The heat is on Insurability and Resilience in a Changing Climate Emerging Risk Initiative - Position Paper - The CRO Forum
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The heat is on Insurability and Resilience in a Changing Climate Emerging Risk Initiative - Position Paper
Notes: This paper frequently refers to insurers. When doing so this is intended to mean the insurance industry including reinsurers, insurers and distributors or brokers. This paper relies heavily on the Intergovernmental Panel on Climate Change (IPCC) for data and charts, drawn from SR15 and AR5 working papers.
The heat is on 3
Insurability and Resilience in a Changing Climate
Foreword
Global warming is underway, yet there are a wide range During our research we have been struck by the precarious
of potential outcomes relating to the timing and extent of situation, with the world currently on a path towards ‘too little,
future warming. Furthermore, there are potentially huge too late’. On the other hand, we are encouraged that the Paris
consequences under scenarios at the upper end of the range. target is technically achievable as recently set out by the IPCC,
Conversely, to achieve the Paris targets and restrict the extent IEA, EDC and others. It will, however, require a determined
of warming will require a massive and prolonged transition and wide-ranging set of transition policies and programmes
effort, unprecedented in scale and duration, which may be (sustained at several times the pace of current transition
orderly or disorderly. activity).
Therefore, climate change is a risk of an unusually broad and We have approached the topic as risk managers, so we give
rich nature, and many regard it as the greatest risk currently due attention to the downside risks as well as the central
facing humanity. Although it has been recognised as a key projections gathered from existing research and publications.
emerging risk for some time, the CRO Forum decided now We consider assumptions and mitigation plans with a critical
was a good time to focus on it, given its increasing urgency, eye, bearing in mind the context and any empirical evidence of
complexity, wide range of scenarios and the pervasiveness of their relevance and effectiveness. At times we have not shied
its impacts. away from expressing our opinion.
The intention of this position paper is to provide insurance I would like to thank our external reviewers, Professor Joanna
sector CROs and their colleagues, and wider stakeholders, Haigh, Professor Peter Höppe, Dr Maryam Golnaghi of the
with a clear understanding of what climate change implies Geneva Association and Professor Sonia Seneviratne, for
for the insurance industry, both from an underwriting and giving up their time and for their insightful comments. Any
investment perspective, and to equip them to challenge their errors are ours, not theirs.
businesses and clients in their responses to climate change.
And I would like to express my gratitude and respect for my
Existing research on climate change is broad and extensive. colleagues on this CRO Forum working group, from Allianz,
This paper does not aim to replicate this research, but to AXA, Generali, Hannover Re, Munich Re, NN Group, Prudential,
navigate the main issues, and provide a clear and up-to-date Swiss Re, SCOR, Uniqa and Zurich Insurance Group, for their
view of the climate change challenge, centred on the potential energy, insight and active participation in the production of this
impacts on the insurance sector. This covers implications for: paper, and in particular to Luke Watts from RSA for organising
and facilitating the entire project and for careful editing. It is the
yy underwriting of climate change related risks (and the collaborative efforts of all that result in what we hope you will
important question of insurability); find a balanced and thought-provoking summary of the climate
yy investment activities; and change issues facing insurance.
yy reporting and disclosure.
The paper also considers the social role of the insurance
William McDonnell
industry and its responsibility to support the wider societal Group Chief Risk Officer, RSA Insurance
effort to transition to a lower carbon world, and to influence
civic and infrastructure planning decisions now to help avoid January 2019
an insurability gap in the decades ahead.
Table of Contents
Foreword 3
Executive Summary 6
1
Introduction 8
1.1 The globe is warming 8
1.2 Current assumptions on climate change 9
1.3 Key physical tipping points 11
1.4 Transition risk 13
1.5 Economic implications 14
2
Climate Change Scenarios 16
2.1 Under 2°C scenario (Paris targets met – steep transition) 18
2.2 +3°C scenario (More severe physical impacts) 22
2.3 +5°C scenario (Physically devastating) 23
3
Implications for Insurers and their Customers 24
3.1 Insurability 24
3.2 P&C underwriting 27
3.3 Life underwriting 31
3.4 Investment implications and stranded assets 33
3.5 Transition risk and socio-economic factors 34
4
Insurance Industry Responses 36
4.1 Resilience, mitigation and adaptation 36
4.2 Supporting societal change – a social role for the insurance industry 38
4.3 Tackling climate risks through investments 39
5
Climate Related Financial Disclosures 41
5.1 Towards better climate disclosure 41
5.2 Accountability and measurement 42
5.3 Challenges and ways ahead 43
Conclusion 45
Appendices:
Concentration pathways and scenario definitions
Glossary
Bibliography
The
Theheat
Parisistarget
on (1.5-2°C) to limit dangerous physical 5 To hit the Paris targets will require a long, profound
Insurability
effects ofand Resilience
climate changein ais Changing Climateto meet.
vital but tough transition. This means major changes to energy, industry,
Research indicates that 3-4°C warming is most likely. freight, heating etc, sustained and extended to deliver
There is a risk of >5°C which would be catastrophic. large new emissions cuts every year, decelerating fast
throughout 2020 to 2070.
