Opinion by Nyasha Madzingira, Client Manager in Aon South Africa’s Commercial Risk Solutions Division. 

Climate change is a hotly debated environmental risk and with a marked increase in the frequency and severity of extreme weather events as outlined by Aon’s Annual Catastrophe Report, there is a rising concern that weather catastrophes will impact the sustainability of insurance businesses.

Climate change is driving massive financial losses – both insured and uninsured.  Actuarial models have also established a correlation and causality between weather variables such as changes in temperature, precipitation and wind speeds and insurance losses experienced as a result.

• Weather events from floods, storms and droughts have translated into massive losses. Global weather-related losses in 2020 equated to US$268bn of which only US$97bn was insured.
• During 2020 the temperature increased by 0.98°C above the Twentieth Century Average, recording the second warmest year on record for land and ocean temperatures since 1880.
• In 2020 the strongest landfalling storm ever recorded globally was Typhoon Goni in the Philippines with a landfall wind speed of 315km/h.
• The International Disaster Database recorded90 noticeable weather-related disasters in South Africa since the early 1980s. These events caused R95bn in associated economic losses and directly affected around 22 million South Africans.

The findings show that it is imperative that the insurance industry comprehensively incorporate climate change into its business strategy to minimise exposure to weather-related losses, by adopting sound enterprise risk management strategies. Risk analysis and solutions that are spearheaded by the insurance industry will greatly facilitate and encourage behaviour that strengthens risk mitigation, resilience and adaptation to weather-related damages. Emerging climate change risks are of such a nature that it is likely to change the way insurance businesses are operated.

So how can the insurance industry manage climate change risks and opportunities to remain viable?

#1:  The viability of the insurance business is based on the ability to underwrite profitably

The insurance industry must review current pricing models to include weather-related risks at the underwriting and pricing stage as climate change risk affects all classes of insurance. Underwriting should include weather risk assessment and changing levels of exposure, as an unanticipated increase in weather losses can disrupt claims assumptions. Strategies such as implementing a peril rating underscored by powerful underwriting systems can assist insurers to charge appropriately risk-rated premiums. A sophisticated underwriting system geocoded to a policyholders’ risk profile and address can predict catastrophic losses in vulnerable areas, estimating the possible frequency and severity of weather claims before they occur. This will aid insurers to prepare in terms of capital reserves, assessment arrangements, expertise and staff required to handle or manage weather-related claims.

#2:  Evolving claims management models

Claims management models should evolve and be aligned to emerging climate change risks using weather data to predict possible weather losses to optimise claim reserves before such a loss occurs. Providing policyholders with weather-related data and educating them on how to prevent weather damages that can lead to a claim can greatly aid in minimising the frequency and severity of claims. From a response perspective, the improvement of claim management systems and technologies will increase the capacity and ability to speed the claim process up in the event of a weather catastrophe.

#3:  Proactive and comprehensive portfolio management

Enabling growth and profitability in the insurance industry involves managing risk exposures, monitoring, protecting and enhancing the book of business. Knowing a client’s nature of assets and risk profile can also help insurers to recommend appropriate coverage, risk management strategies and loss prevention techniques to minimise loss exposures in the face of increasing weather-related losses.

#4:Human and capital development

Human and capital development focusing on climate risk management is also crucial. Since climate change is an emerging risk, insurers might not have adequate personnel or experts trained in climate change and weather risks. Implementing training and development programmes on how weather-related risks should be handled at both underwriting and claims stages is key. Building human capacity and investing in developing specialised expertise in the field of climate change is fundamental in addition to implementing staff and business stakeholder educational programmes on climate risk management. This will equip employees to manage climate risk and advise clients appropriately, leading to a better understanding of climate change risks and minimising losses.

#5:  Review underwriting, claim models and incorporate climate change

Unanticipated increases in weather losses can disrupt insurance statistical underwriting and claims assumptions unless climate change is incorporated into underwriting claim models. It will assist in proactively managing capital requirements and expected claim expenditure to ensure sustainability and viability. As economies transition to low-carbon processes, insurers should seek opportunities to grow their business through insurance products that promote and support green energy projects, initiatives and installations, while educating clients, partnering up with researchers and public authorities to improve risk mitigation and resilience. As the carrier of weather losses the insurance industry needs to be at the forefront of product development and risk management strategies that measure up to the emerging climate risks, as well as motivate business to transition to green business models.

With climate change playing an increasingly prominent role in weather-related damages in South Africa, it is crucial that the insurance industry becomes knowledgeable of developments in the climate and weather space and plays an active role in mitigating the risk it poses to the quantum and severity of short-term insurance claims in South Africa. It is in our industry’s best interests to promote and drive a green agenda that seeks to support our clients in transitioning to more sustainable, environmentally-aware business models, for all our sakes, and for now and the future.

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