The Association of British Insurers report which they commissioned to look into climate change, the financial risks associated with it and how the insurance industry will cope has now been published. The report was produced by AIR Worldwide and the UK Met Office.
As mentioned when I wrote about this a few days ago the loss projections are pretty large and the general conclusion is that the insurance (and reinsurance) industry is going to struggle to cope if projections are accurate. Here are some of the key findings:
- The inland flood component of insurance premiums could increase by around 21% across Great Britain assuming a global temperature rise of 4°C.
- The average annual insured flood losses in Great Britain could rise by 14% to £633 million assuming a global temperature rise of 4°C.
- The insured inland flood loss in Great Britain occurring on average once every 100 years could rise by 30% to £5.4 billion. The insured inland flood loss occurring on average once every 200 years could rise by 32% to £7.9 billion. The estimates assume a global temperature rise of 4°C.
- The average annual insured wind losses in the UK could rise by 25% to £827 million assuming a 1.45° southward shift in storm track across the UK. The insured wind-related loss from winter season windstorms in the UK occurring on average once every 100 years could rise by 14% to £7.3 billion. The insured wind loss occurring on average once every 200 years could rise by 12% to £9.7 billion. The estimates assume a 1.45° southward shift in storm track.
- Within Great Britain, the results vary by region. For example, while the average annual insured flood losses for Great Britain as a whole could rise by 14%, regional increases range from less than 10% to nearly 30%, assuming a global temperature rise of 4°C.
- The average annual insured losses from typhoons affecting China could increase by 32% to £345 million; the 100-year loss could increase by 9% to £838 million, and; the 200-year loss could increase by 17% to £1.1 billion. The estimates assume a global temperature rise of 4°C.
When you see projections like that it has to make you wonder how the industry would cope and secure enough capital to pay the resulting claims without premiums going to levels that consumers couldn’t afford. It’s clear that capital markets will have to be tapped, public-private risk transfer is going to have to play a big role and financial instruments such as derivatives and securitisation where the capital markets bear the some of the risk of loss are going to have to become more prevalent. Traditonal insurance alone won’t be able to cope with the demands and claims ratio a report like this projects.