Probability of 50%
warming Rate of acceleration of CO₂ emissions over time
by 2100 (°C) RCP4.5
accelerating
RCP6.0
WWII
WWI RCP8.5
RCP*2.6
RCP4.5/6
5% 0
RCP8.5
decelerating
Iran, RCP2.6
Great oil crisis
5% Depression Financial Huge
1% effort to
crisis
decelerate
1%
Data from IPCC fast enough
Paris
0 1 2 3 4 5 6 °C 1850 1900 1950 2000 2050 2100
* See page 48 for a description of RCP
Warming by 2100
The heat is on 6 Executive Summary Insurability and Resilience in a Changing Climate Executive summary Despite growing concern, 2018 again set new records in global Research suggests probable warming of 1-6°C above pre- consumption and greenhouse gas emissions. The carbon industrial levels by the end of the century, depending on the budget (i.e. the maximum cumulative emissions) consistent success of mitigating actions. Such increases may not sound with the
The heat is on 7 Executive Summary Insurability and Resilience in a Changing Climate design and carry out the difficult steps. Society must work together globally with each of us taking responsibility for our emissions footprint and with policies to prevent ‘free-riding’. Role of insurers Insurers have a unique role in the global effort to mitigate and adapt to climate change, as both providers of risk protection and as major investors managing c.$30 trillion of assets. In line with our primary functions, insurers will continue to work with customers, industry and governments to: yy Protect customers from the impact of physical perils. yy Provide risk management advice, and support mitigation, resilience and adaptation solutions. yy Maintain insurability, sustaining the real economy by planning ahead with governments, industry and society. yy Remain resilient, to continue supporting our customers. yy Provide long-term investment, including existing efforts to support greener technologies and transition activities. yy Support understanding of the financial and strategic risks of climate change through research and disclosure. Insurability and resilience Insurers can help fortify society’s resilience to climate change by continuing to invest in hazard models, promoting their use and advising on building codes and resilient engineering. This is urgent now to minimise a future insurability gap. Such is the scale of the threat, however, that insurability and affordability are likely to become an increasing concern: yy As hazard modelling becomes ever more precise, certain local peak risks may exceed capacity or become unaffordable to insure. Certain coastal or forest-fringe properties in USA are already on the edge of insurability. yy Governments can overcome some of the issues through pooling mechanisms that share the peak risk across a wider pool of participants; however, unless these are designed very carefully, they can make the problem worse by incentivising unsustainable development. yy However, in the more extreme warming scenario of >5°C, severe damage and disruption could become so frequent later in the century that many risks may be uninsurable, with a profound impact on the economy and on society. Ultimately the key to resilience for society, and also insurers, is to limit future warming by reducing emissions and adapting. Transition risk needs to be taken now to avoid physical risk in the future. The insurance sector is playing its part in current plans and is working on many fronts to do what it can to help the world achieve the vital goal of keeping warming to
The heat is on 8 Introduction
Insurability and Resilience in a Changing Climate
1
1.1
Introduction
The globe is warming of more extreme events, but also in
helping others take action to reduce
emissions or to adapt to climate effects.
Climate change is not some
far off problem; it is happening
here, it is happening now.
Barack Obama, former US President
snow-pack outside the polar regions.
yy Global mean sea-level has risen by
0.19m between 1901 and 2010.
Introduction Transitioning at the pace required will yy 50% of coral reef area has sustained
The science behind global warming and require concerted effort from all in major bleaching damage.
the role of greenhouse gases is clear and society.
generally accepted. While the physical However, this is just the start. There
effects of warming and climate change The signs of climate change are already are many potential repercussions. For
can be modelled, the full extent of apparent. Examples include: example, on the food chain even at 2°C
impacts on living conditions or societies yy New records for extreme weather warming, IPCC tells us the associated
are complex to predict. However, (downpour, windstorm, drought, acidification will destroy vital marine
enough is known to state that a failure to heatwave, wildfire) and more frequent ecosystems. The gravest for humanity,
act now has significant implications for events, as predicted by climate in the higher warming scenarios, may
the citizens of today and generations of models. lead to widespread loss of livelihood
tomorrow. yy The extent and thickness of the Arctic and food shortages as repeated extreme
polar ice-cap shrinking during the water and heat stresses progressively
Insurance has a key role to play not only summer months. impact farm production. Repeated
in protecting society from the impacts yy The rapid shrinkage of glaciers and extreme events may also strain
Figure 1 Global temperature change relative to 1850-1900 (°C) Figure 2 Range of °C increase for each RCP
IPCC SR15 FAQ1.2
Warming reached c.1°C above 1850-1900 in 2017 and is on course
for 1.5°C around 2040.
The heat is on 9 Introduction
Insurability and Resilience in a Changing Climate
and damage infrastructure. It is not
unreasonable to assume such effects
1.2 Current assumptions
will be accompanied by socio-political on climate change
upheaval, migration and conflict. We appear to be embarked on
With recent experience of extreme
a massive experiment where
weather conditions, climate change
Physical and transition risks the consequences are hard to
discussion has grown more prominent.
Before reaching these extremes, people
Within the scientific community there predict and the effects may be
and organisations will face the physical irreversible.
exists very clear evidence as presented
risks of increasingly abnormal weather
through the work of the IPCC, the Professor Lord Nicholas Stern,
(heatwaves, droughts, flooding, wildfires,
international body for assessing the Chair of the Grantham Institute, LSE
shifting storm patterns) and growing risk
science related to climate change.
of coastal flooding. Zones of vulnerability
will grow, affecting property values and
2018 has been a year with several
making investment harder. Outbreaks
extreme weather events. In the summer Alongside CO₂, increasing emissions
of human and agricultural diseases and
there was a global heatwave in the of other greenhouse gases (GHGs)
epidemics are likely to increase.
northern hemisphere, associated with arise from changes in land use from
deaths in Japan and Canada and fires deforestation and agriculture, primarily
As physical impacts become more
in California, Canada, Sweden, Spain methane (CH4) but also nitrous oxide
obvious and disasters more common,
and Greece. In the autumn of 2017 there (N₂O). Methane emissions are also rising
public opinion may shift, and with
were US tropical cyclones with unusually due to leakage or releases from the oil
it liability risks may grow for those
intense rainfall. As noted by IPCC, the and gas industry.
considered responsible.
attribution of individual extreme weather
events to warming is difficult. Recent Scientists have observed various
Insurability concerns will also grow.
and ongoing research is focusing on ongoing changes in the climate system,
For insurers to exist there must be an
attribution science and how climate which intensify global warming:
insurance need at an affordable price.
change affects the likelihood of extreme yy Temperature data of the combined
Seeking to maintain insurability, where
weather events occurring. land and ocean surface already
possible, to support adaptation and to
build increased resilience will not only be shows a rise of over 1°C compared
The IPCC provides policymakers with with the ‘pre-industrial’ average from
vital for society but also to the long-term
regular assessments of the scientific 1850 to 1900, with a greater rise on
role for insurance within society.
