The financial risks of climate change

A project commissioned by the Association of British Insurers

Background

Association of British InsurersWarming temperatures are expected to influence the pattern and intensity of rainfall, winds and storms in the future. The Association of British Insurers asked the Met Office and AIR Worldwide (catastrophe modelling experts) to assess the financial impacts of climate change, including changes to:

  • UK - wind and inland flooding damage
  • China - typhoon damage

Air WorldwideClimate change is a major consideration for insurance companies providing cover for weather-related losses.

Understanding how future claim levels may change is essential for the insurance industry to plan key activities:

  • Premium - Helping to make sure that premiums are set at the right level
  • Capital - Ensuring there's enough capital to cover potential claims

Although there is considerable uncertainty over the exact extent of changes in our climate, the industry must assess the potential impacts to allow a controlled approach to risk.

Approach

We created a series of climate scenarios based on the current state-of-the-art climate model output, as well as a diverse range of published scientific research and data. The scenarios were then used by AIR Worldwide to adjust their catastrophe models - providing a unique insight into relationships between climate change and potential financial risk impacts. The Met Office Hadley Centre also provided updates to key science questions on important related issues.

  • Global warming - What are the likely timescales of Special Report on Emissions Scenarios (SRES) or government policy scenarios reaching 2 °C and 4 °C of global warming?
  • Sea levels - What are the major changes and updates on sea-level rise research since the IPCC Fourth Assessment Report was released?
  • Climate data -How robust and dependable are climate data, globally and for the UK and China?


Key findings

Relationship with rising temperatures

We found the following relationships between climactic events and increasing global temperatures, in both in Great Britain and China:

  • Rainfall - Strong relationship with increasing global temperatures
  • Windstorms & typhoons - No clear dependence on global temperatures

As a result, the study focused on scenarios of variations in position of the storm track for changes to future windstorm, and illustrative scenarios of changes in typhoon intensity.


UK findings

Significant increases in insured risk can be expected across all the key measures. Key results, excluding GDP growth (growth adjusted losses were higher in most cases), include:

Flood losses (UK)

  • Annual - Insured flood losses could rise by 14% to £633 million (valid for a global temperature rise of 4 °C)
  • 1-in-100-year event - Insured flood losses could rise by 30% to £5.4 billion
  • 1-in-200-year event - Insured flood losses could rise by 32% to £7.9 billion (valid for a global temperature rise of 4 °C)

Wind losses (UK)

  • Annual - Insured wind losses could rise by 25% to £827 million (valid for slight southward shift in storm track)
  • 1-in-100-year event - Insured wind losses could rise by 14% to £7.3 billion
  • 1-in-200-year event - Insured wind losses could rise by 12% to £9.7 billion (valid for a slightly southward shift in storm track) 

China findings

Significant increases in insured risk due to typhoons can be expected across all the key measures. Key results, excluding GDP growth (growth adjusted losses were higher in most cases), include:

  • Annual - Insured losses from typhoons could increase significantly by 32% to £345 million
  • 1-in-100-year event - Insured losses from typhoons could increase to £838 million
  • 1-in-200-year event - Insured losses from typhoons could reach £1.1 billion (valid for a global temperature rise of 4 °C).

Conclusion

By combining expert knowledge in the fields of climate and actuarial science, this report provides a detailed analysis relating climate change to its potential impact on insurers. The impacts of these forecasts will have considerable impact on:

Premiums

  • 21% rise is possible for insuring flood losses in Great Britain, based on a 4 °C temperature rise

Capital

  • 30% rise is possible (from £5.9 billion to 7.8 billion - an increase of £1.9 billion) for insuring flood losses in Great Britain, based on a 4 °C temperature rise

There are a number of variables involved in the research, however, which means there are inevitably limitations to the information provided. Some risks, such as sea-level rises, were not included in the financial analysis.

Last updated: 7 March 2014

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