Climate change raises spectre of insurance market failure

www.environmental-finance.com
London, 26 February:

Climate change increases the possibility of the failure of insurance markets, according to a Chartered Insurance Institute report, which cites the need for better measures of market robustness. Extreme weather events present the most obvious risk to insurers, says the Coping with climate change: risks and opportunities for insurers report, but global warming may already be compounding catastrophe losses by 2% a year, it warns.

"Social disorder and international tensions could deteriorate to the point where substantial markets become uninsurable. Another potential problem is 'claims contagion', when systems cannot cope with the sheer volume of work," the report says. Insurance markets can fail to operate as intended in four ways, the report notes: through lack of capital, lack of cover, inability to pay claims, or failure to contract.

"Lack of cover is the most likely of these problems to spread with climate change," it says. Insurers withdrawing from a market can lead to many problems, the report states, such as shareholder doubts about a firm's long-term strategic capabilities, exit costs, and customer and intermediary distrust.

The report's lead author, Andrew Dlugolecki, a visiting research fellow at the University of East Anglia's climate research unit, advocates the creation of an independent index of market robustness that would indicate the aggregate degree of coverage, the collective vulnerability to catastrophes, and the overall capacity to manage a disaster claims situation.

"The most important strategy to preserve insurability is to reduce greenhouse gas emissions. Insurers can play a role as underwriters and investors [in] clean technology, and by lobbying for action on policies," the report concludes. The global insurance industry manages assets worth $55 trillion, which are impacted by and have an impact on climate change. "Yet this factor is still largely ignored," the report says.