basis of climate change, its impacts and land than over the ocean. There is
This may become an issue of public
future risks, and options for adaptation already evidence that certain extreme
policy, where the question will be how far
and mitigation. The key takeaways from events (e.g. heatwaves, drought)
to spread or nationalise the risks so that
its last full assessment report, AR5, in are more frequent, linked to climate
insurance protection remains available
2014 were: change.
to individuals and organisations. Linked
yy Human influence on the climate yy The atmospheric water cycle is
with this is the need for long-term
system is clear. intensifying, with greater downpours
planning and adaptation.
yy The more we disrupt our climate, the and evaporation. Higher temperatures
more we risk severe, pervasive and raise the saturation point of air
As increasing efforts are made to
irreversible impacts. (by c.7% per °C) and accelerate
mitigate emissions, these give rise to
yy Any additional CO₂ emissions lead evaporation (by c.10% per °C). Also,
transition risks. The carbon budget to
to increased global warming with the as atmospheric layers warm and
achieve
The heat is on 10 Introduction Insurability and Resilience in a Changing Climate happening in succession. In turn, this ice mass loss contributes to a rise in clouds can release locally is growing could exacerbate extreme events like sea levels and may have an impact at much faster rates at or above 10% wildfires, as was the case in 2017 on global ocean circulation. There per °C warming. Evaporation is rising in California. An exceptionally wet is some evidence that the Atlantic at a similar rate. As a consequence, season led to growth of vegetation circulation system that includes the both flooding and large scale that dried out in the following drought Gulf Stream has slowed by c.30% droughts are likely to be dominant creating perfect conditions for since the late 1950s. loss factors; and due to increasing wildfires. The Western US wildfire yy The effect of Arctic ice loss on mid- temperatures and dryness, wildfires area has doubled due to these latitude weather has also become are likely to become more common in effects. a very active area of research, in many regions of the world. yy A large part of the rising CO₂ particular into the slowdown and yy There is less certainty about the emissions into the atmosphere is meandering of the jet stream which impact on windstorms, but direct absorbed by the ocean. However this may contribute to more prolonged physical consequences on large scale results in rising acidity levels. Ocean weather anomalies in economically extra-tropical/tropical cyclones or surface water pH is approaching productive regions including Canada, winter storms seem less imminent. the threshold when many marine Northern USA and Europe. In fact the frequency in some areas organisms at the base of the food yy Between 1901 and 2010, global mean could even become smaller. While the web struggle to form calcium- sea-level rose by 0.19m, rising at a overall frequency of cyclones might based shells or skeletons, and coral faster rate since 1993. This makes a not be significantly impacted, their begins to dissolve. A compounding sea-level rise of up to 1m this century potential maximum intensity is likely stress is the decrease of oxygen seem plausible. to increase (NOAA 2018) and storm levels, particularly in coastal waters, paths may extend into higher latitudes observed since 1960 that is probably Climate models make additional than before. Due to the increased due to warming combined with predictions of physical risk impacts moisture it is also possible that fertiliser run-off. relevant for insurers: cyclones could survive longer over yy The Greenland and Antarctic ice yy Although average rainfall at a large land than currently and carry greater sheets are more sensitive to warming scale increases at only c.2% per °C amounts of rain. than previously thought. The rate of warming, the total water amount that
The heat is on 11 Introduction
Insurability and Resilience in a Changing Climate
Tipping points are so dangerous because if you pass them, the climate is out of humanity’s control:
if an ice-sheet disintegrates and starts to slide into the ocean, there’s nothing we can do about that.
Dr James Hansen, Climate Science, Awareness and Solutions Program, Earth Institute, Columbia University
point could trigger abrupt, non-linear yy Greenland sea-ice loss, linked to
1.3 Key physical tipping responses (e.g. Amazon rainforest weather anomalies in North America
points changing to savanna or seasonally dry and Europe with potential to change
forest), others would lead to a more thermohaline circulation linked to the
In the climate system, most of the
gradual response (e.g. large-scale loss of gulf stream
feedback mechanisms are of a gradual
permafrost). There can be lags but also yy Ice sheet dynamics (Greenland and
nature while tipping points arise where a
acceleration after passing a tipping point West-Antarctica), raising sea levels
critical observable threshold is crossed
(e.g. ice sheet dynamics for Greenland over the long-term and potentially
indicating a change in state and that a
or the Antarctica). slowing down Atlantic thermohaline
specific point in the warming process
circulation
has been crossed. In some cases
Sample physical tipping points yy Permafrost thawing, releasing
tipping points trigger further warming
Examples of physical tipping points and CO₂ (under aerobic conditions)
or an acceleration, such as permafrost
their potential implications are as follows and/or methane (under anaerobic
thawing. Therefore, monitoring tipping
(Steffen, 2018 & WWF, 2009): conditions). Note that IPCC have ‘high
points is key to tracking climate risks
yy Reduction of northern hemisphere confidence’ permafrost will thaw and
and major step-changes.
spring snow cover, decreases the release carbon but ‘low confidence’ in
albedo effect and amplifies regional how much will be emitted how soon
Some feedback mechanisms are
warming, as is already seen in higher yy El Niño – Southern Oscillation
reversible (e.g. sea ice with warmer and
latitudes (ENSO) increasing and changing
cooler temperatures) on relatively short
yy Arctic sea-ice loss, linked to in amplitude, changing patterns of
timeframes (50-100 years) whereas
potential changes in thermohaline hurricanes, precipitation and drought
others are irreversible (e.g. carbon
circulation (gulf stream and jet stream yy Collapsing marine ecosystems and
loss due to permafrost thawing). While
included) and rising sea levels dissolving coral reefs, impacting
in some cases, passing a tipping
fishing, biodiversity and coastal
protection from storms or storm
surges
yy Dying Boreal Forests and Amazon
Rainforest due to heat stress,
reducing rainfall and wildfire, thereby
reducing CO₂ uptake
yy Reduced West African Monsoon,
increased risk of drought and a
greening of the Sahel
yy Interference in Indian Summer
Monsoon, increasing drought
frequency
yy Prolonged S.W. North American
droughts, leading to desertification,
as is already being experienced
Figure 3 Map of potential tipping points, colour-coded by global estimated mean
temperature threshold, with arrows showing potential interaction cascades based on
expert elicitation. NB: although the East Antarctic Ice Sheet risk is proposed at >5°C,
some sectors may be vulnerable at lower temperatures (Steffen 2018).The heat is on 12 Introduction
Insurability and Resilience in a Changing Climate
Methane hydrates
not all about CO2 By emitting just a little bit of methane,
mankind is greatly accelerating the rate of
Methane hydrate (or ‘clathrate’) consists of methane climatic change.
