A new piece of research by, amongst others, Swiss Re and Entergy Corporation has concluded that the combination of climate change, economic development land subsidence could cost communities along the U.S. Gulf Coast over $350 billion in cumulative losses over the next 20 years.
The study found that wind and storm surge damage along the Gulf Coast already costs an average of $14 billion per year. Take that level of losses and factor in expected economic growth and land subsidence and you could see that figure rise to an average of $23.4 billion in losses per year by 2030.
The study considers assets across coastal parishes in Texas, Louisiana, Mississippi and Alabama. These are all energy producing states with significant development on their coastlines and dependence on tourism and fishing as well. The analysis looked to estimate the potential impact of natural hazards on key areas of the regions economy.
Swiss Re’s Senior Climate Change Advisor, Andreas Spiegel, said: “The Entergy project confirmed our findings from previous adaptation studies, namely that there is a flip-side to the climate debate. Inaction at the global policy level to reduce greenhouse gas emissions, combined with economic growth that is not risk-adequate, will come at a cost. In the Gulf Coast region, such failures could result in annual average expected losses of two to three percent of GDP by 2030.”
Spiegel added: “Perhaps even more important is that there are potentially attractive measures that can keep the risk profile of the Gulf Coast constant over the next 20 years. While there is still significant residual risk, insurance is a key measure to address this, in particular for extreme events for which risk transfer solutions are more cost-efficient than physical adaptation measures.”
The study says insurance is the most cost-effective solution for remaining residual risk and cites four ways insurance and risk transfer can best help. Increasing levels of insurance by making premiums more affordable through physical adaptation measures; decreasing under-insurance (an issue when property insured values are out of date); promoting additional self insurance; and transferring top-layer risk through catastrophe bonds and other instruments.
We are all aware of the need for catastrophe coverage in these hurricane exposed areas. We expect to see the Gulf Coast continuing to receive attention from the cat bond market but also increasingly from the ILW and traded cat futures marketplaces.
The press release from Swiss Re can be found here.