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8.1. Introduction
Our definition of the financial services sector includes private and public
institutions that offer insurance, disaster preparedness/ recovery, banking,
and asset management services. Analysis of the financial services sector provides
a unique opportunity to quantify the potential socioeconomic impacts of climate
change and offers a barometer of effects on other sectors (including the government
sector). The Intergovernmental Panel on Climate Change (IPCC) Third Assessment
Report (TAR) highlights insurance and other components of the financial services
sector because they represent a risk-spreading mechanism through which the costs
of weather-related events are distributed among other sectors and throughout
society. The sector also is among the world's largest and is captured less
effectively in other parts of the TAR. The financial services sector also stands
to play a central part in adaptation and mitigation activities and is a major
source of global and regional data on the costs of weather-related events (Mills,
1996; Changnon et al., 2000; Kunreuther, 2000).
This chapter is about the impact of climate change on the financial services
sector, as well as the way this sector can adapt and help society to adapt to
climate change. Still, little can be said about the total financial cost of
adapting to climate change. Short-term effects are likely to be felt most through
changing frequencies and intensities of ordinary and catastrophic weather events.
The Second Assessment Report (SAR) chapter on financial services concluded
that "within financial services the property insurance industry is most likely
to be directly affected by climate change, since it is already vulnerable to
variability in extreme weather events" (Dlugolecki et al., 1996). Experience
and analyses over the past 5 years has confirmed the trend of growing weather-related
damage costs since the 1950s (see Section 8.2).
The vulnerability of and challenges for the insurance sector, private and public,
are addressed in Section 8.3. Section
8.4 discusses the implications for other financial services, such as corporate,
retail, and investment banking. There is evidence that the banking and insurance
industries have become more aware of opportunities and threats with regard to
climate change since the SAR. However, little information is available on climate
change impact and adaptation implications for the banking sector.
Climate change impacts are expected to be greatest in the developing world.
There is only limited penetration of or access to insurance in these regions.
This situation makes these regions more vulnerable and will impair their ability
to adapt. Over the past few years, several multilateral organizations and banks
have taken initiatives to develop new financial schemes for coping with natural
disasters in developing countries (see Section 8.5).
Issues regarding funding for adaptation are addressed in Section
8.6. Although knowledge about the financial services sector, private and
public, generally has increased since the SAR, major questions remain. Research
could help explore the potential roles of the sector in helping society respond
to the challenge of climate change (see Section 8.7).
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