Changes in the climate have the potential to produce significant changes in the risk posed by natural hazards around the world.
As the world economy grows and changes, the risk to businesses, governments and public well-being will be dominated by the combined dynamic effects of changes in hazards, and the increasingly fast evolution of economic vulnerability to extreme events. The potential exists for economic risks from natural hazards to increase to levels where events with devastating and wide economic impact on countries and companies are no longer rare.
As highlighted in the latest Intergovernmental Panel on Climate Change (IPCC) report, the current state of knowledge on climate science, and hence current and future changes solely in the frequency and severity of natural hazards, continues to develop, but is still largely clouded with uncertainty. In contrast, factors driving increases in vulnerability, including the total assets exposed to these hazards and the consequences of those assets being impacted, continue to expand at a steady rate. Interconnected economic growth is increasingly concentrated in coastal urban areas, which increases the density of economic value in regions that are disproportionately exposed to hazards from wind and water—the two hazards most impacted by changes in the climate.
The general sets of recommendations offered from studies in the last 10 years by the insurance, reinsurance and broker communities are fairly obvious; more research, more effort to limit impact on the climate, and better models. However, what is really needed is insight on how to translate the current science into action, and to collaborate to accelerate the understanding and cost effective reduction of the evolving risk. In early July, a session under the same title as this article was hosted by FM Global at the Understanding Risk conference in London, England, with those objectives. The following three panelists, comprised of experts on climate science, public policy and economics, led a topical discussion and engaged in dialogue with a diverse audience:
- Professor Tim Palmer, Royal Society research professor in climate physics, Oxford University, co-director of the Oxford Martin Programme on Modelling and Predicting Climate. Palmer has served as author, lead author or review editor on all five IPCC Working Group One assessment reports.
- Professor Roger Pielke Jr., professor and director of Center for Science and Technology Policy Research at University of Colorado. Pielke is a fellow of the Cooperative Institute for Research in Environmental Sciences (CIRES) and author of the books “The Honest Broker” and “The Climate Fix.”
- Mr. Jeremy Oppenheim, director of McKinsey's Global Sustainability and Resource Productivity Practice and leader of New Climate Economy project. Oppenheim co-authored a major report: Resource Revolution: Meeting the World's Needs for Energy, Food, Water and Materials and is a former senior economist from The World Bank.
The discussion was structured around the factual understanding of climate change from current data, our knowledge of the physics, and the ability to translate that knowledge into climate science and then to usable assessments of economic risk. Insight from this group of experts, through their prepared remarks and dialogue with the audience, yielded the following five key points:
Climate science is not a long-term weather forecast.
The goal of a climate projection is to understand the trends present in the changing statistics of weather. These trends are subject to an evolving bias in the change of the overall climate and hence have to be expressed in probabilistic terms due to the high degree of variability in what we observe as weather.
The specific hazards and the timeframe of change are important.
Although short-term increases have been predicted in the past, they have proven not to be credible. The disconnect between short-term trends and long-term observations is reflected in the discrepancies between climate science and the cosmetic treatments that gain media attention. Despite media coverage following specific storms attributing them to climate change, U.S. hurricanes have not increased in frequency or intensity since 1900. Continual, and highly geographically variable, increases in sea level rise, however, are well-established.
Risk is currently driven by economic factors.
Although losses continue to increase, when adjusted for increase in value, there is no upward trend in loss from these hazards. This observation does not mean changes won't occur in the future, only (as per above) that the trends will evolve over long periods of time.
The need for energy is an important driving factor of economic growth.
Population growth and urbanization will continue to increase demand for energy in the most available and cost-effective forms. Energy is the key challenge in terms of efficiency and overall business value stability.
There is a space full of opportunity for improved economic growth and reduced risk.
Sustainable modes of energy efficiency are already making a huge difference. The right technologies will continue to expand—and with economic growth—the potential for investing in more resilient and lower emitting energy sources should improve in step. Investing in these systems, and making others more resilient, is good economics. Innovation (of all types) that is firmly in this space is yet another economic opportunity.
With the world changing faster every year, it's more important than ever for insurance professionals to be informed and avoid the trap of inaction produced by the cloud of uncertainty. By taking a factual view of the economics of climate risk, it becomes more viable to manage and take proactive steps to reduce risk through climate change mitigation from reduced environmental impact and by climate adaptation through improved resilience. Even in the environment where hazards are not increasing, the current acceptance of risk will lead to unacceptable outcomes in the long-term. However, when we consider the potential long-term climate change trends, it becomes increasingly urgent to take actions that are both good for the economy and good to reduce risk.
The future is not what it used to be, but cost effective measure of resilience can make it even better.
Dr. Louis Gritzo is vice president and manager of research at FM Global, one of the world's largest commercial property insurers.
Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader
Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
- Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
