Climate change reaching a tipping point; capital markets called on to help

Allianz and the World Wildlife Fund (WWF) have issued a report (press announcement available here) looking into the ‘tipping points’ associated with climate change and global warming. The report looks into the impacts of what they call tipping point issues such as shifting of the monsoons, sea level rise on the east coast U.S. and dieback of the Amazon rainforest and explores the economic and insurance impact that would result.

In essence the report serves to remind us that inaction on climate change will result in devastating impacts to the population of the world and cause many billions of dollars of insurance claims. The report highlights the place that the capital markets could play in providing swift paying coverage for regions likely to be affected and also mentions that one of the main blockers to that (which we’ve written about before here) is availability of data and the need for better risk analysis on a huge scale. Bloomberg quote Clemens von Weichs, of Allianz’s reinsurance unit, as saying the insurance industry ‘could be too small to handle all future risks related to natural disasters, capital markets need to play a more active role with instruments such as catastrophe bonds‘.

Alternative risk transfer including catastrophe bonds and weather derivatives definitely have to play a part in protection against climate change, and the insurance and reinsurance industry have to continue to play an active part in stimulating research and discussion on the topic. If it is left too late to design coverage to address the potential risks the insurance industry alone will not be able to cope with the burden of claims. I expect we’ll see many more pilot projects looking to expand the scope and reach of weather risk related products in the next few years.

You can download the full report in PDF format here.