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Natural catastrophe insurance and climate change:The Economics of Climate AdaptationA framework for decision-makingto enable risk prevention, sharing and transfer
Natural catastrophe insurance and climate change:The Economics of Climate AdaptationA framework for decision-makingto enable risk prevention, sharing and transferDr. David Bresch, Head of Sustainability and Political Risk Management, Swiss [email protected]
“Business as usual”high-carbon growth isno longer an option
Development
The need for climate-resilientdevelopment
Mitigation is aligningwith the broaderdevelopment agendaas people accept thathigh-carbon growthis unsustainable
Adaptation willrequire incrementalfunds beyondbusiness as usual;adaptation anddevelopment areoften indiscernible
“Business as usual”high-carbon growth isno longer an option
Mitigation
Climate-resilientdevelopment
Adaptation
climatecompatible
development
2
Mitigation is aligningwith the broaderdevelopment agendaas people accept thathigh-carbon growthis unsustainable
Adaptation willrequire incrementalfunds beyondbusiness as usual;adaptation anddevelopment areoften indiscernible
Mitigation AdaptationClimate-proofed
abatement
No need to take notes …www.swissre.com/climatechange
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Nat Cat losses on the riseand: Massive gap between economic and insured losses
Natural catastrophe losses 1980-2010, in USDbillion
300Economic Loss (grand total)
100
150
200
250
Economic Loss (grand total)Insured Loss (grand total)
4
Note: Loss amounts indexed to 2009 Source: Swiss Re, sigma No 2/2010Note: Loss amounts indexed to 2010 Source: Swiss Re sigma catastrophe database
0
50
1980 1985 1990 1995 2000 2005 2010
Objectives:
Provide decision makers with the facts and methods necessary to design and executea climate adaptation strategy
Supply insurers, financial institutions, and potential funders with the information required to unlockrisk prevention funding and deepen global risk transfer markets
Climate-resilient development needs toassess and address total climate risk
Provide decision makers with the facts and methods necessary to design and executea climate adaptation strategy
Supply insurers, financial institutions, and potential funders with the information required to unlockrisk prevention funding and deepen global risk transfer markets
We developed and tested a methodology to: Follow a rigorous risk management approach to assess local total climate risk, the sum of today’s climate risk, the economic development paths that might put greater population and value at risk the additional risks presented by climate change
Propose and prioritize a basket of adaptation measures to address total climate risk on an economicbasis
The team:
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The team: Economics of Climate Adaptation (eca) Working Group, a partnership between the Global Environment
Facility, McKinsey & Company, Swiss Re, the Rockefeller Foundation, ClimateWorks Foundation, theEuropean Commission, and Standard Chartered Bank.
So far, economics of climate adaptation studies have been carried out for Maharashtra, India and North and North East China: focus on drought risk to agriculture; Mopti region, Mali:focus on risk to agriculture from climate zone shift; Georgetown, Guyana: focus on risk from flash floods; Samoa: focus on risks caused by sea level rise (storm surge and groundwatersalination); Tanzania: focus on health and power risks caused by drought; Hull, UK: focus on risk from multiple hazards (wind, inland flood, storm surge); Miami and South Florida, USA:focus on risk from hurricanes; Caribbean: Multihazard and sector studies in Anguilla, Antigua and Barbuda, Cayman Islands, Bermuda, Barbados, Jamaica, St. Lucia and in Dominica;and a sector study along the US Gulf Coast (Alabama, Louisiana, Mississippi, Texas). See www.swissre.com/climatechange
WhatWhat
Identify Analyze Plan measures Implement
Climate-resilient developmentThe methodology to assess & address total climate risk
Estimate of potential loss
Hazard: Developfrequency and severityscenarios
Assets: Quantify assetsand income value in areaat risk
Vulnerability: Determinevulnerability of assetsand incomes to thehazard
Set of adaptation measures
Identify potentialadaptation measures
Determine societalcosts and benefits andbasic feasibility- Interviews with
experts- Economic analysis
Implementationassessment
Assess currentprogress against themeasures
Understandrequirements toimplementation
Determine actionsrequired to implementmeasures
Map of areas at risk
Identify most relevanthazard(s) in caselocation
Identify areas that aremost at-risk, byoverlaying hazard(s) on: Population Economic value
Where andfrom what isthe region
most atrisk?
What is themagnitude ofthe expected
loss?
What is themagnitude ofthe expected
loss?
Whatmeasuresshould be
considered?
Whatmeasuresshould be
considered?
How canmeasures be
impleme
How canmeasures beimplemented?