embedded in a crystal structure of water, with the water
molecules completely surrounding the methane. In
Steve Hamburg, Environmental Defence Fund Chief
appearance it resembles wax or solid fuel tablets.
Scientist
The methane is present in a highly compressed form. Under
normal conditions, 1m³ of gas hydrate is equivalent to
164m³ of gas and 0.8m³ of water. Gas hydrate forms in cold
water under pressure in sea-bed or lake-bed sediments. It
is unstable at room temperature and the methane escapes.
There are moves to try to extract the methane for use as a
fuel.
The environmental effects could be significant if methane
is released during extraction, which given the technical
complexities is possible. Methane is a greenhouse gas and
about 60 times more dangerous than CO₂ per unit mass
but it doesn’t linger as long in the atmosphere. In 100 years
following emission, methane has a warming effect 30 times
greater than CO₂.
Over 60% of methane emissions are man-made through
natural gas and petroleum industries, agriculture and human
waste. Any increase in or appearance of new emission
sources has significant ramifications.
Figure 4 Geographical distribution of methane hydrate deposits (World Ocean Review, 2017)The heat is on 13 Introduction
Insurability and Resilience in a Changing Climate
The IPCC carbon budget forThe heat is on 14 Introduction
Insurability and Resilience in a Changing Climate
the current trajectory towards 3.7°C is New or more nuanced economic
1.5 Economic implications calculated as $550 trillion.3 principles will be necessary to achieve
Climate change directly and indirectly the sustainable global economy
impacts economic outcomes, such as Implications from transition risks required. We do not believe we can rely
agricultural output, critical economic The benefit from acting now to minimise heavily on negative emissions as a ‘silver
resources, manufacturing, energy warming is to avoid the much greater bullet’, as outlined overleaf, and would
production, transport and other services, cost that global warming brings in the caution against a human tendency
as well as wider human welfare. These long-term, as well as potentially saving towards optimism over realism.
factors are likely to hamper economic lives and avoiding major hardship for
development and contribute to inequality many. However, that introduces risks One important economic question is
and poverty. Thus they are also likely associated with transition, although of a how to design economic policies that
to reduce ability to afford insurance, lower order of magnitude than physical are effective, and why actions successful
especially in developing countries, and risks. at reducing emission from individual
negatively affect insurance penetration, sources have not yet slowed emissions
to the detriment and lost opportunities One such implication is an economic growth on an aggregate global scale.
for both customers and insurers. drag on countries that are major fossil ‘Balloon-squeezing’, as this may be
fuel extractors or major carbon emitters. termed, is a complex matter. Counter-
Implications from physical risks However, there are also material intuitively, efficiency gains appear to
Moreover, recent research shows that opportunities for jobs and growth in help drive growth and keep energy costs
the damage from higher warming many sectors as sustained investments low, fuelling increasing consumption
scenarios will impact global GDP this are made into the low-carbon economy. and therefore increasing emissions. This
century. Simply based on the observable demonstrates the complexities ahead.
data, global GDP could be 25-40% Rapid shift to a low-carbon
lower by 2100 in a >3°C scenario vs economy is vital Any policy actions need to be
baseline. The impacts of climate change have appropriately calibrated and
major economic repercussions. To date communicated. Without this, it could
However, when the risk associated with the overriding goal driving economic trigger a feeling of inequality or a sense
the compounding effects of large scale policy has been ongoing growth, which of unfairness, leading to social unrest,
tipping points are included the NPV fuels consumption. But there is a nationalism/protectionism, climate
of damage rises eight fold. This being feedback loop where that consumption, litigation or even conflict.
evaluated using a stochastic model still based largely on fossil fuel, drives
containing a realistic range of policy further climate change.
decisions. The ultimate damage on
Some economic models show much more modest impacts from climate change, including those of 2018 Nobel laureate, William Nordhaus. Such results appear to
3
be at odds with the IPCC and climate science, for reasons analysed by Nicholas Stern (Stern, 2013) and others. We have given more weight where these models
have been adapted to take a broader view of risk such as allowing for damage from tipping points, extreme events and socio-political consequences of food crises,
migration and conflict.The heat is on 15 Introduction
Insurability and Resilience in a Changing Climate
Negative emissions - “no silver bullet” (EASAC, 2018)
To meet the Paris targets, most IPCC scenarios4 require • Other complex factors arise: e.g. in the case of Bio-
not only major emissions cuts but also large-scale negative Energy CCS (BECCS) it is vulnerable to policy change,
emissions, i.e. active removal of CO₂ from the atmosphere. increasing water and energy costs, ecological risks, and
Several technologies are proposed, which are mostly the side-effects of warming, such as wildfires. Growing
immature and face major drawbacks and challenges. The forest faces some of the same sustainability risks.
most cited are storage of CO₂ either from burning biomass
for energy or captured directly from the air using chemical There is also significant risk associated with moral hazard,
absorption machines. where the illusion of an easy way out clouds the urgency of
emissions cuts.
