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3.7. Insurance and Other Financial Services
The costs of ordinary and extreme weather events have increased rapidly in
recent decades. Global economic losses from catastrophic events increased 10.3-fold
from 3.9 billion US$ yr-1 in the 1950s to 40 billion US$ yr-1
in the 1990s (all in 1999US$, unadjusted for purchasing power parity), with
approximately one-quarter of the losses occurring in developing countries. The
insured portion of these losses rose from a negligible level to 9.2 billion
US$ yr-1 during the same period. Total costs are a factor of two
larger when losses from smaller, non-catastrophic weather-related events are
included. As a measure of increasing insurance industry vulnerability, the ratio
of global property/casual insurance premiums to weather related losses fell
by a factor of three between 1985 and 1999. [4.6]
The costs of weather events have risen rapidly despite significant and increasing
efforts at fortifying infrastructure and enhancing disaster preparedness. Part
of the observed upward trend in disaster losses over the past 50 years is linked
to socioeconomic factors, such as population growth, increased wealth, and urbanization
in vulnerable areas, and part is linked to climatic factors such as the observed
changes in precipitation and flooding events. Precise attribution is complex
and there are differences in the balance of these two causes by region and type
of event. [4.6]
Climate change and anticipated changes in weather-related events perceived
to be linked to climate change would increase actuarial uncertainty in risk
assessment (high confidence6).
Such developments would place upward pressure on insurance premiums and/or could
lead to certain risks being reclassified as uninsurable with subsequent withdrawal
of coverage. Such changes would trigger increased insurance costs, slow the
expansion of financial services into developing countries, reduce the availability
of insurance for spreading risk, and increase the demand for government-funded
compensation following natural disasters. In the event of such changes, the
relative roles of public and private entities in providing insurance and risk
management resources can be expected to change. [4.6]
The financial services sector as a whole is expected to be able to cope with
the impacts of climate change, although the historic record demonstrates that
low-probability high-impact events or multiple closely spaced events severely
affect parts of the sector, especially if adaptive capacity happens to be simultaneously
depleted by non-climate factors (e.g., adverse financial market conditions).
The property/casualty insurance and reinsurance segments and small specialized
or undiversified companies have exhibited greater sensitivity, including reduced
profitability and bankruptcy triggered by weather-related events. [4.6]
Adaptation to climate change presents complex challenges, but also opportunities,
to the sector. Regulatory involvement in pricing, tax treatment of reserves,
and the (in)ability of firms to withdraw from at-risk markets are examples of
factors that influence the resilience of the sector. Public- and private-sector
actors also support adaptation by promoting disaster preparedness, loss-prevention
programs, building codes, and improved land-use planning. However, in some cases,
public insurance and relief programs have inadvertently fostered complacency
and maladaptation by inducing development in at-risk areas such as U.S. flood
plains and coastal zones. [4.6]
The effects of climate change are expected to be greatest in the developing
world, especially in countries reliant on primary production as a major source
of income. Some countries experience impacts on their GDP as a consequence of
natural disasters, with damages as high as half of GDP in one case. Equity issues
and development constraints would arise if weather-related risks become uninsurable,
prices increase, or availability becomes limited. Conversely, more extensive
access to insurance and more widespread introduction of micro-financing schemes
and development banking would increase the ability of developing countries to
adapt to climate change. [4.6]
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