Input intoadaptation
strategy
Input intoadaptation
strategy
Estimate of potential loss
Hazard: Developfrequency and severityscenarios
Assets: Quantify assetsand income value in areaat risk
Vulnerability: Determinevulnerability of assetsand incomes to thehazard
Set of adaptation measures
Identify potentialadaptation measures
Determine societalcosts and benefits andbasic feasibility- Interviews with
experts- Economic analysis
Implementationassessment
Assess currentprogress against themeasures
Understandrequirements toimplementation
Determine actionsrequired to implementmeasures
Map of areas at risk
Identify most relevanthazard(s) in caselocation
Identify areas that aremost at-risk, byoverlaying hazard(s) on: Population Economic value
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Economic growth is the key driverof losses until 2030
2030, totalexpected loss
Incrementalincrease fromextreme climatechange scenario
Incrementalincrease fromeconomic growth;no climate change
23
2008, today’sexpected loss
+71%
Potential impact fromeconomic growth
Potential impactfrom change inclimate
Expected loss from exposure to climateExtreme climate scenario, USD millions
Example city of Hull, UK:
Wha
t is
at
stak
e?
96
17
56
2030, totalexpected loss
Incrementalincrease fromextreme climatechange scenario
Incrementalincrease fromeconomic growth;no climate change
23
2008, today’sexpected loss
+71%
Potential impact fromeconomic growth
Potential impactfrom change inclimate
Expected loss from exposure to climateExtreme climate scenario, USD millionsW
hat
is a
t st
ake?
96
17
56
2030, totalexpected loss
Incrementalincrease fromextreme climatechange scenario
Incrementalincrease fromeconomic growth;no climate change
23
2008, today’sexpected loss
+71%
Potential impact fromeconomic growth
Potential impactfrom change inclimate
Expected loss from exposure to climateExtreme climate scenario, USD millions
Please find the full study at www.swissre.com/climatechange
9
6
5
4
7
3.30
4.80
5.605.60 6.20
Cost/benefit
Measures with netnegative benefits
Measures below
EXTREME CLIMATE CHANGEAdaptation cost curve, city of Hull, UK
65% of lossescan be avertedcost-effectively
Insurance is less costlyan option than furtherhard measures
How
coul
d w
e re
spon
d?
3
2
0
950
0.25 0.280.39
0.49 0.650.77
1.541.67
0.01 0.131
1.681.90 2.15
3.30
0 1,000 1,050850 1,100 1,15030050 500 550 700 750 800 900
Measures belowthis line have neteconomic benefits
Floo
d aw
aren
ess
cam
paig
n
Sea
defe
nce
east
Sea
defe
nce
wes
t
Riv
er H
ull d
efen
ce
Mob
ile p
rote
ctio
n fo
r con
tent
Trai
n st
aff i
n em
erge
ncy
resp
onse
Hyd
raul
ic b
arrie
r up
grad
ene
w b
uild
ing
stra
tegi
c lo
catio
nIn
crea
se d
rain
age
syst
ems
Insu
ranc
e w
/rent
Insu
re p
ublic
bui
ldin
gsIn
sura
nce
w/ c
ontin
gent
cap
ital
Dec
reas
e SM
E in
sura
nce
Bui
ld n
ew b
uild
ings
on
podi
um
Clo
sed
cell
new
bui
ldin
gsSa
ndba
g bu
ildin
gs–
gene
ral
exis
ting
build
ings
exis
ting
build
ings
exis
ting
build
ings
exis
ting
build
ings
exis
ting
build
ings
Avertedloss$ Millions
0.080.03
Insu
ranc
e
How
coul
d w
e re
spon
d?
Floo
d aw
aren
ess
cam
paig
n
Sea
defe
nce
east
Sea
defe
nce
wes
t
Riv
er H
ull d
efen
ce
Mob
ile p
rote
ctio
n fo
r con
tent
Trai
n st
aff i
n em
erge
ncy
resp
onse
Hyd
raul
ic b
arrie
r up
grad
eFl
ood
proo
fing
of fl
oors –
new
bui
ldin
gSa
ndba
g bu
ildin
gs–s
trat
egic
loca
tion
Incr
ease
dra
inag
e sy
stem
sIn
sura
nce
w/re
ntIn
sure
pub
lic b
uild
ings
Insu
ranc
e w
/ con
tinge
nt c
apita
lD
ecre
ase
SME
insu
ranc
eB
uild
new
bui
ldin
gs o
n po
dium
Clo
sed
cell
new
bui
ldin
gsSa
ndba
g bu
ildin
gs–
gene
ral
Floo
d pr
oofin
g of
floo
rs –ex
istin
g bu
ildin
gs
Clo
sed
cell
insu
latio
n –ex
istin
g bu
ildin
gs
Roo
f foa
m–e
xist
ing
build
ings
Stro
nger
roof
fixi
ngs –
exis
ting
build
ings
Roo
f net
ting–
exis
ting
build
ings
Source: Shaping Climate resilient development, Swiss Re, McKinsey et al., 2009 www.swissre.com/climatechange
Insu
ranc
e
10
The working group studied seventeenregions with diverse climate hazards
Samoa
Florida
MaliMali
IndiaMaharashtra
U.K. / HullChina
North, Northeast
Samoa
GuyanaGuyana
TanzaniaTanzaniaSamoa
Florida
MaliMali
IndiaMaharashtra
U.K. / HullChina
North, Northeast
Samoa
GuyanaGuyana
TanzaniaTanzania Anguilla, Bermuda,Barbados , Jamaica,Antigua and Barbuda,St. Lucia, Dominica
US Gulf coast
Samoa
Florida
MaliMali
IndiaMaharashtra
U.K. / HullChina
North, Northeast
Samoa
GuyanaGuyana
TanzaniaTanzania Anguilla, Bermuda,Barbados , Jamaica,Antigua and Barbuda,St. Lucia, Dominica
All details: www.swissre.com/climatechange
Caribbean
Case study: Island of St. Lucia, CaribbeanInsurance proves more effective than (further) riskmitigation measures for rare high severity events
We simulate thousands of possiblenatural catastrophes in great detail
Swiss Re proprietarytropical cyclone modelsimulating500'000 events,equals 50'000 possibleoutcomes of next yearshurricane season