To assume massive negative emissions is problematic as
each technology has a drawback or limitation, although The European Academies’ Science Advisory Council
through continued research some may be overcome. published a report in 2018 which concludes negative
emissions are not a credible option in the near term. “There
• The scale is vast, so requires huge capital investment, are serious questions over whether any (separately or
high running costs and competition with agriculture cumulatively) have the potential to deliver carbon removals
for land (except for direct air capture). This comes at the gigatonne scale and rate of deployment envisaged
potentially when land value is at an increasing premium as necessary in IPCC scenarios.” They conclude that the
as climate change impacts food production and water first priorities should be to:
security. • reduce emissions;
• The technology proposed is immature (apart from • slow rapid deforestation; and
growing forest), so investment risk will be high until • develop CCS to be relevant and economically viable.
designs are refined and lifetime performance and costs
are understood. The 2018 Royal Society and Royal Academy of Engineering
joint report reached a similar conclusion.
Comparison of Negative Emissions Technologies
Maturity Scale for 12Gt/yr C0₂ removal Challenges
High 60% global arable land. Difficult on Huge land use. Water needs. Vulnerable to
Growing
degraded land logging, pests, fire, drought. Offset by reduced
forests
albedo, GHG emissions.
Manage Medium N/a. Possibly 2Gt/yr for 10-20 Reach early saturation. Vulnerable to release from
land for CO₂ years higher soil carbon respiration in warming climate.
storage
BECCS Low 20-350% of global arable land High cost. Huge land use, fertiliser. CO₂ ‘leakage’
(bio-energy + at various stages. Needs ‘off the shelf’ CCS. Up to
CCS) 50% less efficient than fossil fuel energy + CCS.
Direct Air Low Scalable subject to site availability Expensive. High energy and water needs. 1-10x
Capture and cost more costly than point-source CCS of flue gas.
(DACCS)
Chemical Speculative 3-10 billion tons/yr of powdered Speculative. Major mining and logistics
weathering rock challenges. High costs. Ecological impacts.
Ocean iron Speculative N/a. Max 3Gt/year Huge ecological risks for small CO₂ removal
fertilisation potential.
4
Among the AR5 models, 87% of sub-2°C scenarios include material negative emissions, and 100% of those that achieve 1.5°C.The heat is on 16 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
2 Climate Change
Scenarios
The use of models and scenarios
is essential to understand future
implications. Climate change progresses
pathway (RCP2.6), limiting global
warming toThe heat is on 17 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
Selected scenarios yy The first corresponds to global The relative scale between the scenarios
The paper will focus on three broad warming of under +2°C, or ‘Paris of some of the major human impacts is
scenarios, based on temperature Targets Met – Steep Transition’ illustrated in Figure 7 below:
increase by 2100 relative to 1850-1900 yy The second assumes that global
baseline and linked to the IPCC’s four warming exceeds +3°C or ‘More
RCPs. These are described in more Severe Physical Impacts’
detail in this chapter and are as follows. yy The third corresponds to global
These are not forecasts but represent a warming reaching +5.2°C or
reasonable synthesis of the science to ‘Devastating Physical Impacts’.
provide guiding ‘pathways’.
Figure 7 Avoiding the impacts of dangerous climate change
SELECTED GLOBAL CLIMATE IMPACTS IN 21004
With sustained effort up to and beyond 2030, the Paris pledges
will limit the severity of key impacts on people and society.
The scenarios used are:
1. No mitigation: RCP8.5
2. Emissions capped at INDC level: INDC pledgesto 2030 and no backtracking
3. Strong further action to meet 2°C target: INDC pledges to 2030, with further large reductions in greenhouse gas emissions to meet 2°C by 2100
4. Relative to a scenario with no climate change
The temperatures displayed here represent median values for each scenario. Water stress and cropland availability will also be affected by land use decisions e.g. concerning biofuels.The heat is on 18 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
Physical risks regions, as well as in Eastern Asia
2.1 Under 2°C scenario Physical risks arise within the scenario, (including China and Japan) and in
(Paris targets met - steep transition) which could lead to increased flooding, Eastern North America. At a European
This scenario can be associated with droughts, and severe convective storms. level, recent research models indicate
the IPCC’s RCP2.6 that have following According to IPCC SR15: that flood damage could increase in
features or assumptions. yy Heatwaves are likely to increase, today’s money from an average of €5
yy In policy terms, it is closest to the particularly in mid-latitudes on billion a year for 1976-2005 to €12
Paris Agreement to contain warming land, with the increase in peak billion in a +2°C world.
to “well under 2°C” with the aim of temperatures being 2-3 times yy Tropical cyclones may be fewer
achieving 1.5°C. higher than global average increase. overall, but the most powerful
yy Based on a rapid stabilisation and The strongest change is found in category 4-5 storms may be 16%
eventual reduction in the level of Central and Eastern North America, more frequent.
GHG’s in the atmosphere after 2050. Central and Southern Europe, yy Heavy rainfall associated with tropical
yy Median expected temperature the Mediterranean, Western and cyclones is likely to increase by 10-
increase by 2100 of 1.6°C, with Central Asia, and Southern Africa. 15% (already seen with Hurricane
a range of 1.0-2.8°C allowing for These regions all have a strong Harvey).
climate system uncertainties. soil-moisture-temperature coupling yy Coastal flooding is likely to cost
yy Increase in sea level rise of 0.45m, leading to increased dryness. 0.3-5.0% of global GDP annually by
with a range between 0.3m and 0.8m. yy Climate change has substantially 2100 with today’s level of coastal
increased the probability of drought protection.
‘Tipping points’ that become likely by years in the Mediterranean (already
2°C warming include: yy The Arctic Ocean is likely to be
seen) and in Southern Africa. ice-free at least one summer in ten,
yy A profound impact on marine life and
yy Warming trends are likely to be partly opening it up for greater commercial
fisheries from rising ocean acidity,
offset in NW Europe by further 11% use.
making it hard to form calcium-based
slowing of the Gulf Stream.
shells or skeletons; total collapse of
reef-building coral; very high risk to yy Increased warming and drying are The effects on the global economy
bivalves (mussels, clams, oysters etc.) already linked to an almost doubling are likely to be significant. Some low
and to fundamental food web species of the Western US wildfire area. lying and coastal communities would
such as pteropods. yy Extreme downpours and fluvial be impacted and require adaptation
yy The Greenland ice-cap enters gradual flooding may increase in many areas. measures, particularly in developing
terminal decline (raising sea-level by Robust increases in precipitation nations, but widespread economic
7m, over several centuries). extremes can already be observed dislocation from physical impacts may
in mid-latitudes of the Northern be avoided. Nevertheless, a 13% net
Hemisphere. Hotspots for heavier reduction in global GDP is forecast vs a
downpours include high-latitude no-increase scenario.
