Insurance and Business Ireland
Insured losses - Globally
Globally, insured and total property losses are rising faster than premiums, population, or economic growth; inflation adjusted economic losses from catastrophic events rose by 8-fold between the 1960s and 1990s and insured losses by 17-fold. Large catastrophic events cause less damage in an average year than the aggregated impacts of relatively small events (a 40/60 ratio globally) (7).
In the United States, averaged over the past 55 years, weather-related events have been responsible for 93% of all catastrophe events, 83% of the economic damages of natural disasters, and 87% of the insured losses. ... The observed upward trend in losses is consistent with what would be expected under climate change and with demographic factors (7).
Flood risk insurance in Ireland
In Ireland, flood insurance is voluntary and policies are issued and managed by private companies. Ireland applies risk-based pricing, with a certain degree of cross-subsidization (12).
Vulnerabilities - Business - Ireland
At a macro level, research from the European Central Bank estimated that extreme weather events could impact on the public finances of developed countries by a minimum of 0.23% of GDP annually; translating into approximately €370 million per year for Ireland based on current GDP projections (9).
Research from Munich Re and the Confederation of British Insurers has estimated that additional investment of 5 to 20% of cost would be needed in 2030 to adapt new infrastructure vulnerable to climate change (10). Several sources have indicated that the costs of taking action to address climate change (including mitigation and adaptation measures) will be much lower than the costs of inaction over the medium to long term (11). Early consideration of the need to adapt to climate change can ensure that risks are minimised at least cost.
Potential Irish business areas that climate change may impact are (8):
- Markets: climate change could change demand for goods and services.
- Logistics: climate change could increase vulnerability of supply chains, utilities (in particular water and energy), transport arrangements and communications.
- Premises: climate change could impact on location, materials, building design, construction, maintenance and facilities management.
- Finance: climate change could have implications for investments, insurance and stakeholder reputation.
- People: climate change could have implications for workforce, customers and changing lifestyles.
- Processes: climate change could have impacts on production processes (in particular cooling requirements) and service delivery.
Some of the firms and sectors that are expected to be most exposed to the impacts of climate change include (8):
- Sectors currently affected by weather events (e.g. food and drink, construction);
- Sectors making long-term investment decisions (e.g. utilities, pharmaceuticals);
- Sectors heavily reliant on transport/ infrastructure in (global) supply and demand chains (e.g. ICT/ pharmaceuticals);
- Sectors that are global in nature and are particularly exposed to adaptation internationally (e.g. financial services);
- Sectors that need a lot of high quality water such as pharmaceuticals, ICT (wafer manufacturing), food and drink.
Vulnerabilities - Insurance - Overview
The insurability of natural disasters and extreme weather events may be affected by increases in the frequency, severity, or unpredictability of these events. ... Climate change presents various challenges to insurability. These include technical and market-based risks (7):
- Shortening times between loss events, such as more hurricanes per season,
- Changing absolute and relative variability of losses,
- Changing structure of types of events,
- Shifting spatial distribution of events,
- Damages that increase exponentially or nonlinearly with weather intensity,
- Widespread geographical simultaneity of losses (e.g. from tidal surges arising from a broad die-off of protective coral reefs or disease outbreaks on multiple continents),
- Increased difficulty in anticipating "hot spots" (geographic and demographic) for particular hazards,
- More single events with multiple, correlated consequences. This was well evidenced in the pan-European heat catastrophe of 2003. Immediate or delayed impacts included extensive human morbidity and mortality, wildfire, massive crop losses, and the curtailment of electric power plants due to the temperature or lack of cooling water, and
- More hybrid events with multiple consequences (e.g. El Nino-related rain, ice storms, floods, mudslides, droughts, and wildfires).
- Historically-based premiums that lag behind actual losses,
- Failing to foresee and keep up with changing customer needs arising from the consequences of climate change,
- Unanticipated changes in patterns of claims, and associated difficulty in adjusting pricing and reserve practices to maintain profitability,
- Responses of insurance regulators,
- Reputation risks falling on insurers who do not, in the eyes of consumers, do enough to prevent losses arising from climate change, and
- Stresses unrelated to weather but conspiring with climate change impacts to amplify the net adverse impact. These include draw-downs of capital and surplus due to earthquakes or terrorist attacks and increased competition from self-insurance or other competing methods of risk-spreading.
Pressure on insurance affordability & availability under climate change
Extreme weather events have already precipitated contraction of insurance coverage in some markets, and the process can be expected to continue if the losses from such events increase in the future. Impacts vary, of course, depending on the specific circumstances, and can be relatively minor (gradual price increases) to more significant. For the United States, the following outlook has been presented for different types of issues (7):
- Flood - currently a mix of public/private insurance and risk sharing. Under climate change, insurability problems may extend from the present personal and small commercial lines into larger commercial lines.
- Windstorm—a largely insured risk at present. There are already considerable insurability problems and associated changes in terms and pricing, non-renewals, market withdrawl, etc. This could increase dramatically under climate change, resulting in shifting of losses to governments and consumers.
- Agriculture and livestock—currently a public/private insurance partnership. Climate change will stress this sector considerably, with potential for impacts due to drought, flood, pests, or other events on a scale with the Great Dust Bowl of the 1930s.
- Wildfire—currently largely privately insured. More retention of risk by purchasers of insurance and more involvement by state governments is anticipated, while insurers raise deductibles and reduce limits of liability and scope of coverage.
- Mold and moisture damage—largely commercially insured until the crisis emerged a few years ago. Now, many states have exclusions.
- Earth movement and coastal erosion—primarily insured by government, if at all. With permafrost melt, subsidence of dry soils, sinkholes will become more prevalent, as will mudslides and property losses from coastal erosion. Government programs covering storm-surge-driven losses on eroded property could be overwhelmed with losses under climate change, with the result of more retention by property owners.
