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GIRO 2007 - Opportunities for adaptation

Here is a paper written by Richenda Connell from Acclimatise on the subject of adaptation.

Adaptation in developed countries in partnership with governments

In the UK, the ABI has been commissioning and publishing research over a number of years into the area of flood risk and into the future impact of climate change. In 2003, the ABI set out a Statement of Principles on the Provision of Flood Insurance setting out the UK non-life insurance industry’s commitment to provide flood cover (for example in areas with less than 1 in 75 year flood risk, ABI members will provide flood cover as standard but with premiums differentiated to reflect risk) but also the actions it expected of Government (for example the reform of the land-use planning system to ensure sustainability).

This is an example of the non-life insurance industry engaging with local and national government in the area of adaptation. National economies need to be robust to Climate Change and non-life insurance is a key part of maintaining this resilience, but as in the example of flood risk the non-life insurance industry should in turn expect governments to take action to reduce risk. The key debate on public private partnership is discussed in detail on our wiki.

Adaptation in developed countries in partnership with policyholders

The non-life insurance industry needs to convince its policyholders that we are part of the solution to Climate Change not part of the problem. Good communication and education is key here. Some insurers already have links to useful resources from their websites; they could go much further. Some companies are considering early warning systems to policyholders as they learn of incoming natural hazards they can send out emails and text messages alerting policyholders to give them time to prepare their properties and reduce claims costs.

Taking flood risk for example: policyholders can take the twin approaches of resilience and resistance. Resistance is where the building is adapted to prevent the water entering the property; there are already products on the market such as airbrick covers, door guards and skirt systems. However, in some cases water cannot be prevented from entering the property; indeed sometimes allowing water inside can actually reduce the damage to property as large pressure builds up outside from the weight of water. If water has entered a property the objective of Resilience is to reduce the amount of damage it can do. Where appropriate, concrete rather than wooden floors will recover quicker; keeping electric rings away from floor level and simply reducing the amount of contents that is kept on the ground floor; or moving contents upstairs once you know a flood is on the way will all reduce losses. The non-life insurance industry can work with policyholders to encourage this behaviour and reflect it in premiums.

What if a flood has actually occurred? Insurers could insist that properties are rebuilt like for like; but this is missing a great opportunity. Instead the approaches of resistance and resilience can be applied when rebuilding, thus reducing the cost of insurance claims in future floods. In the UK, insurers are very supportive of this idea and have, in partnership with the National Flood Forum, produced literature for policyholders on how to rebuild sustainably after a flood. In many cases the costs are similar. If they are more expensive a small loan may be required. The Association of British Insurers has worked with the Council of Mortgage Lenders who has agreed to look favourably on requests for additional loans to pay for such work. This is a good example of different businesses cooperating with one another and their customers.

Adaptation in developing countries

Insurers are already involved in a number of innovative initiatives, often in partnership with Governments and Non-Governmental Aid Agencies in developing countries designed to assist with adaptation to climate related impacts. Examples include:

• The Caribbean Catastrophe Risk Insurance Facility (CCRIF) which was launched in 2006 (following the impact of Hurricane Ivan two years earlier) through the co-operation of the World Bank and the CARICOM Heads of Government. It provides participating governments with immediate liquidity if hit by a natural disaster, until other sources of financing become available and essentially allows Caribbean countries exposed to natural disasters to pool their risk in order to lower the cost of coverage
• A co-operation between the World Food Programme and Axa Re, funded by the Ethiopian government and a small group of donors including the US Government, which used weather derivatives to cover rural families against drought
• A partnership between an Indian micro-finance institution BASIX, the World Bank and private insurers (including Swiss Re) to provide rainfall insurance to crop growers as well as providing weather hedges to protect BASIX’s crop lending portfolio.
• Swiss Re, the Earth Institute at Columbia University and the Millennium Promise Alliance have pioneered weather derivative contracts protecting several villages in Kenya, Mali and Ethiopia against severe drought.

Education and Research

We clearly need to encourage and carry out research into this risk so we can protect our shareholders capital; and at the same time help society to manage the risks. Our Working Party’s view is that it is in our industry’s interest to share our research. Any competitive advantage in this area will be short lived and our reputation would be enhanced if we were more open. As an industry we need to capture better data; only with more accurate data in terms of location; construction of property; the use to which it is put; the building standards that it satisfies and other relevant factors, can we accurately access the risk.

Insurance is adaptation!

We can help with one form of adaptation very easily; one key way to protect yourself from risk is to….…buy insurance! Surprisingly a large number of smaller companies do not have insurance against catastrophic weather loss. The UNEPFI report “Insuring for Sustainability” quotes figures from AXA which suggest that over 50% of businesses with less than £50k turnover are not insured against such events; for companies ten times that size some 25% are still not insured. Yet when small businesses that had been affected by a severe weather event were asked to rank the help they from a range a choices (such as emergency services, local government etc) insurance comes out top. Simply increasing the proportion of business insured will help with adaptation. We can become a lot more efficient with our existing insurance systems without even needing to change them. This seems a useful marketing message to us.

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