Climate change is running away from us, is the stark warning from the Intergovernmental Panel on Climate Change ‘s (IPCC) Report, which was published today.
“Many of the changes observed in the climate are unprecedented in thousands, if not hundreds of thousands of years, and some of the changes already set in motion—such as continued sea level rise—are irreversible over hundreds to thousands of years,” the reports authors warn.
These changes are set to have significant ramifications for the insurance, reinsurance and insurance-linked securities (ILS) industry, not least in the rising exposures they will bring, but also in the increasing need for robust risk capital and new forms of innovative risk transfer protection.
The IPCC’s report says that scientists are now observing changes in the earth’s climate across every region of the world and across the whole climate system.
The report warns that we are at-risk of exceeding the global warming level of 1.5°C in the next decade and that unless the world greatly reduces emissions immediately, we are also at-risk of being unable to limit warming to close to 1.5°C or even 2°C.
“Strong and sustained reductions in emissions of carbon dioxide (CO2) and other greenhouse gases would limit climate change,” the reports author’s have concluded.
But they warn that while benefits for air quality would come quickly, it could take 20-30 years to see global temperatures stabilise, even with the swiftest action.
The report states that emissions of greenhouse gases from human activities have already caused roughly 1.1°C of warming since 1850-1900, while averaged over the next 20 years, global temperature is expected to reach or exceed 1.5°C of warming.
“Climate change is already affecting every region on Earth, in multiple ways. The changes we experience will increase with additional warming,” explained IPCC Working Group I Co-Chair Panmao Zhai.
For 1.5°C of global warming, there are expected to be increasing heat waves, longer warm seasons and shorter cold seasons, the report’s authors state.
At 2°C of global warming, heat extremes would more often reach critical tolerance thresholds for agriculture and health, with significant ramifications for society.
Climate change is impacting the entire system, the report concludes, with ramifications for more than just temperatures.
- Climate change is intensifying the water cycle. This brings more intense rainfall and associated flooding, as well as more intense drought in many regions.
- Climate change is affecting rainfall patterns. In high latitudes, precipitation is likely to increase, while it is projected to decrease over large parts of the subtropics. Changes to monsoon precipitation are expected, which will vary by region.
- Coastal areas will see continued sea level rise throughout the 21st century, contributing to more frequent and severe coastal flooding in low-lying areas and coastal erosion. Extreme sea level events that previously occurred once in 100 years could happen every year by the end of this century.
- Further warming will amplify permafrost thawing, and the loss of seasonal snow cover, melting of glaciers and ice sheets, and loss of summer Arctic sea ice.
- Changes to the ocean, including warming, more frequent marine heatwaves, ocean acidification, and reduced oxygen levels have been clearly linked to human influence. These changes affect both ocean ecosystems and the people that rely on them, and they will continue throughout at least the rest of this century.
- For cities, some aspects of climate change may be amplified, including heat (since urban areas are usually warmer than their surroundings), flooding from heavy precipitation events and sea level rise in coastal cities.
“It has been clear for decades that the Earth’s climate is changing, and the role of human influence on the climate system is undisputed,” said IPCC Working Group I Co-Chair Valérie Masson-Delmotte.
Human actions still have the potential to determine the future course of climate, the report states, as scientists agree that carbon dioxide (CO2) is the main driver of climate change, according to the report author’s, even as other greenhouse gases and air pollutants also affect the climate.
“Stabilizing the climate will require strong, rapid, and sustained reductions in greenhouse gas emissions, and reaching net zero CO2 emissions. Limiting other greenhouse gases and air pollutants, especially methane, could have benefits both for health and the climate,” added Zhai.
Dr. Roxy Mathew Koll, a Climate Scientist at the Indian Institute of Tropical Meteorology, Chair of the CLIVAR Indian Ocean Region Panel, and a Lead Author of the IPCC Reports, gave some stark insights into the reports findings today.
“The climate has changed, forever. Humans have caused it and our commitments are insufficient to bring the curve down. This is a curve that we are not flattening. Climate change will continue and intensify for centuries, if not a few thousand years into the future,” Koll explained.
He continued to explain that the global mean temperature is expected to cross the 1.5°C limit in the current decade or next, and the 2°C during 2040–2060.
This, he attributes to the fact “the nationally determined contributions (NDCs) submitted by nations via Paris Agreement are insufficient to flatten the curve.”
