Climate change: synonymous with uninsurability?
30 june 2017
Will the business community still be able to insure itself sufficiently against nature-related risks in the future? And, to take this one step further, will insurers still be willing to cover the consequences and risks of climate change? Ron de Bruijn, managing partner of Riskonet, explores the challenges and answers in this blog.
A group of risk & insurance managers in our country recently took part in a discussion on these issues during the NARIM conference. If the sessions made anything clear it was that all of the participants recognised this development. And all of them understand that nature-related risks and damage make risk management far more complex.
Every farmer is well aware that nature can be unpredictable. A storm can destroy a crop and heavy rainfall, hail or even extreme heat can cause unprecedented economic losses in the agricultural sector. Flooding in the river area threatens homes and companies and the claims departments at insurance companies have had to work overtime because private policyholders and business professionals got their feet a little wet. If you are one of the unfortunate few with a distribution centre in Beneden-Leeuwen along the Waal River that was hit by flooding a few years ago…. Is your insurer still willing to insure your property against flood damage?
These are phenomena that will occur with greater frequency in the future in line with the warming trend, rising sea levels and climate change. And if insurers are forced to pay out more claims and more often, this will affect their willingness to insure risks. That in turn will alter the risk landscape, the approach taken to nature-related risks by insurers and, of course, risk management in the business community. An important question to ask is whether nature-related risks (whether or not caused by climate change) will be uninsurable in the future?
Our consultancy practice is receiving a growing number of requests to analyse nature-related risks. The need for insight and relevance, especially on the part of banks and investors, is increasing. Most insurance policies have limited coverage for damage caused by natural disasters. Depending on the nature of the location, the specific site and calamity scenario, these limits can be exceeded and a business professional may end up with uninsured damage.
It is understandable that insurers place limits on certain claims since nature-related damage often entails accumulation, i.e. a combination of claims from various policyholders. Insurers are apprehensive about accumulation because it threatens their financial stability. They tend to be prudent as a result.
Generally speaking, you can say that ‘natural events’ are still very much insurable, but that the limits are becoming increasingly tough. Insurers are wary of accumulation risks and ask more questions.
Their need for information is growing and investors and asset managers at companies need to adapt to this reality. The information provided to insurers on properties, activities, risks and possible damage is increasing in importance. What is the ‘likelihood and extent’ that, for example, floods or forest fires could threaten homes and companies?
This puts pressure on risk and asset managers at organisations. They need to stay on the ball and be pro-active! Insurers are saying: we want to know more about you – about the property and about measures taken to prevent and limit damage. The flow of information and the analysis are increasingly important.
How can organisations respond? By making sure they have their affairs in order. They need to devote more energy to risk management, establishing records and building their case. We receive more and more requests from clients to analyse the risks associated with, for example, floods, earthquakes and wind storms. “And advise on further measures that can be taken to prevent damage resulting from such natural phenomena,” is often added. It goes without saying that the right preparation will alleviate the stress involved in submitting damage claims.
In other words, take risk management seriously. Focus on decision-making and on formulating a sound policy. Increase accountability and transparency towards insurers. And, finally, make sure you are properly insured in keeping with the capacity and limits of the insurer. Those who are well prepared will find themselves in a better negotiating position, with better chances to agree on higher limits in the event of a catastrophe.
I’m convinced that the level of professionalism in this area can be increased in coming years. There are advantages to be gained. Good risk management means that climate change and nature-related damage does not have to be disastrous to a company’s bottom line.
Ron de Bruijn, Managing Partner at Riskonet