Economic cost of climate change projected to grow, ILS has role to play

by Artemis on June 25, 2014

A new report titled ‘Risky Business’ that focuses on the need for U.S. companies to treat climate change as any other business threat has been released, warning that climate change will cost businesses billions.

The main study of the report predicts that within the next 15-20 years hurricanes, rising sea levels and greater storm surges could raise the yearly cost of coastal damage along the U.S. East Coast and the Gulf of Mexico to $35 billion.
Other figures from the study conclude that U.S. agricultural areas could potentially see a 10% decline in yields, due to greater droughts and increased flooding, suggesting these pressures could be felt as early as five years time.

The Risky Business Initiative was set up in October 2013 and is co-chaired by Henry Paulson, Michael Bloomberg and Tom Steyer and, announced a partnership with risk modeling firm Risk Management Solutions (RMS) in April 2014, as a way to better model and assess climate risk. Speaking in April about the collaboration, RMS Chief Executive Officer (CEO) Hemant Shah said; “My colleagues and I are passionate about this issue, and are delighted to join The Risky Business team and apply our considerable expertise on hurricane and coastal flooding risk to this very important initiative.”

RMS Senior Director and Model Product Manager, Paul Wilson, spoke about the rising sea-levels in the U.S., saying; “One of the key findings of our work on the future costs of US hurricane risk is how, irrespective of changes in frequency of storms, the proportion of loss caused by storm surge will continue to increase through the 21st century as sea-levels rise. Hurricane Sandy and Katrina look like harbingers of the future in this respect, in that more than 50 percent of losses were caused by storm surge.”

And so it seems the collaboration has come to fruition, with a combined calling for immediate and urgent action to be taken to reduce the economic risks of climate change, an issue that the reinsurance, insurance-linked securities (ILS) and catastrophe bond market space could benefit from.

The cat bond, reinsurance and ILS market can provide protection against the perils of climate change, ensuring widespread disruptions and losses caused by increased severe weather events are financially covered. This ensures companies aren’t vulnerable to being wiped out following a major weather event and citizens can feel confident that rebuilding post-event can take place immediately.

Tom Steyer commented on the report, saying; “Climate change is nature’s way of charging us compound interest for doing the wrong thing.” Adding; “The Risky business Report confirms what many of us have long suspected: The longer we wait to address the growing risks of climate change, the more it will cost us all. From a business perspective, given the many benefits of early action, it would be silly to allow these risks to accumulate to the point where we can no longer manage them.”

Frank Nutter, President of Reinsurance Association of America spoke about the need for this report, stating; “It is crucial that the industry factor into account the science of climate change, and changes to national and global weather patterns in risk assessment and pricing.”

The growing risks that Steyer and Nutter refer to were outlined in the report, suggesting that if we continue on our current path, by the year 2050 between $66 and $106 billion of existing U.S. coastal property will be below sea level, growing to $507 billion by 2100. Other predictions include rising U.S. heat levels, stating that by 2050 the average American will experience 27-50 days per-year where the temperature is above 95F, that’s three times more the average amount over the last 30 years.

Wilson of RMS added; “The uncertainty surrounding the long-term impact of climate change presents huge challenges for the catastrophe insurance market as a whole. However, as demonstrated by MetroCat with regards to storm surge, the ILS community is well-positioned to lead the innovation to tackle demand for capacity and ensure the markets sustainability.”

Should the business and corporate world really begin to seek protection against the risks posed by climate change and average annual losses from catastrophe and weather events rise as expected, the capital markets and ILS will be called on to augment the reinsurance market’s capacity.

Corporate catastrophe bonds have been issued in the cat bond markets history and as the threat of losses to businesses grow we could see a resurgence of such structures. At the very least, the capital markets and third-party capital will no doubt be called on to provide reinsurance protection to the insurers who soak up growing demand for protection from climate driven risks.

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