What does Economics of Climate Adaptation mean for insurance?

Interview with David Bresch, Head of Sustainability & Emerging Risk Management

For whom is the Economics of Climate Adaptation (ECA) written?

Our focus has been on giving country and local level decision-makers the facts and framework to design an adaptation strategy and to demonstrate the role of insurance risk transfer measures. We took a bottom-up, problem-solving approach, moving away from global estimates of what adaptation funding may be required. It was therefore important to use local, case studies to test out the methodology and understand how expected losses would develop under different climate change scenarios. We chose 8 locations, US-Florida, UK-City of Hull, India, Guyana, Tanzania, Mali, China and Samoa to cover a range of climate risks, levels of economic development and potential adaptation measures.

What is total climate risk?

Interestingly, we found that countries and regions are not organised to develop an overview of the total climate risk (TCR) faced by their communities. By TCR we mean the combination of climate risks today, the value and concentration of future economic development and the effects of on-going climate change. Of course, TCR is nothing new for reinsurance because it is important for modeling and pricing risks, but it emerged as one of the key findings of the report that societies need to understand TCR to prioritise the risks they face and to plan how to either avoid or adapt to them. This is why we also support the development of a Country Risk Officer role that would be able to supply this risk perspective moving forward

So what role does the insurance play in ECA?

Insurance measures are set to play a key role in adaptation. This is already reflected in the discussions in the run up to Copenhagen. The ECA study has demonstrated that reinsurance addresses low frequency, high-severity weather events such as one-in-100 year floods, where it is often the most cost effective measure. Additionally, the insurance industry is an important partner in future adaptation plans because of its experience in risk management and modeling, and developing new insurance products, especially those based on risk-based pricing.

Who has been involved in the ECA project?

ECA has been a collaborative project with input and funding from Swiss Re, McKinsey, Global Environment Facility, European Commission, the Rockefeller Foundation, Climate Works, and Standard Chartered Bank. The work was informed by an advisory group of leading academics and experts on adaptation. We have learnt a great deal from having these different stakeholders involved, for example in how adaptation funding can support broader sustainable development goals in poorer countries. Swiss Re was the lead contributor to the research. It defined the assessment and risk modeling approach and provided overall risk assessment knowledge to bear on the challenge of quantifying climate risks.

What happens next?

Our vision is that countries and regions can use a more advanced version of the ECA approach to make decisions on how face up to and become more resilient to the total climate risks they face. Specifically for Swiss Re, we are engaging in dialogue with clients, governments and other stakeholders to further define how we and the insurance industry can play a productive role in delivering solutions to the challenges of climate change.

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