Figure 8 Changes in annual daily maximum temperature relative to Figure 9 Changes in extreme precipitation (Rx 5day) at 2°C
1981–2010 at 2°C warming (Betts, 2018) GMST warming (IPCC SR15, 2018)The heat is on 19 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
Transition risks Figure 10 Annual change in CO₂ emissions over time
To achieve the Paris targets, rapid action
is vital to transform the world economy:
over $1 trillion investment p.a. is needed
(according to IPCC SR15) in order to
WWII
accelerating
transition to a low-carbon economy. This WWI RCP8.5
is comparable to aggregate global defence
budgets (c.2% of GDP).
RCP4.5/6
The unprecedented scale and duration
compared with history can be appreciated 0
from Figure 10 on the right.
Iran, RCP2.6
decelerating
In RCP2.6 (the IPCC representative oil crisis
pathway toThe heat is on 20 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
The potential actions, as per the 2017 UN Figure 11 Annual global total greenhouse gas emissions (GtCO₂e)
Emissions Gap Report, only account for around
half the emissions reductions needed by 2030 to
meet the Paris targets.
The speed and scale of reductions needed is
visualised in Figures 11 and 12.
To close the gap, a range of tougher mitigation
actions is set out in IPCC SR15 Chapter 4.
Recently a similar list was set out in detail in the
2018 New Climate Economics report, including:
yy Decarbonise electricity: growth of renewables,
mothball coal and gas generators
yy Decarbonise cars and heavy transport:
electric buses, trucks, trains, ships
yy Reduce air travel, promote car sharing or use
of public transport
yy Food: reduce waste at all stages promote
concepts like ‘farm to table’, ‘eat local’, or
vegan alternatives
yy Heating: insulate buildings better and replace
oil and gas boilers with renewable/electric
yy Local / national planning for denser, car-less
urban living
yy Construction and industry: move to circular
economy, re-use of materials, greener inputs
yy Incentives including significant carbon pricing
Figure 12 Total emission reduction basic potentials compared to the current policy scenario in 2030The heat is on 21 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
Figure 13 IPCC SR15 summary for policymakers
Carbon capture & storage is the Breakdown of contributions to global net CO₂ emissions in
only hope for mankind. four illustrative model pathways
Sir David King, Chief Scientist to UK
Government
Carbon capture and storage (CCS) is a key
technology but is developing far more slowly
than expected. One example of an active
project is Climeworks in Switzerland that have
created a direct air capture system.
The main technical problems so far have been
how to store the captured gas and the costs
involved. In the case of reforestation and
afforestation land use issues also arise.
In the absence of sound economics or
incentives several CCS projects have been
shelved, however the technology exists.
Therefore, capturing carbon is a political and
economic challenge not a technological one.
Most current projects capture CO₂ from
natural gas fields rather than in flue gas from
power plants. CCS is expensive to retrofit to
existing plants, and ‘cannibalises’ up to 20%
of output energy. Flue gas is typically c.10%
CO₂. More efficient designs are proposed
with CCS designed into new plants. Some
burn fuel in pure oxygen, which improves
efficiency and reduces the volume of flue-gas
by around 75%. Once the water content is
condensed out, it is mainly CO₂ which can be
compressed and stored.
The scale of CCS required by 2050 to hit the
Paris climate targets is equivalent to burying
the total volume of liquid (oil, gas and water)
handled today by the entire global oil industry.
Total oil industry infrastructure is estimated
at $30 trillion, so the order of magnitude of
investment needed could be c.$1 trillion each
year for the next 30 years. This is to install
equipment for carbon capture, compression,
pipelines to storage sites and underground
injection.
Alternatively, without CCS, countries with
the highest emissions would need to cut
them to zero within around 30 years, which is
challenging.The heat is on 22 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
desertification of the Mediterranean increasing maintenance costs given their
2.2 +3°C scenario region. There is a growing risk at critical dependency.
(More severe physical impacts) this point of accelerating warming,
This scenario corresponds to both as a result of feedback effects from Diseases currently typical of tropical and
IPCC’s RCP 4.5 and RCP 6, as lower the release of natural carbon stores, equatorial areas may spread towards
and higher bounds, and is close to either growing soil emissions or CO₂ more temperate latitudes, requiring
the AVOID2, UK government funded and methane release from thawing renewed research efforts and resulting
research. permafrost. Passing this important in further strain to the national health
yy It is marked by a stabilized flow ‘tipping point’ would have numerous systems. Agricultural diseases and pests
of net emissions of GHGs into the consequences with direct impact on may also migrate.
atmosphere, resulting in a steady infrastructure in Alaska, Canada or
growth in GHG concentration levels. Russia, plus landslides and rock fall in More severe physical impacts on
yy Median expected temperature mountainous regions. investment performance may arise
increase by 2100 of 3.0, with a range compared with the 2°C scenario.
of 1.5-5.8°C allowing for climate Extreme weather events (downpour, Emerging market assets (sovereign
system uncertainties. flood, windstorm, heatwave, drought, and corporate debt) are likely to be
yy Sea level rise, with a range between wildfire etc.) would lead to higher hardest hit. However, developed
0.4m and 0.9m. expenses tied to either the cost of economies will not escape unscathed.
damage and disruption, the reduction The disruption to global trade and
It is roughly in line with current in value of exposed property, or the supply chains from climate change
aspirations when considering country need to harden defences to reduce could erode corporate profits and
commitments to act, and appears vulnerability to the events. Drought, physical damage from weather effects
increasingly as a base case. With it heat stress and other weather extremes could weigh on economic performance.
