risk trends and work with governments to address them.
We cannot continue to build or meet the climate of yesterday because, as we know, things continue to accelerate forward. The insurance sector needs to work even harder to help others manage this volatility, while at the same time examining its own operations to ensure that continuous progress is being made towards a net-zero environment. We should continue building the systems and knowledge to prevent and mitigate disastrous events, and supporting communities to recover.
Steve Bowen is managing director and head of catastrophe insight at Aon.
You can download Aon’s 2021 Weather, Climate and Catastrophe Insight report.
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