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Synergisms between climate change mitigation and adaptation: an insurance perspective

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Abstract

As the world’s largest industry, the insurance sector is both an aggregator of the impacts of climate change and a market actor able to play a material role in decreasing the vulnerability of human and natural systems. This article reviews the implications of climate change for insurers and provides specific examples of insurance-relevant synergisms between adaptation and mitigation in the buildings and energy sectors, agriculture, forestry, and land use. Although insurance is far from a “silver bullet” in addressing climate change, it offers significant capacity and ability to understand, manage, and spread risks associated with weather-related events, more so today in industrialized countries but increasingly so in developing countries and economies in transition. Certain measures that integrate climate change mitigation and adaptation also bolster insurers’ solvency and profitability, thereby increasing their appeal. Promising strategies involve innovative products and systems for delivering insurance and the use of new technologies and practices that both reduce vulnerability to disaster-related losses and support sustainable development. However, climate change promises to erode the insurability of many risks, and insurance responses can be more reactive than proactive, resulting in compromised insurance affordability and/or availability. Public–private partnerships involving insurers and entities such as the international relief community offer considerable potential, but have not been adequately explored.

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Notes

  1. Unless otherwise noted, the terms “insurance” and “reinsurance” are used interchangeably in this report. Reinsurance is the purchase of insurance by insurers, typically for losses in excess of a pre-agreed amount but also on a proportional basis, and is the means by which many insured risks (both life and non-life) are ultimately distributed (Reitz 2003). Because a given reinsurance company will assume risks from thousands of insurers around the globe, reinsurance is an inherently global segment of the industry. The world reinsurance market is projected to nearly double from $106 billion in premiums in 1995 to $194 billion in 2010 (Duffy 2001).

  2. Of course, insurers can become insolvent (bankrupt) following catastrophic events (Mills et al. 2001) although this is the exception to the rule, and solvency is less of an issue for insurers than for individually “self-insured” households or businesses.

  3. This includes “large” and “small” events, as defined by insurers, but does not in fact fully capture all events. For example, the Property Claims Service in the United States only counts events that result in over $25 million in insured losses, effectively including all losses from events such as lightning strikes, soil subsidence, and small storms.

  4. As with all such datasets, caveats apply with respect to uniformity over time in data collection methods, data quality, comprehensiveness, etc. A discussion of the longitudinal quality and consistency of the EM-DAT data provided by Brooks and Adger (2003) concludes that analyses based on data from 1970 forward are “fairly robust.”

  5. Detailed country-by-country statistics (in U.S. dollars and local currencies) are published in Swiss Re’s annual “World Insurance” reports (e.g., Swiss Re 2004).

  6. Data presented in this report represent western-style insurance and do not include the premium-equivalents that are collected from alternative systems, such as Takaful methods used in the Muslim world or so-called “self-insurance” which is often formalized and represents considerable capacity.

  7. For the period 1980–1998, South and East Asia was the fastest growing region with 15 percent per year growth for non-life insurance and 25 percent for life insurance. In Latin America, growth was 10 percent and 15 percent, and in Africa five percent and 15 percent, respectively. Trends in Eastern Europe were highly erratic for the post-1992 period for which data are available (Swiss Re 1999).

  8. There is a common misconception that floods are entirely uninsured. Typically one-quarter of flood losses are paid by insurance, depending on the country in which they occur and the nature of the impacts. More than half of the economic losses from the massive Central European floods in 2002 were insured (Best’s Review 2004). Government flood insurance in the U.S. only applies to residential and small commercial properties. Definitional ambiguities often classify flood-related losses as (insured) “storm” losses (Swiss Re 2003b).

  9. The leading insurers in this category include Aetna, AIG, CGU, Chubb, Cigna, Metropolitan Life, New York Life, and Prudential (Swiss Re 2000).

  10. For data on additional Central and Eastern European countries, see Munich Re (2000) and Swiss Re (2001).

  11. Chile and Mexico have the highest penetrations. In Asia, the greatest shares are found in Malaysia, the Philippines, Indonesia, and Singapore (Swiss Re 2000). In Central and Eastern Europe, Hungary and Poland have the highest penetration of foreign insurers.

  12. See http://eande.lbl.gov/IEP/archive/uv/index.html

  13. http://www.swissre.com/INTERNET/pwswpspr.nsf/fmBookMarkFrameSet?ReadForm&BM=./alldocbyidkeylu/SBAR-59FLV7

  14. For example, the introduction of tax-deductible life insurance premiums boosted the premium growth rate in Mexico and in Brazil (Swiss Re 2003a). In contrast, financial crises can dampen insurance markets in various ways.

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Acknowledgment

This publication was made possible through support provided by the Bureau for Economic Growth, Agriculture and Trade, Office of Environment and Science Policy, Climate Change Team, U.S. Agency International Development, under the terms of Award No. ENV-P-00-99-00003-00. The opinions expressed herein are those of the author and do not necessarily reflect the views of the U.S. Agency for International Development. Two anonymous referees provided helpful comments.

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  1. Lawrence Berkeley National Laboratory, MS 90-4000, Berkeley, CA, 94720, USA

    Evan Mills

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Special Issue, Challenges in Integrating Mitigation and Adaptation as Responses to Climate Change. Edited by Thomas J. Wilbanks, Richard Klein, and Jayant Sathaye

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Mills, E. Synergisms between climate change mitigation and adaptation: an insurance perspective. Mitig Adapt Strat Glob Change 12, 809–842 (2007). https://doi.org/10.1007/s11027-007-9101-x

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