This week last year, Hurricane (later to be designated Superstorm) Sandy was raging up the east of the US. In the course of a week, at least 286 people were killed and $68bn of damage incurred, making Sandy the second costliest hurricane in US history.
In light of this sombre anniversary and following the recent publication of the Fifth Assessment Report from the International Panel on Climate Change (IPCC), insurance economics think tank the Geneva Association is calling on governments to expand and increase their disaster resilience and response efforts.
The GA says that the science underlying the IPCC report makes it clear that the climate is changing and the speed at which these changes is taking place is accelerating. As a result, the frequency and intensity of weather events will continue to increase.
At the same time insurance industry data also confirms that both the cost and the frequency of climate related insurance claims are rising. This is partly attributable to a greater number of policyholders and an increased value of possessions as well as an increased frequency and severity of events, as the IPCC report suggests.
The GA’s concerns are increasingly reflected by insurers and reinsurers around the world. For example, The Australian Business Roundtable for Disaster Resilience & Safer Communities, backed by a panel of insurers, recently published a White Paper that forecasts the cost of natural disasters in Australia will rise from $6.3bn a year currently to around $23bn a year in 2050 as population density increases and the severity and frequency of storms, floods, cyclones and bushfires grow.
Just last week in Baden-Baden, Munich Re led its press call with a warning about the growing societal and economic cost of weather related events. Munich Re board member Ludger Arnoldussen noted that the frequency of flood events in Germany and central Europe has doubled since 1980. Arnoldussen urged policymakers in Germany to invest more into prevention and risk transfer in order to stabilise state budgets and facilitate indemnity payments that will spur economic recovery.
But he lamented the German government’s response so far, saying Germany has not placed enough urgency on resilience. “We won’t have to wait another 100 years for the next centennial flood,” he warned.
In Australia, the government now spends an estimated $560m on post-disaster relief and recovery compared with an estimated $50m on pre-disaster resilience. The white paper said a program of resilience expenditure of around $250m a year to 2050 would ultimately generate budget savings of more than $12bn and Australian Government expenditure on disaster response could reduce by more than 50%.
The insurance industry stands ready to increase its collaboration with governments everywhere to adapt to, mitigate and recover from disaster risks, the GA says.
“But the way we construct our societies needs reconsideration because risks are not being accounted for correctly and this is the responsibility of governments. There is a clear correlation between risk accumulation and economic growth which is saving up the potential for greater economic and human losses in the future, not least in the face of a changing climate,” Michael Butt, co-chair of The Geneva Association’s climate risk and insurance working group said in a statement.
The GA says that governments must recognise the urgency of the implications of the IPCC report and take action to adapt to the changing environment. As well as more disaster conscious investment in future, government investment is also needed in measures to reduce disaster impacts and retro-manage risks in communities to stem the increasing human and economic costs.
Insurance can support governments in a number of different ways, as the GA points out. Insurance pricing, terms and conditions, send a clear signal about the cost of taking a particular risk– building on flood plains for example. Insurers can also advise governments on resilient behaviour and the legislative environment that promotes risk adequate behaviour through, for example, adjusting building codes to make buildings more resilient to earthquakes or flooding.
As the GA says, insurance fosters stability in the global economy as well as for governments and taxpayers by taking on risks and dispersing them around the world through the global reinsurance markets. Research from the World Bank (2011) shows that at an economic level, insurance supports post disaster economic recovery by injecting liquidity into the affected areas and lifting some of the monetary burden from the affected government and therefore the taxpayer.