One are of concern is how oceans absorb the rising temperature, leading Koll to state, “Ocean warming might increase four to eight times by 2100. These changes are irreversible and will last for centuries if not a millennium or more.”
This could mean an ice-free Arctic ocean in the summer one year before 2050, while ice melt will continue for decades.
Because of the this, areas of coastal property are likely to find themselves under increasing threat.
“Due to ice-glacier melting and thermal expansion of water, sea level will rise further by 40 cm to 1 m by 2100. Current rates of 3.7 cm per decade of sea-level rise are equivalent to tens of meters of land taken away by the sea every decade, considering the slope of the coast,” Koll explained.
In addition, warmer oceans could create more intense cyclones, heavier rains and impacts from sea level rise, while storm surges may increase and the compound effects of stronger storms, more rain and higher sea-levels could be disastrous for some regions of the planet if climate change continues unabated.
Koll raises the point of disaster protection, saying that now is the time to ensure communities are protected from these rising threats.
Insurance and reinsurance capital is going to play a critical role as the world adapts to the climate threats it faces.
Financing will be key, which will often require insurance cover.
While individuals will need protecting to enable recovery and rebuilding, plus their own financing is going to often need to be underpinned with insurance.
Corporations are going to need more protection. Insurers are going to need more reinsurance. Governments are going to need more climate and disaster risk financing, to protect their populations and reduce their reliance on debt.
Debt too likely needs to change, as the world is going to increasingly call for natural catastrophe trigger clauses to be built in so that the debt burden is not worsened when liquidity is required.
But still, a shift away from debt to paying for protection is also necessary for those countries that can afford it, while financing tools need to innovate to account for risk within resilient infrastructure development and the like.
Loss and damage is set to be a critical piece of thee upcoming COP26 meetings this year, with a focus on how to enable smaller and more indebted nations to enhance their resilience, including through financing means.
This new IPCC report is likely to drive the agenda for COP26 to a degree and it lays bear the threat of slow-onset, climate linked disasters, as well as the threat of rising sea levels.
Those that can, need to protect themselves, their assets, their employees, their communities, through resilience building and risk financing means. The most immediate area that insurance and reinsurance risk capital can make a significant difference.
Those that can’t need to be helped.
But, here too, there is a significant role for risk transfer, insurance and also efficient capacity from the capital markets, as financial innovation can construct new paradigms of climate related hedging and financing tools, which the world will need over the coming decades.
Risk data, modelling and analysis is also critical, as the world needs to be able to better price for the slow-onset of climate related risks and exposures.
This is necessary not just to be able to price risk transfer, but also to be able to put a value of the expected damages, to raise the urgency for mitigation, response and resilience building.
If you can’t value the risk it is very hard to justify the necessary spending that the world requires to mitigate climate related threats and these risk metrics need to cascade through our financial system, from reporting, to mitigation and resilience building, to risk management and also hedging or insurance costs.
It’s important to point out that insurance, reinsurance and the use of insurance-linked securities (ILS) such as catastrophe bonds are no panacea when it comes to climate change.
They are a useful financial tool and one that we feel can be more tightly integrated into adaptation, mitigation and resilience planning.
They are also a financial tool that every company, country, or person that can, should be using to ensure they have post-disaster response financing in-place, to aid in their ability to recover from the potential physical impacts of climate change.
The loss and damage questions related to global climate change response are far larger than the re/insurance industry alone, but this industry has a key role to play in providing risk transfer solutions that are robust and responsive to the needs of actors and people around the world as climate change continues.
Lastly, the work of climate scientists needs to be considered and factored for in catastrophe risk modelling within the insurance and reinsurance industry, which has ramifications for affordability of insurance further down the line.
If the stark warnings play out as the author’s and scientists behind the IPCC report believe, parts of the plant may become particularly expensive to insurer, or impossible to insure, while the industry is likely to greatly reduce its exposure to some coastal regions if the sea-level rise forecasts hold true.
In order to protect people for as long as possible then, the threat of climate change is yet another factor that demonstrates the need for greater efficiency to reduce the cost of insurance risk capital.
That means sourcing risk capital in the most efficient manner, transacting in risk in the most efficient manner, operating in the most efficient manner, all of which suggests industry disruption, innovation and evolution has to continue and perhaps accelerate in insurance and reinsurance, with capital markets technology likely to play a significant piece in that transformation to keep the industry as useful as possible, for as long as possible, in the face of rising threats and exposures.
You can find the IPCC’s new report here.