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Explainer: Why the insurance industry is taking over $100 billion hit from climate change losses?

New Delhi, IndiaEdited By: Rahul KarunakarUpdated: Jan 10, 2023, 04:54 PM IST
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Similarly, according to data gathered by Munich Re, insured losses from natural disasters reached over $120 billion in 2022, the majority of which was weather-related. Photograph:(Reuters)

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A separate KPMG study showed, "climate change poses an imminent threat to both the short-term and long-term stability and sustainability of insurance operations".

The insurance sector is having trouble adjusting to the new normal, as losses brought on by climate change now routinely approach $100 billion annually, reported Bloomberg citing a Munich Re study.

A separate KPMG study showed, "climate change poses an imminent threat to both the short-term and long-term stability and sustainability of insurance operations".

Similarly, according to data gathered by Munich Re, insured losses from natural disasters reached over $120 billion in 2022, the majority of which was weather-related.

Approximately half of that was caused by Hurricane Ian, which wreaked havoc in Florida in September. Last year, storms, droughts, earthquakes, and fires cost a total of $270 billion, including uninsured damages.

“There is no denying that climate change is driving losses from natural catastrophes,” Ernst Rauch, chief climate scientist at Munich Re, told Bloomberg in an interview. “Insured losses of more than $100 billion a year are the new normal.”

That represents a significant divergence from the industry standards of less than two decades ago.

According to records maintained by Munich Re, insured losses have never surpassed $50 billion annually before Hurricane Katrina devastated New Orleans in 2005.

This decade has seen a steep rise in inflation as well as increased market volatility, which has contributed to the substantially larger loss level.

Last year, flooding and storms were very damaging. The most expensive natural disaster of 2022 will likely be the Australian floods in February and March, which surpass Hurricane Ian in cost.

According to Munich Re, insured losses would likely total over $4 billion.

The deep freeze known as Elliott, which covered the US last month, is still too early to produce a reliable estimate of the losses it will have caused, according to the German insurer.

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The Munich Re research also demonstrates that, in comparison to insured losses, uninsured losses are noticeably bigger than insured losses, which often concentrate on the developed world.

Meanwhile, the consequences of climate change are frequently felt most keenly in Asia and Africa.

Over 800 people died from flooding in Nigeria, Niger, and Chad last summer, according to World Weather Attribution, a scientific organisation that examines extreme weather for signs of climate change.

The worst floods of 2022 occurred in Pakistan when at least 1,700 people died and countless others were exposed to cholera, malaria, and other water-borne illnesses.

According to Munich Re, the event's direct damages are expected to be at least $15 billion, and nearly nothing is insured.

Governments and international organisations are looking into new mechanisms to route money to those most impacted by climate change because such damage is beyond the capacity of insurers to pay.

Negotiators decided to establish a fund that will aid developing nations by gaining promises from wealthy countries at the COP27 climate meeting in Egypt last year.

The establishment of such a fund “isn’t about dispensing charity,” Sherry Rehman, Pakistan’s climate minister, said after the deal was struck in late November, according to Bloomberg. “It is clearly a down payment on the longer investment in our joint futures.”

Regulatory and industry-wide organisations have also jumped into action, according to KPMG. Regulators are now setting expectations of what regulated organisations need to consider when evaluating climate change risks, in line with a worldwide ESG-oriented approach, said a KPMG report.
 
 

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