comes more severe physical damage could degrade agricultural production Public spending to restore and harden
and disruption than in the Low scenario. in many regions. Some production damaged infrastructure or to provide
This scenario is broadly similar to the may move together with its associated capital through pooling techniques
IEA WEO New Policies Scenario, at least infrastructure. As well as price inflation, could be a drag on government finances
until 2040, which assumes achieving and this could lead to food shortages with further restricting capacity for mitigation/
extending the latest policies as laid out economic and political consequences adaptation projects.
in the Paris Agreement. arising from increased unrest, migration
and conflict. Transition risks
Physical risks Whilst the Physical Risks are greater
The physical risks are the same as Sea level rise could lead to the eventual the transition risks are reduced,
for the 2°C scenario but with greater abandonment of low-lying coastal although not avoided entirely. Some
severity. For example, heatwaves could cities and economic regions. The assets would still be stranded from the
affect around three times as many most vulnerable include the Nile delta, need to reduce emission and some
people and farms as in the 2°C scenario, Mekong delta, Bangladesh, parts of carbon capture may be necessary.
and flooding around twice as many. Florida as well as the well-known plight However, the major economic impact
The 2°C tipping points become even of certain small island states. For regions of substantially reducing consumption
more likely, and in addition above 3°C that can afford it, an alternative would would not be as prominent. There will
a number of models predict the loss of be significantly increased costs in be some need to invest in adaptation
the Amazon rainforest (hotter and drier, adaptation (e.g. building dykes, barriers and there is likely to be some social
not resilient to wildfires) and increasing and drainage solutions), with ever and political upheaval.The heat is on 23 Climate Change Scenarios
Insurability and Resilience in a Changing Climate
Physical risks Social and political upheaval will be
2.3 +5°C scenario In this scenario, the physical risks listed significant, as the global populations
(Physically devastating) previously become more extreme, and jostle for the shrinking habitable and
This scenario may be linked to IPCC’s natural protection and buffering e.g. by productive lands. In this scenario,
RCP 8.5 and it is in line with current forests and wetlands will have been lost. the consequences for investment
trends continuing. The scenario is close In several regions, peak heatwaves are performance are secondary to the
to the upper AVOID2 estimates. projected to be 10°C higher than current potential collapse of sectors of the
yy Continuous growth in GHG emissions extremes. global economy and, conceivably,
throughout the century, accelerating doubts over the ability of society to
further and then decelerating It is estimated that 60% of global continue functioning.
somewhat later in the century (see cropland may be degraded as soil
figure 10 above). moisture falls dramatically in many Transition risks
yy Median expected temperature key regions (see figure 14), heat stress Transition risk is largely avoided in
increase by 2100 of 4.5°C, with reduces yields from crops, and weather this scenario in the medium term
a range of 2.8-7.8°C allowing for damage causes cumulative destruction. and investment will be focused on
climate system uncertainties. Widespread food and water shortages adapting to the changing planet.
yy Sea level rise of a range between are likely (implied by many models), However, when the full effects of
0.5m and 1.7m. together with massive displacement extreme climate change become
of populations as large areas become obvious, stranding of assets may
The scenario is uncomfortably plausible, uninhabitable due to flooding or drought. occur for the following reasons:
especially if the greatest contributors yy Society may create a backlash
to GHG emission fail to respect their The potential for reaching possible against carbon emitting businesses
targets and no economic transformation tipping points and runaway feedback resulting in assets being stranded
were to occur. The current lack of clear effects would dramatically increase. even if too late to avoid the worst
climate policy continues to hamper Sea-level rise could accelerate to over 2 physical risks.
the implementation of actions against metres due to melting from destabilising yy In the longer term, human progress
climate change. It is important to factor areas of Arctic and Antarctic ice-caps becomes unpredictable as the
in the role of ‘growth’ from growing or the occurrence of other tipping extremes of physical and social
populations, increasing consumption points. Eventual sea-level rise after impacts play through.
and increasing transportation/travel, many centuries may be 70 metres, yy Stranded assets and disrupted
which could all increase emissions transforming coast-lines and many land- business models would still arise in
despite significant efforts to reduce masses. this scenario. As society struggles
them, continuing the ‘balloon squeezing’ to adapt to climate change some
effect seen in recent decades. areas, particularly those close
to the equator, may be largely
abandoned as environments
become inhospitable.
Figure 14 Annual near-surface soil moisture change 2081-2100 (IPCC AR5, 2014)The heat is on 24 Implications for Insurers and their Customers
Insurability and Resilience in a Changing Climate
3 Implications for
Our sector will struggle to
reduce this protection gap if our
response is limited to avoiding,
Insurers and
rather than managing, society’s
exposure to climate risk
Maurice Tulloch, Chairman of Global
their Customers
General Insurance at Aviva and
previous Chair of ClimateWise
low-lying areas in flood-plains and on consequence of being unable to rely as
3.1 Insurability coasts where agriculture, infrastructure much on historical data to predict future
Insurability is a key topic in a warming and trade is easier to develop and events, it will be key to invest in research
world with a chance of some risks or operate. Climate change, which is a that fosters innovation in data analytics
regions becoming uninsurable where global phenomenon, could have very and forward-looking models that identify
premiums become unaffordable. different local consequences, and the trends in frequency and severity of
Maintaining insurability could be way governments address these issues extremes.
