The social and economic changes caused by the COVID-19 pandemic have had a significant impact on our lives over the course of 2020. It has been argued, though, that the changes we have seen over 2020 pale in comparison to the expected impact that climate change will have on our societies and economies. Some predict that we have just 10 years to act on climate change before the damage to the planet is irreversible.
With this in mind, regulators are looking to the financial services industry to better understand the challenges posed by climate risk, including a transition to a low-carbon economy. This briefing note by Milliman’s Sinéad Clarke, Orlaith Lehane and Eóin Stack provides a beginner’s guide to climate risk for Irish insurers. It includes a high-level introduction to climate-related risks and information on what the Central Bank of Ireland and European Insurance and Occupational Pensions Authority are currently doing in relation to climate risk in addition to an overview of the approach taken by regulators in the UK.
To begin to address climate risk effectively, governments, insurers, banks and asset managers, infrastructure experts, and technical assistance and research firms need to be enlisted to work together. Addressing climate change adaptation to reduce risk before disasters hit is the best chance to improve the outcomes of climate risk events.
This is especially true for low-income and small island nations. For many of these nations, resilience efforts are simply out of reach. Insurance may mitigate some of the costs for citizens, but it is of limited benefit in adaptation. The bond markets focus on short durations. And it can be difficult for small countries to obtain even basic infrastructure financing.
Climate adaptation requires significant financing. Basic asset-liability management says that long-term projects should be matched with long-term investments while mitigating long-term risks—like climate change. Linking insurance directly to long-term climate adaptation bonds can help governments more effectively adapt to and manage the effects of climate change.
This article by Milliman’s Michael McCord of the MicroInsurance Centre at Milliman and Abhisheik Dhawan of the UN Capital Development Fund says that coming together to address climate change risks should begin before disaster strikes.
Despite recent efforts to reform the National Flood Insurance Program (NFIP), most U.S. homeowners do not carry insurance to protect their properties against the risk of flooding. For most homeowners, the purchase of this coverage is mandatory only if they live in certain specified high-risk areas. However, significant risk exists in areas where the purchase of flood insurance is rare. Even in areas where flood coverage is required, data from the NFIP and private flood insurers do not indicate high degrees of coverage.
Beyond direct damages to property and communities, the flood insurance protection gap could have many downstream financial impacts. Homeowners insurance is integral to protecting the collateral that underpins the U.S. mortgage system. As a result, coverage gaps could create adverse financial exposure to bearers of mortgage risk including mortgagees, insurers, reinsurers, federal underwriting agencies, and bondholders.
In a new Society of Actuaries report, professionals from Milliman and catastrophe modeling firm KatRisk examine the countrywide residential exposure to flooding and downstream implications including its impact on mortgage default risk. They also consider how flooding may be affected by rising sea levels and evaluate how it could affect the financial health of residential householders.
Ethiopia is a country prone to many climate risks, which particularly affect its majority rural population. To manage these agriculture-related climate risks, Ethiopian farmers respond by spending their savings, selling valuable assets at heavy discounts, and reducing consumption.
Until recently, insurers barely had any footprint in rural areas with smallholder farmers. In fact, 2014 data shows that less than 2% of Ethiopians were covered by any type of formal microinsurance product. Because insurance is an ex-post tool and not all risks are insurable, a holistic approach to dealing with climate risks is needed to help vulnerable communities become more resilient.
In this article, Milliman’s Mariah Mateo Sarpong and Mebrahtu Brhan Gebre present an example of a holistic risk management solution that the MicroInsurance Centre at Milliman developed for smallholder farmers in northern Ethiopia. The product illustrates Milliman’s Climate Resilience Initiative’s holistic approach to enhancing climate resilience in low-income communities.
As the 2020 wildfire season again exceeds historical norms, insurers and policymakers must turn their attention from the literal fires to the figurative one: the threat—and increasing likelihood—that this escalating wildfire risk will result in a homeowners insurance crisis in the state of California.
For homeowners, insurance is often the last line of defense against losing everything to wildfire. However, for many, this crucial financial backstop is rapidly becoming harder to obtain as insurers reduce their portfolios due to billions in losses and regulatory restrictions on reflecting the true cost of risk in the premiums charged. This withdrawal is creating an untenable situation for many Californians and efforts to address it are becoming an urgent priority for policy makers.
In this article, Milliman professionals explain in more detail the state of home insurance in California and the regulatory efforts to address the issues thus far.
Climate change is one of a number of interconnected risks threatening the stability of the global financial system. This year, for the first time, the World Economic Forum ranked it as the top challenge facing humanity. This issue has not gone away amid COVID-19, which has exposed how actions in one country can have direct consequences for the whole world.
In this article, Milliman’s Neil Cantle and Nancy Watkins, along with The Oracle Partnership’s Peter Kingsley, discuss the role actuaries and insurers can play in tackling climate change following the coronavirus crisis.