Howden says climate will change insurance for good

Broking group Howden has called on the world’s pension funds to channel their wealth into investments that can close the global protection gap, enabling the insurance industry to create a raft of new solutions.

In its latest report, ‘Climate in Peril’, the broker analysed a range of topics that it believes will dominate agendas in the run up to COP26 – including the science of climate change, increased loss frequency and severity, the power of insurance in incentivising ‘better’ behaviours through an ESG lens – alongside the opportunities presented by the transition to net-zero and the innovative use of insurance capital in the disaster relief space.
The report concluded climate change is now driving the frequency and intensity of certain perils beyond historical norms.

Analysis of insurance industry losses in the last 50 years showed an exponential increase for weather-related events versus other non-climate perils. As such the (re)insurance market has suffered an unprecedented run of $10 billion plus weather-related losses in real terms since 2017, with the number of events (12) more than double anything seen in previous five-year periods.

Global insured losses from wildfires rose a remarkable 500% during 2010-2019. This decade has got off to an equally ominous start with the value of losses in the first two years already double that of the decade to 2010.

A key issue is the humanitarian funding gap, which has grown from less than $1 billion 20 years ago, to $4 billion 10 years ago, to over $20 billion today.

Howden estimated that as much as $1.5 trillion of total pension fund capital could be deployed in the (re)insurance space to help close the protect gap.

Data and analysis in the report reinforces the link between the changing climate, more extreme weather events and higher insured catastrophe losses. It explains that increased loss frequency and severity elevate the importance of insurance, but that accessibility is a problem for many of the world’s most vulnerable communities.

David Howden, Howden Group CEO, explained: “The power of insurance both in removing barriers to the transition to a lower-carbon future, and in picking up the pieces when disaster strikes is immense. However, we cannot continue with a model that only protects those who can afford it.

“The need to deconstruct and rebuild insurance models in response to climate change is an opportunity to build back a more balanced approach, one which supports the long-term resilience of the world’s most vulnerable populations.”

The report warned: “There is now no doubt that climate change is impacting the frequency and severity of certain weather perils. Analysis in the report demonstrates the impact this is having on insured loss patterns.

“When comparing the trajectory of weather-related insured losses over the last 50 years with those occurring from man-made events there is a striking underlying increase in weather-related insured losses especially over the last 10 years, even when allowing for inflation and asset growth.

“After a period of benign catastrophe loss experience in the middle of the last decade, a succession of intense, mid-sized weather events, within the $10 billion to $30 billion bracket has hit the insurance market in the last five years. Twelve events incurring losses greater than $10 billion have been recorded since 2017, more than double anything seen previously.”

Howden said the pace of change over a relatively short timeframe is starting to move the (re)insurance market.

“The significant shift in loss experience is forcing insurers and reinsurers to reassess their views of risk,” stated the report. “Howden’s research indicates that those expecting a return to the loss amounts of yesteryear are likely to be disappointed: the past is no longer a guide to the future for climate-sensitive perils.”

Howden said the challenges we face will provide an opportunity for insurance to be used to create new markets and act as a force for social good by building resilience in communities without access to traditional forms of protection.

“Whilst governments and NGOs are taking on a greater burden of risk at a time of strained public finances, insurance solutions and private capital are severely underutilised for disaster relief funding,” it said.

Charlie Langdale, Head of Climate Risk and Resilience at Howden explained: “Traditional methods of disaster relief funding cannot keep pace with demand, and existing risk transfer products cannot close the protection gap. The magnitude of the issue requires something far more imaginative and innovative, something that resets how disaster relief is funded, with insurance at its core.”

He continued: “The volcano catastrophe bond launched earlier this year for the Danish Red Cross has proven that insurance-based products can bring together charitable donations and private capital in a way that provides more funds, more quickly to those who need it. Scaling this model up unlocks significant potential to address the imbalance in accessibility, whilst creating an attractive market for investors.”

Howden concluded: “I am convinced that what we have achieved with the Red Cross will prove to be a game changer. By focusing our collective expertise, data and ingenuity on creating new markets, we can unlock the huge sums of private capital looking for environmentally and socially conscious investments. This isn’t about tweaking existing models, it is about reinventing risk transfer and creating completely new markets. This is about changing insurance for good.”

“The power of insurance both in removing barriers to the transition to a lower-carbon future, and in picking up the pieces when disaster strikes is immense. However, we cannot continue with a model that only protects those who can afford it.”

David Howden, Howden Group

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