challenged under the three different will significantly influence the context
scenarios. Insurers’ intention is to in which insurers operate and therefore Affordability: In the context of changing
close the protection gap and good insurability of the risks. climate, premiums may rise so high
progress has been made in recent years. as to be uneconomic or unaffordable
Schemes such as InsurResilience, 3.1.1 How is climate change for the customer. Increased risk may
initiated by G7, are designed to provide challenging the insurability of translate into higher premiums or more
climate risk insurance to poorer risks? restrictive terms and conditions, making
countries, supported by the Insurance For a risk to be insurable, the insurer an insurance product unattractive. A
Development Forum. However, this may must be able to meet the following single event that changes the perception
not be possible in the more extreme conditions: of a climate risk could disproportionately
scenarios, which is likely to be led yy Identify and quantify the frequency / affect premium levels. Where there is
more by affordability than insurers’ risk severity of potential hazards and the an inability to properly model and price
appetite. resulting losses. the risk, this can also mean that insurers
yy Satisfy itself that the risks are decide to be more cautious, adding a
Numerous factors will determine what unintended (no adverse selection) and risk margin to the premium (Silver 2014)
is considered insurable so these must unexpected (no moral hazard). or withdrawing capacity. The customer
be understood in order to attempt yy Demonstrate it can pay potential may underestimate the level of risk and
to maintain continuation of cover in losses while maintaining its solvency, consider the price to be excessive,
extreme circumstances or for high- partly by avoiding major risk rendering the risk uninsurable.
risk areas. Government led pooling accumulations.
mechanisms may be key to locking yy Offer a price that is acceptable to all Threat to coverage availability:
in insurance for the high-risk areas stakeholders (insurers, reinsurers, Mismatch of pricing expectations could
or looking at other innovative ways policyholders, regulators). prompt policymakers to limit the prices
of providing finance. However, the that can be charged to a level that is
insurance industry needs to be cautious Climate change is challenging many of not sustainably profitable for insurers.
not to insure the truly uninsurable as these conditions: They may exercise caution and refuse
this could impact resilience limiting to underwrite risks in a given area.
the industry’s ability to support the Global trends and local uncertainties: Examples have already been seen
insurable. The specific local impacts of current of weather-related risks becoming
global warming trends are still hard to unaffordable or unavailable as follows.
Extreme weather risks have always been quantify. In extreme cases, this could yy 2002 German floods (€9bn cost to
challenging for insurers and represent an challenge insurability as pricing depends public funds): risk reassessment
accumulation risk that is a key driver of on the assessment of risk. Existing by insurers led to an increase in
capital. This is particularly true for flood climate models have limitations when premiums of up to 50%, and a
risk given that the majority of economic it comes to assessing local trends (e.g. reduction in areas where flood
development has historically been in wildfire zones). Due to this and as a insurance was offered of 10-20%.The heat is on 25 Implications for Insurers and their Customers
Insurability and Resilience in a Changing Climate
yy 2005 Hurricane Katrina (insured In the moderate warming scenario (2°C), or by resorting to self-insurance and
loss >$100 billion): the availability of the horizon of insurability may expand mutualising risks.
insurance fell following Katrina and with the development of new industries
other events in 2004-2005. with insurance needs (e.g. renewable In a +5°C degree world, insurance
energy, carbon capture and storage), activity may remain in the regions where
Imperfect information: Exposure to and new types of operations becoming there continues to be economic activity.
natural hazards is public information, viable (e.g. drilling, shipping in the Arctic However, the intense warming and
but high-quality maps of changing region). Insuring risks in some regions destruction of ecosystems, infrastructure
perils, such as flash flood and wildfire, more affected by climate change may and agriculture in some regions means
do not exist as yet or are proprietary. become difficult, and it will depend on economic activity may be significantly
Additionally, some decision makers the insurer’s willingness to accept higher impaired.
(e.g. real estate companies and local risks. Demand for insurance may grow
governments) continue knowingly to in places as the increased uncertainty 3.1.3 Factors determining
develop uninsurable areas for short demonstrates the value of insurance. insurability
term profit. It can be considered as a Regions most at threat are those already In practice insurability is not a fixed
moral hazard, as they know homeowner experiencing flooding, wildfires, and concept. For each risk, the boundary
insurance remains available under coastal surge threats. They are likely to of insurability may not remain the same
certain national regimes. get worse and the size of the area at risk forever and may vary from one company
is likely to grow. Low lying and coastal to another. Some insurance companies
Risks of accumulation: The current areas are considered most at risk. may decide not to insure a risk that
global diversification of risks may be could be insurable, based on economic,
threatened if climate change increases Preventive and adaptive measures strategic, reputational or ethical
the correlation between different should be able to keep the overall risk considerations.
physical risks. Accumulation could at an affordable level for most perils in
also occur in highly exposed regions developed insurance markets. In regions The role of public administration is also
and across Lines of Business. Physical with already high-risk levels, more risk critical and insurers should maintain
risks of climate change will mostly have participation of the insured might be dialogue, as per the following, helping to
implications for property insurance, but required, either through investment in foster a culture of mitigation, adaptation
liability risks could also arise, if there is higher protection standards or by higher and resilience.
growth in related litigation actions. risk retentions.
yy Governments’ risk management
Solvency: Climate change may gradually The 3°C scenario creates real insurability strategies can positively impact
change the risk profile for insurers challenges and could therefore challenge insurability, e.g. building codes,
and reinsurers, with stronger impacts the sector. However, insurance will land-use planning, flood-hazard zone
and accumulations. This has potential continue to be an important product. regulations.
solvency implications. Reinsurance By actively monitoring developments yy The development of a “governmental
is a key tool Property & Casualty caused by climate change and managing backstop” for insurance claims
(P&C) insurers use to manage their their risk portfolio, insurers will be able related to climate change impacts,
solvency. Currently, property insurance to adapt to new conditions. Some types similar to the US Terrorism Risk
policies renew annually; this frequency of climate risks may become effectively Insurance Act, is another option and
of repricing is fundamental to the uninsurable in highly exposed regions. can improve loss sharing between the
sustainability of the insurance market. Property insurance may become private and public sector.
increasingly unaffordable in flood-prone yy For some climate risks, such as
3.1.2 Insurability under different areas and some regions may only be flood, national governments can act
climate scenarios insurable with very high self-retentions as “last resort” insurers. However,
The insurability challenges noted above on customer side due to high frequency this role could be challenged due to
will manifest differently for the various of large loss events. Governments the growing uncertainty caused by
scenarios. may get more involved, trying to find climate change.
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