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Swiss Re proprietarytropical cyclone modelsimulating500'000 events,equals 50'000 possibleoutcomes of next yearshurricane season
St. Lucia: Only 16% of adaptationmeasures have net economic benefitIn USD m, 2009
16%
Rare high severity events: insurancemore effective than further risk mitigation measures
e.g. prevention
Caribbean Cat Risk Insurance Facility – CCRIFThe CCRIF offers parametric hurricane andearthquake insurance policies to 16 CARICOMgovernments. The policies provide immediateliquidity to participating governments. Membergovernments choose how much coverage theyneed up to an aggregate limit of USD 100 million
The mechanism will be triggered by the intensityof the event (e.g. winds exceeding a certainspeed). The facility responded to events andmade payments (USD 33 Mio to date):
Dominica & St. Lucia after earthquake (2007)
Turks & Caicos after Hurricane Ike (2008)
Haiti (2010)
Swiss Re and other overseas reinsurers, programplaced by Aon Benfield Ltd. derivative placed byWorld Bank Treasury
The CCRIF offers parametric hurricane andearthquake insurance policies to 16 CARICOMgovernments. The policies provide immediateliquidity to participating governments. Membergovernments choose how much coverage theyneed up to an aggregate limit of USD 100 million
The mechanism will be triggered by the intensityof the event (e.g. winds exceeding a certainspeed). The facility responded to events andmade payments (USD 33 Mio to date):
Dominica & St. Lucia after earthquake (2007)
Turks & Caicos after Hurricane Ike (2008)
Haiti (2010)
Swiss Re and other overseas reinsurers, programplaced by Aon Benfield Ltd. derivative placed byWorld Bank Treasury
16
The CCRIF offers parametric hurricane andearthquake insurance policies to 16 CARICOMgovernments. The policies provide immediateliquidity to participating governments. Membergovernments choose how much coverage theyneed up to an aggregate limit of USD 100 million
The mechanism will be triggered by the intensityof the event (e.g. winds exceeding a certainspeed). The facility responded to events andmade payments (USD 33 Mio to date):
Dominica & St. Lucia after earthquake (2007)
Turks & Caicos after Hurricane Ike (2008)
Haiti (2010)
Swiss Re and other overseas reinsurers, programplaced by Aon Benfield Ltd. derivative placed byWorld Bank Treasury
http://media.swissre.com/documents/ECA+Brochure-Final.pdf and www.swissre.com/climatechange
Roadmap and business case foradaptation funding
Insu
ranc
e
Loss assessment
17
Insu
ranc
e
Please find the full study at www.swissre.com/climatechange
Cost/benefit analysis
Legal notice
©2012 Swiss Re. All rights reserved. You are not permitted tocreate any modifications or derivatives of this presentation or touse it for commercial or other public purposes without the priorwritten permission of Swiss Re.
Although all the information used was taken from reliablesources, Swiss Re does not accept any responsibility for theaccuracy or comprehensiveness of the details given. All liabilityfor the accuracy and completeness thereof or for any damageresulting from the use of the information contained in thispresentation is expressly excluded. Under no circumstancesshall Swiss Re or its Group companies be liable for any financialand/or consequential loss relating to this presentation.
©2012 Swiss Re. All rights reserved. You are not permitted tocreate any modifications or derivatives of this presentation or touse it for commercial or other public purposes without the priorwritten permission of Swiss Re.
Although all the information used was taken from reliablesources, Swiss Re does not accept any responsibility for theaccuracy or comprehensiveness of the details given. All liabilityfor the accuracy and completeness thereof or for any damageresulting from the use of the information contained in thispresentation is expressly excluded. Under no circumstancesshall Swiss Re or its Group companies be liable for any financialand/or consequential loss relating to this presentation.
©2012 Swiss Re. All rights reserved. You are not permitted tocreate any modifications or derivatives of this presentation or touse it for commercial or other public purposes without the priorwritten permission of Swiss Re.
Although all the information used was taken from reliablesources, Swiss Re does not accept any responsibility for theaccuracy or comprehensiveness of the details given. All liabilityfor the accuracy and completeness thereof or for any damageresulting from the use of the information contained in thispresentation is expressly excluded. Under no circumstancesshall Swiss Re or its Group companies be liable for any financialand/or consequential loss relating to this presentation.
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