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Insurance Industry in the Context of Global Climate Change: Challenges, Transformations, and Collaborations

Photo: Reuters

Against the backdrop of severe global climate change, the frequent occurrence of natural disasters has posed unprecedented challenges to the insurance industry. According to the latest 2023 data report released by the Emergency Events Database (EM-DAT), there were 399 natural disaster events last year, resulting in 86,473 deaths and economic losses of up to 202.7 billion US dollars, slightly higher than the average annual level over the past 20 years. Among the numerous natural disasters, earthquakes in Turkey, tropical storm Doksuri in China, and drought in the United States were particularly severe, causing economic losses of up to 34 billion US dollars, 25 billion US dollars, and 14.5 billion US dollars, respectively. Natural disasters have increasingly posed a serious threat to human society. As an important measure to reduce losses from natural disasters and a crucial component of risk management, the insurance industry effectively alleviates the pressure on the government’s post-disaster funding by raising and reserving sufficient funds based on risk algorithms. It also provides timely financial support for national disaster recovery and reconstruction, contributing to the revitalization of the economy. According to data from Swiss Reinsurance Company, as of 2023, up to 85% of economic losses caused by natural disasters in Asia were not covered by insurance, and insurance participation rates in developing countries and emerging markets are generally low. This not only increases the financial pressure on governments but also hinders rapid post-disaster recovery.

With the frequent occurrence of natural disasters, the insurance industry is facing tremendous pressure. According to data from El País, since 1994, insurance losses caused by natural disasters have increased at an annual rate of 5.9%, far exceeding the growth rate of the world’s gross domestic product (GDP) during the same period, which was only 2.7%. This unbalanced economic state makes it difficult for insurance companies to fully cover the increased losses caused by natural disasters through economic growth. Consequently, global commercial insurance rates have been rising for 26 consecutive quarters, with Europe reaching a 3% increase in the first quarter of 2024.
Frequent natural disasters not only pose a threat to the sustainability of insurance companies but also impose economic burdens on consumers. Andrew Hall, the CEO of the Insurance Council of Australia, pointed out that as disaster risks increase and losses intensify, some major insurance companies may reduce new insurance policies or services due to financial pressure. To compensate for rising reinsurance premiums after major disasters, insurance companies’ pricing strategies may further affect the public’s ability to obtain insurance.
In the face of the insurance industry’s dilemma caused by natural disasters, it is far from enough to limit ourselves to paying premiums and mitigating existing losses. Better risk prediction or prevention is also crucial. However, both prediction and prevention face numerous challenges. The mathematical theorems that the insurance industry usually relies on, though predictive of general risks, become ineffective in extreme situations where losses occur simultaneously. In terms of prevention, establishing strict building codes, zoning and permitting systems, considering climate risks, and strengthening household resilience all face significant challenges.
Carolyn Kousky, the Associate Vice President for Economics and Policy at the Environmental Defense Fund, believes that in the context of increasing risks, the long-term solution to maintaining accessible and affordable insurance for climate extreme events lies in transformative investments in risk reduction and climate adaptation. Moreover, government intervention may alleviate the pressure on insurance companies to bear disasters when they face sustained operational difficulties. In fact, initiatives such as the National Flood Insurance Program launched by the federal government years ago not only help protect consumers from natural disasters but also contribute to maintaining the stability of the financial market.
Although insurance companies can take various measures in climate adaptation and mitigation, collaborative efforts between the private and public sectors, including regulatory agencies, governments, and policymakers, are crucial for effectively responding to the increasingly severe impacts of climate change and preventing systemic failures at the market and individual levels. This view was emphasized at the United Nations Climate Change Conference (COP 28) held in 2023.
To achieve this goal, the first step is to comprehensively understand the key issues related to climate change, including its direct and indirect impacts on the insurance industry, and how to mitigate these impacts through innovation, policy-making, and public-private partnerships. Only through comprehensive understanding and collaborative efforts can we effectively respond to the challenges brought by climate change and protect our economy and society from its negative impacts.
In the face of challenges brought by natural disasters, insurance industries in various countries are adopting different strategies to cope with them. Take the United States, for example, as the largest single-country insurance market in the world, accounting for about 40% of global insurance premiums. Despite facing multiple pressures such as natural disasters and inflation, the US insurance market still shows a hard cycle trend, with significant differentiation among different insurance types. To address risks, the United States has strengthened premium growth and risk control, which has been supported by the SEC regulatory agency. In addition, a sound disaster response system, government support, and insurance product innovation have also improved the situation of the US insurance industry.
In the Philippines, due to its geographical location and climate conditions, it is one of the countries vulnerable to disasters and climate change. To mitigate the ultimate impact of natural disasters, the Philippines has formulated an upgraded catastrophe risk insurance plan, transferring risks to the private reinsurance market by establishing an insurance pool. This innovative strategy and financial instruments developed over the years have provided effective means for the Philippines to cope with natural disasters.
The insurance markets in European countries are relatively mature. France, Germany, and other countries assess risks through technological means to more accurately price insurance and formulate premium strategies. Asian insurance markets such as China and Japan have developed rapidly in recent years, actively responding to the threats posed by natural disasters by strengthening international cooperation and improving the insurance system.
The United Nations Economic and Social Council stated that early warning and action are critical adaptation measures to save lives and livelihoods and minimize losses and destruction. Insurance industries in various countries need to continue to strengthen risk warning, increase insurance coverage, optimize insurance product design, and other aspects of work to better cope with the challenges brought by natural disasters.
By Han Gao

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