- Health impacts—currently largely privately insured. An insurability crisis under climate change is not anticipated. Impacts will manifest in the form of elevated health insurance prices.
Vulnerabilities - Insurance - Europe
It is estimated that losses from weather events are doubling globally every 12 years. Even though the observed increase in losses is dominated by socio-economic factors (such as population growth, increased number of habitations in vulnerable areas, increased wealth, increased amount and value of vulnerable infrastructure), there is evidence that changing patterns of natural disasters are also drivers (1). It is however not known how much of this increase in losses can be attributed to anthropogenic climate change (2). After accounting for changes in population and wealth, it has been shown that changes in extreme weather events may be responsible for a growth in losses by about 2% a year since the 1970s (6).
In Europe, 64% of all loss events since 1980 are directly attributable to weather and climate events (storms, floods and heat-waves) and 25% to wild fires, cold spells, landslides and avalanches, which are also linked to weather and climate. 95% of the overall losses and 78% of all deaths caused by disastrous events result from such weather and climate-related events. The annual average number of these weather- and climate-related events in Europe increased during the period 1998–2007 by about 65% compared with the 1980s (3).
Swiss Re has estimated that in Europe the costs of a 100-year storm event could double by the 2080s with climate change (to EUR 40 billion compared with EUR 20 billion today), while average storm losses are estimated to increase by 16–68% over the same period (3). Analyses of long-term records of flood losses indicate that societal and economic factors have played an important role in the observed upward trends (4).
According to an estimate by the Reinsurance Association of America (RAA), 50% of insured losses in the world within the last 40 years have been the consequence of natural catastrophes in the 1990s. Insurance experts have warned that large regions of the world may be recategorised as ineligible for insurance, because changes in weather caused by climate change (such as heat waves and hurricanes) continue at an accelerating pace (4).
Climate change is expected to lead to an increase in compensable damage, which will contribute to increased insurance premiums. This means that extreme events will result in an increased level of risk in the insurance sector. Climate change may lead to increased costs and maybe even the bankruptcy of insurance companies (5).
Adaptation strategies - Ireland
From a business perspective, the following priority policy areas can help business reduce the risks and maximise the opportunities of climate change (8).
- Spatial policies. There is clearly a strong role for local and regional authorities to play in spatial policy as it is impacted by climate change.
- Built environment. The need to incorporate climate change, including extreme phenomena, into long-term planning, standards and regulations (such as the Building Regulations) concerning existing buildings and the use of building materials is an important consideration from a business risk reduction perspective. It is also a potential significant opportunity for the domestic construction sector. Further industry guidance and design criteria are needed which incorporate climate change allowances in design.
- Insurance. Access to insurance payouts can lessen the net adverse impact of climatic events on business policy holders. At the same time, insurance is also an instrument for incentivising business adaptations aimed at reducing climate risks. Thus, the benefits of covering climate risks will need to continue to be promoted to business. As climate changes and historical weather records become less useful, the insurance sector will have to develop new ways of assessing risk.
- Regulations. In response to climate change, it is possible that new or existing regulations which incorporate adaptation considerations will increase in number and influence in areas such as building quality standards, use of water, health and safety, etc. To minimise impacts on business competitiveness, any proposed new measures should be well justified in terms of the risk probability. It is equally important that upon introduction of such measures, businesses are enabled to meet new regulations in a manner that minimises costs and that information on what is required of companies to comply is strongly promoted by business representative bodies and enterprise development agencies.
- Institutional. A strong institutional framework is central to the mainstreaming and co-ordination of climate change adaptation policy responses across government departments, critical infrastructure providers and a range of stakeholders.
- Research and information. Research and development and technology transfer will be a key aspect in meeting the adaptation challenge. Publicly funded research which helps improve business understanding of climate change risks should continue to be supported and promoted to businesses. Business stakeholders should continue to be involved to identify and agree adaptation research priorities. A significant proportion of the climate change research undertaken in the short to medium term should address areas of potential business opportunities such as adaptation technologies, design standards, building materials and techniques, food production, etc.
- Procurement Given the time period for a range of infrastructure projects, decisions about public infrastructure will have significant, long-term consequences for resilience to climate change. Incorporating climate change adaptation into public procurement would help improve the resilience of critical business infrastructure to climate change and also assist companies in Ireland to realise opportunities arising from climate change adaptation.
Some specific responses that could develop business capacity to deal with adaptation could include (8):
- developing and applying business planning tools to help business;
- ensuring that both new and existing professionals have developed the skills necessary to respond to climate change and keep pace with policy and technology advancements;
- sector organisations creating, gathering and sharing sector-specific information on adaptation as well as developing appropriate, training, accreditation and support programmes;
- assessing current business supports and capital allowances to understand their potential to support business adaptation;
- the enterprise development agencies (and IDA Ireland in particular) should continue to incorporate climate change adaptation research and considerations (in particular avoiding purchase of sites on flood plains) in their expansion of Greenfield developments and future industrial estates/ business parks.
The references below are cited in full in a separate map 'References'. Please click here if you are looking for the full references for Ireland.
- UNEP FI (2006), in: EEA, JRC and WHO (2008)
- Höppe et al.(2006), in: EEA, JRC and WHO (2008)
- EEA, JRC and WHO (2008)
- Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)
- Marttila et al. (2005)
- Muir-Wood et al. (2006), in: Ward et al. (2008)
- Mills et al. (2005)
- Forfás (2010)
- European Central Bank (2009), in: Forfás (2010)
- Munich Reinsurance Company (2007), in: Forfás (2010)
- OECD (2008), in: Forfás (2010)
- Maccaferri et al. (2012), in: Surminski et al. (2015)